April 23, 2007

Medicare Part D is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States. It was enacted as part of the Medicare Modernization Act of 2003 (MMA) and went into effect on January 1, 2006.

By the design of the program, the federal government is not permitted to negotiate prices of drugs with the drug companies, as federal agencies do in other programs. The Department of Veterans Affairs, which is allowed to negotiate drug prices and establish a formulary, has been estimated to pay between 40% and 58% less for drugs, on average, than Medicare Part D. For example, the VA pays as little as $782.44 for a year's supply of Lipitor (atorvastatin) 20 mg, while the Medicare pays between $1120 and $1340 on Part D plans. "Although generic versions of [several popular drugs] are now available, plans offered by three of the five [exemplar Medicare Part D] insurers currently exclude some or all of these drugs from their formularies. … Further, prices for the generic versions are not substantially lower than their brand-name equivalents. The lowest price for simvastatin (generic Zocor) 20 mg is 706 percent more expensive than the VA price for brand-name Zocor. The lowest price for sertraline HCl (generic Zoloft) is 47 percent more expensive than the VA price for brand-name Zoloft."

Former Congressman Billy Tauzin, R-La., who steered the bill through the House, retired soon after and took a $2 million a year job as president of Pharmaceutical Research and Manufacturers of America (PhRMA), the main industry lobbying group. Medicare boss Thomas Scully, who threatened to fire Medicare Chief Actuary Richard Foster if he reported how much the bill would actually cost, was negotiating for a new job as a pharmaceutical lobbyist as the bill was working through Congress. A total of 14 congressional aides quit their jobs to work for the drug and medical lobbies immediately after the bill's passage.

In response, the Manhattan Institute, a free-market think tank, which, according to the Capital Research Center, receives funding from a large number of private interests including pharmaceutical companies, issued a report by Frank Lichtenberg, a business professor at Columbia University, that said the VA National Formulary excludes many new drugs. Only 38% of drugs approved in the 1990s and 19% of the drugs approved since 2000 are on the formulary. He also argues that the life expectancy of veterans "may have declined" as a result.

Paul Krugman disagreed, comparing patients in the Medicare Advantage plans, which are administered by private contractors with a subsidy of 11% over traditional Medicare, to the VA system: mortality rates in Medicare Advantage plans are 40% higher than mortality of elderly veterans treated by the V.A., said Krugman, citing the Medicare Payment Advisory Commission.

In 2012, the plan requires Medicare beneficiaries whose total drug costs reach $2,930 to pay 100% of prescription costs until $4,700 is spent out of pocket. (The actual threshold amounts will change year-to-year and plan-by-plan, and many plans offer limited coverage during this phase.) This coverage gap is known as the "Donut Hole." While this coverage gap will not affect the majority of program participants, about 25% of beneficiaries enrolled in standard plans find themselves in this gap. However, the Washington Post reports that upwards of 80% of enrollees are satisfied with their coverage, despite the fact that nearly half had chosen plans that do not cover the "donut hole." Medical researchers say that patient satisfaction surveys are a poor way to evaluate medical care. Most respondents aren't sick, so they don't need medical care, so they're usually satisfied. The only respondents who can evaluate care are respondents who are sick, who are usually a minority.