Monday, December 03, 2007

Part D and Generics

I wonder if branded drug makers are having second thought about the Medicare Part D benefit.

On one hand, Part D has demonstrably improved access and reduced out-of-pocket costs for seniors with no drug coverage. (See PhRMA’s September 2007 study.) Part D has also slowed drug diversion from Canada, which improves patient safety.

However, the much-maligned “donut hole” also appears to be encouraging greater generic substitution. Check out a new OIG report called Generic Drug Utilization In The Medicare Part D Program., which examines 341 million prescriptions paid by Part D in the first half of 2006. During the first six months of the Part D program:

  • Generic drugs were dispensed 88 percent of the time when generic substitutes were available

  • 56 percent of all drugs dispensed were generics
Hey, whadda ya know? People respond to incentives. Under Part D, seniors have strong incentives to keep their total drug costs below the lower end of the donut hole ($2,250). As a result, more seniors are trying to get the biggest bang for their buck by accepting generic substitution as well as shopping around at pharmacies.

Ironically, the donut hole may ultimately end up hurting brand manufacturers by accelerating already-rapid generic substitution rates. (Good New York Times article on this topic: Strategies to Avoid Medicare’s Big Hole). According to the Times, CMS estimates that generic dispensing rates are now 61.5%.

This unexpected dynamic could slow momentum for dramatic changes to the Part D program. Democrats perpetually chatter about using “direct price negotiations” with manufacturers to fund the elimination of the donut hole. Although the structure of the Part D benefit makes such negotiations virtually impossible to implement, brand manufacturers will likely feel much more pricing pressure from Part D plans.

The next few years will see an enormous wave of new generics. In 2006, Part D cost the Federal Government $47 billion in 2006, which is $13 billion less than the original estimate of $59 billion. Generic drug substitutions were a prime contributor to the 2006 reduction and lowered future cost estimates. Look for further reductions in the estimated cost of Part D, especially if Average Manufacturer Price (AMP) gets linked to Part D.

Ironically, I learned over Thanksgiving that my own grandmother was one of the few seniors who hit the donut hole. Why? Grandma told me that “she doesn’t believe in generics” because “they are just not as potent.” (I'm not making this up!) She insists on paying for brands even though her own pharmacist said that she is wasting her money.

Don’t worry – I thanked her on behalf of all branded manufacturers.

BONUS: Boomer humor

Click here to see a very funny animation aimed at readers who are (or will soon be) eligible for Part D!


  1. Love your blog, but that video is HILARIOUS!!!

  2. Dr. Fein,

    Are pharmacies able to profit off Part D generics the way they can from other plans? I'm wondering how part D margins compare to normal margins and if the profits make up for slow payments.

  3. Dr. Fein,
    I thoroughly enjoy reading your blog, it always challenges me to ponder how in the world independent pharmacy can hope to be successful in these turbulent times. However, as a pharmacy owner for over 25 years, I can tell you that I have never had a year in which my business did not increase from the previous year, both in volume and profits. My practice competes with CVS,Walgreens,Rite Aid, Walmart, Stop & Shop, and mailorder. We fill over 2300 scripts per week, do a good portion of medicaid rx, about 95% third party total. Business has never been better. The independents still standing, I believe, are viable businesses. Certainly we will be challenged by amp, new awps,etc., but I do not share your belief that we will soon be extinct.
    Seasons Greetings!

  4. Matt,

    I do not think that independents will be extinct. However, there will be fewer independent pharmacies even as the number of pharmacist grows.

    FYI, I am drafting a think piece to be posted in early 2008 aimed at independent pharmacies called "Get Big, Get Focused, or Get Out."

    Sounds like you have figured out how to get focused, compete, and survive. Well done!