Thursday, April 04, 2013

Part D Drug Prices are Increasing Very, Very Slowly

The Medicare payment Advisory Commission (MedPAC) just released its latest Report to the Congress: Medicare Payment Policy (March 2013). As always, this annual report is a dream come true for Medicare policy wonks. (You know who you are!)

Chapter 15 (starting on page 355) provides a valuable Medicare Part D data dump, including information on program design, enrollment trends, benefit design, costs, and prices. Below, I pluck out the surprising news about Medicare Part D prices. Key highlights:
  • From 2006 to 2010, Medicare Part D drug prices grew by only 0.5% per year. (Since rebates are excluded from the computations, the data probably overstate price increases.)
  • To increase generic substitution, Part D plans used very aggressive benefit designs, which contributed to the slow price rise.
  • Drugs in Part D’s six protected classes weren’t very protected from generic substitution.
These results provide one more reason why we should be hesitant to alter the highly successful Part D program, per my comments in the February news roundup. And by using underlying CMS data, the new report thoroughly refutes the politically-motivated and inaccurate Part D pricing studies conducted by the AARP and the University of Minnesota. An ounce of data is worth a pound of opinions.


To help you understand the chart below, page 355 of MedPac’s report provides the following background Medicare Part D drug coverage:
  • For most drug classes, CMS requires plan formularies to cover at least two drugs in every therapeutic class and key drug type that are not therapeutic substitutes unless only one drug is approved for that class. This policy is intended to protect beneficiaries who need a drug that is the only one available to treat a certain condition and allows competition in classes with multiple products.
  • For six drug classes, CMS requires Part D plans to cover “all or substantially all” drugs in the class. Those classes are antineoplastics, antidepressants, antipsychotics, antiretrovirals, anticonvulsants, and immunosuppressants used by transplant patients. Although plans can charge higher cost sharing for drugs in these classes—for example, by placing them on tiers for nonpreferred brands—plans may have limited ability to influence utilization of these classes of drugs. (Below, these six drug classes are referred to as “protected-class drugs.”)

MedPac looked at Part D drug prices, as measured by reimbursement paid to pharmacies. The data exclude manufacturer rebates to the plans, so you should view the figures below as an upper bound on price increases. I suspect the actual figures are much lower. (For beneficiaries, rebates reduce premiums, rather than net drug prices paid to pharmacies.)

The chart below shows volume-weighted price indexes based on retail pharmacy payments. These payments include copayments (paid by beneficiaries) and ingredient costs and dispensing fees (paid by Part D plans).

As you can see, the annual growth rate of non-generic drug prices (labeled “All drugs and biologics”) was 5.3%. Prices of specialty drugs in Medicare Part D (not shown on the chart) grew by 9.4% per year.

Thanks to generic substitution, prices grew by only 2% IN TOTAL from 2006 to 2010. That’s an average annual growth rate of 0.5%.

Once generic substitution was taken into account, the price index for protected class drug prices declined by 2%, i.e., an average rate of -0.5% per year. As CMS notes: “[D]espite the drugs’ protected status, plan sponsors appeared to have had success at moving enrollees toward generics for these drugs when generic substitutes were available.”

Benefit plan design explains the high generic substitution rates. Part D plans encourage generic substitution by requiring the patient to pay progressively higher copayments or coinsurance for brand-name and specialty drugs on higher tiers. Here’s a look at cost-sharing in 2012’s seven largest plans:

The coverage gap (donut hole) also encourages seniors to keep their total drug costs below the initial coverage limit, which is $2,970 in 2013.


These results contrast sharply with the computational hackery published by the AARP and the University of Minnesota. For background, see AARP Distorts Drug Price Data (Again).

The 2012 AARP/University of Minnesota study claimed that “retail prices for the 469 prescription drug products that have been on the market since the end of 2004 have increased by 25.6 percent from 2005 through 2009.” (source)

In other words, the AARP/University of Minnesota computations were 13 TIMES HIGHER than the official figures from MedPAC. Believe it or not, the 2012 report was an improvement from a previous AARP estimate that was 21 TIMES HIGHER than reality. This discrepancy can’t be explained by the one-year difference in measurement periods.

The AARP/U of MN have been pretty quiet after withering criticism about its slipshod methodology. I’m curious to see how their next report will willfully ignore the wonkery buried deep within the new MedPAC report.


  1. Adam-
    Its a shame the Feds can't learn from their own program. The ACA is a slickly guised race to single payer that intends to control costs through price controls dictated by "the secretary." It seems to me that good ol' fashioned competition has worked well for the Part D program...wonder how it would work for the rest of healthcare, if only it were allowed.

  2. I agree with the benefits of competition in Part D. Can you comment on the Time article on the "Bitter Pill: Why Medical Bills are Killing Us?" The premise of the article is that for the Medical Benefit Medicare is the only player paying reasonable reimbursement and this is entirely due to their size. How to do you inject more competition into the Medical benefit and still make it work?