Reducing Drug Prices To Those Of France, Canada, And The U.K.
Would Allow Medicare To Eliminate The ‘Doughnut Hole’

But Health Affairs Article Says That Price Controls Could Limit Funds Available For Pharmaceutical Research And Development

BETHESDA, MD — The federal government could eliminate the gap in Medicare prescription drug coverage if it were willing to reduce drug prices to those paid by other industrialized nations, but it would do so at the risk of hurting pharmaceutical innovation, according to a new analysis posted today on the Health Affairs Web site.
“Drug prices are 34-59 percent lower in Canada, France, and the United Kingdom,” Anderson says. “These countries provide a benchmark for the drug prices Medicare could achieve. If Medicare could also meet this benchmark, then Congress could eliminate the doughnut hole in the Medicare drug benefit.”

A research team lead by Gerard Anderson, a professor at the Johns Hopkins University Bloomberg School of Public Health, compared projected Medicare spending beneficiaries using current assumptions about pharmaceutical prices with spending assumptions if beneficiaries paid the lower prices for drugs in the United Kingdom, France, and Canada. The study was supported with funding from the Commonwealth Fund and the Robert Wood Johnson Foundation.

Anderson finds that Medicare spending would be unchanged but payments by other insurers and beneficiaries themselves would be greatly reduced. According to the analysis, total projected drug spending in 2006 under the current benefit will be $101.9 billion, assuming a 20 percent price discount. Of that, the federal government would pay $44.5 billion, beneficiaries $31 billion, and third-party payers $26.4 billion.

Alternatively, Medicare could negotiate or set prices comparable to those of selected other countries and eliminate the “doughnut hole” in Medicare drug benefits—for the same cost to the federal government and lower out-of-pocket costs for beneficiaries. Under this alternative, which assumes a 45 percent price discount and elimination of the doughnut hole, the federal government pays the same amount, but beneficiaries pay just $19.1 billion and third-party payers $9.9 billion.

[Under the drug benefit enacted through the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), beneficiaries pay a deductible of $250 for prescription drugs, 25 percent of their drug costs up to $2,250, and then 100 percent of those costs once their annual expenses reach $2,250. Medicare begins covering 95 percent of costs once expenses reach $5,100. This gap is sometimes called the “doughnut hole.”]

The alternative benefit would especially benefit Medicare beneficiaries with chronic conditions. Medicare beneficiaries with one of ten specific chronic conditions would save an average of $500 per year.

Anderson acknowledges, however, that by lowering prices, the alternative benefit will reduce the pharmaceutical industry’s ability to fund research and development, potentially harming innovation and advances in medicine.

“Policymakers in the United States have a choice,” he says. “It is possible to improve access to prescription drugs for Medicare beneficiaries if Medicare pays drug prices that are similar to the prices of Canada, the United Kingdom, and France. The trade-off is less pharmaceutical R&D.”

In an accompanying analysis, Patricia Danzon, a professor at the University of Pennsylvania’s Wharton School, argues that the price differences between the United States and other countries are probably not as big as Anderson assumes, and they appear to be — and should be — related to differences in per capita income. She also questions whether the methods for lowering prices in the United States, such as regulation, putting excessive risk on pharmacy benefit managers, or importation of drugs, would be as effective and simple as Anderson assumes. She suggests extending income-related subsidies as an alternative strategy to protect needy seniors from undue risk.

Anderson’s coauthors are Dennis Shea, a professor at Pennsylvania State University; Peter Hussey, a doctoral candidate at Johns Hopkins; and Salomeh Keyhani and Laurie Zephyrin, fellows in the Robert Wood Johnson Clinical Scholars Program at Johns Hopkins.

Anderson’s article can be read at content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.396.

Danzon’s article can be read at content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.405.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research. Additional peer-reviewed papers are published weekly online as Health Affairs Web Exclusives at www.healthaffairs.org. Health Affairs Web Exclusives are supported in part by a grant from the Commonwealth Fund.

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©2004 Project HOPE–The People-to-People Health Foundation, Inc.