Criteria For Assessing The Bush Administration's Proposed Medicare Drug Discount Card Program

Background: The Bush Administration is expected to publish a new proposal in the Federal Register soon that would establish a Medicare Drug Discount Card Program. This proposal is likely to be introduced with considerable fanfare and may become the subject of significant debate and analysis. In advance of the Administration's proposal, Families USA-the national organization for health care consumers-has developed key criteria to use in assessing the drug discount proposal. Shortly after the Administration's proposal is issued, Families USA will release an evaluation of the plan based on those criteria.

The critical question in assessing the Administration's proposal is whether it will give Medicare beneficiaries substantial discounts and other cost savings. Currently, Medicare beneficiaries can purchase a variety of prescription drug discount cards. However, the real savings those cards offer is questionable. A recent General Accounting Office (GAO) study found that existing drug discount cards give consumers savings averaging only $3.31 per prescription, or less than ten percent in price reductions. The following criteria will help to answer this question.

Criterion # 1: Will the discounts under the new proposal come predominantly from pharmaceutical manufacturers or from pharmacists?
The Administration's original proposal did nothing to encourage pharmacy benefit managers (PBMs) to negotiate discounts with manufacturers and pass those discounts on to consumers. PBMs typically obtain consumer discounts by reducing payments to pharmacists. However, pharmacies account for less than a quarter of the price of prescription drugs. When a consumer pays for a prescription, on average, 73.3 percent of the price is attributable to the pharmaceutical manufacturer; only 23.6 percent is based on pharmacists' mark-up; and the remaining 3.1 percent comes from the wholesale distributors. Not only are pharmaceutical manufacturers the source of the largest share of drug costs, they also have the largest profit margins of any entity in the drug supply chain-profits for the industry average 18.6 percent of sales, compared to an average of 2.1 percent for community pharmacies. Any program that intends to offer substantial savings will require PBMs to negotiate price reductions with manufacturers and pass those savings on to consumers.

Criterion # 2: Does the proposed new program establish incentives for the purchase of equally effective but cheaper generic drugs?
To promote real consumer savings, a drug discount card program also should include incentives for consumers to purchase generic drugs when appropriate. Generics usually sell at a fraction of the price that is charged for brand-name drugs. The resulting savings are usually considerably greater than a typical brand-name drug price discount.

Criterion # 3: Will the administrators of the new Medicare Drug Discount Card Program be required to fully disclose pricing information and all agreements with manufacturers, including the price the PBM pays for a drug, the prices to consumers with and without the discount, all rebates the PBM receives from manufacturers, and all contract terms surrounding rebates?
Only through true pricing transparency will beneficiaries, the Medicare program, and the public be able to evaluate the savings available through this or any other pharmacy discount program. Achieving price transparency means that PBMs must disclose the upfront price paid for a drug and any money they subsequently receive in the form of a rebate. PBMs often receive rebates from pharmaceutical manufacturers and generally retain these rebates. These rebates are sometimes based on the PBMs' ability to increase the market share of a specific drug. Since rebates are greater for higher-priced, brand-name drugs, this practice can be an incentive for PBMs to encourage the use of more expensive drugs over generics. To ensure program integrity, it is important that PBMs be required to report all contract terms surrounding pricing agreements, such as the price paid for a drug, the rebates received, sales guarantees related to the size of the rebate, and what portion of the rebates, if any, will be passed on to consumers.

Criterion # 4: Does the proposed new Medicare Drug Discount Card Program guarantee beneficiaries a significant discount off of the manufacturer's price?
If the proposal does not adequately address criteria 1 through 3 (which will provide consumers with significant discounts), then it should guarantee consumers a certain level of price discounts from the manufacturer. The federal government currently requires that drug companies provide significant price reductions to the Medicaid program and the Veterans Health Administration. A discount program should give Medicare beneficiaries comparable price reductions.

Criterion # 5: Is the new program likely to withstand legal challenge? Can the details of the proposed Medicare Drug Discount Card Program be implemented through the federal rulemaking process without congressional authorization?
All of the above criteria are moot if the proposed program is halted in court. On September 6, 2001, Judge Paul Friedman of the United States District Court for the District of Columbia granted a preliminary injunction against the Administration's initial attempt to implement a Medicare Drug Discount Card Program. That initial effort, which involved no public input, was intended to be established without new legislation or new regulations. On November 5, 2001, Judge Friedman issued a stay of proceedings because the Department of Health and Human Services (HHS) said it would not pursue its original plan. HHS indicated that it would propose a new and different Medicare Drug Discount Card Program through the regulatory process and would seek "the views of all interested parties." Once the proposed new rules are published, an assessment can be made concerning whether the new program can be established without congressional authorizing legislation.

February 2002