Deficit Reduction and Medicare: Save Money Without Harming Beneficiaries

Although passage of the Affordable Care Act (ACA) has achieved considerable savings for the Medicare program, Medicare is still being targeted by policymakers looking to negotiate a large “grand bargain” deficit-reduction package. Many of the proposals to achieve Medicare savings would shift costs from the federal government to Medicare beneficiaries

As the debt and deficit debate heats up, the Center for Medicare Advocacy urges policymakers to protect Medicare and Medicaid.  These critical programs are health and economic lifelines for Americans and their families.  Half of all Medicare beneficiaries have incomes of $22,000 a year, and women with Medicare have an average income of only $15,000 a year.[1]

While most Medicare beneficiaries have very limited incomes, they are paying more out-of-pocket than ever for their care.  In 1970, premiums and cost-sharing accounted for 6% of beneficiaries’ Social Security benefits; by 2010, that figure had risen to 27% of Social Security benefits – nearly a third of their income.[2] In short, people with Medicare cannot afford to shoulder the burden of deficit-reduction through higher out-of-pocket costs. If policymakers are serious about saving money from Medicare and health costs without harming beneficiaries, they must consider proposals that would achieve significant savings without shifting costs to people who rely on Medicare and Medicaid.

Below are proposals that would save the Medicare program money, without harming beneficiaries, by addressing the cost of prescription drugs:

1. Negotiate Drug Prices with Pharmaceutical Companies

The Medicare Modernization Act (MMA) of 2003 prohibits the Secretary of Health and Human Services from negotiating prices with pharmaceutical companies. These companies gained 50 million new customers when Medicare began covering prescription drugs, but they did not have to adjust their prices in return. Requiring the Secretary to negotiate drug prices and rebates for Medicare would save taxpayers billions of dollars – potentially over $200 billion over ten years.[3] Taxpayers currently pay nearly 70% more for drugs in the Medicare program than through the Veteran’s Administration, which has direct negotiating power.[4] Savings realized from reducing Medicare drug cuts could be used to both improve benefits for beneficiaries and reduce the deficit.

2. Reinstate Drug Rebates for Low-Income People with Medicare

Until Congress created the prescription drug program as part of the MMA, drug manufacturers paid rebates for drugs provided to individuals eligible for both Medicare and Medicaid (known as “dual eligibles”) who are typically the poorest and most vulnerable population in the health care system.[5] As a result of the MMA, drug manufacturers received a windfall when the drug coverage for dual eligibles shifted from Medicaid to Medicare and the rebates were ended. Reinstating these rebates could save over $130 billion over ten years while curbing costs for beneficiaries.[6]

3. End Harmful “Pay-for-Delay” Settlements to Expand Access to Generic Drugs

“Pay-for-delay” settlements by brand-name drug manufacturers that pay off generic drug manufacturers to keep generic drugs off the market are increasingly common. In 2010, the Federal Trade Commission reported a 60% increase in reported pay-for-delay settlements in one year alone. [7] These unfair settlements cost taxpayers and beneficiaries billions of dollars every year and contribute to rising drug costs.[8] Prohibiting these settlements would ensure greater access to lower-cost generic drugs and help lower premiums for consumers and beneficiaries.

4. Add a Drug Benefit in Traditional Medicare

Offering a drug benefit in traditional Medicare would give beneficiaries a choice they do not now have, encourage people to stay in the cost-effective traditional Medicare program, and save money for taxpayers.  A Medicare-administered drug plan would have lower administrative costs than private plans.  Such a plan would be easier to understand than sorting through multiple private plan options, would result in lower drug prices for beneficiaries, and could save taxpayers over $20 billion a year.[9]

Conclusion

The solution to addressing rising Medicare costs is not to shift those costs onto consumers, but instead to focus on proposals that would bring down health costs overall.  Addressing the cost of prescription drugs would benefit not only the Medicare program, but also taxpayers and the health care system as a whole.


[1]Kaiser Family Foundation, Medicare at a Glance, available at http://www.kff.org/medicare/upload/1066-15.pdf.
[2]2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, available at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf.
[3] National Committee to Preserve Social Security and Medicare, available at http://www.ncpssm.org/pdf/price_negotiation_part_d.pdf (2009).
[4] Center for Economic and Policy Research, “Negotiating Prices with Drug Companies Could Save Medicare $30 Billion”, March 2007, available at http://www.cepr.net/index.php/press-releases/press-releases/negotiating-prices-with-drug-companies-could-save-medicare-30-billion.
[5] Center for Medicare Advocacy, Debunking Medicare Myths: Drug Rebates for Dual Eligibles, available at http://www.medicareadvocacy.org/2011/07/21/debunking-medicare-myths-drug-rebates-for-dual-eligibles/.
[6]  See, e.g., President Obama’s “Plan for Economic Growth and Deficit Reduction” (September 2011) which includes a proposal to require rebates for drugs provided to beneficiaries who receive the Low-Income Subsidy (LIS), with a projected savings of $135 billion over 10 years.
[7] Federal Trade Commission Report, available at http://www.ftc.gov/opa/2011/05/mmareport.shtm.
[8] Federal Trade Commission, “Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions”, available at http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf.
[9] Senator Dick Durbin, Press Release: “Medicare Prescription Drug Savings Act of 2011” (March 11, 2011), available at http://durbin.senate.gov/public/index.cfm/pressreleases?ID=555cc1e8-cc54-4ead-9d85-d5e6275b3789.