Medicare's Drug Problem

Medicare Part B has a drug problem. Program spending on prescription drugs has doubled--growing from $11 billion to $22 billion--over the past eight years. While taxpayers foot the majority of this spending, Medicare Part B beneficiaries are responsible for 20 percent of their prescription drug costs with no out-of-pocket limit. This cost-sharing structure can leave some beneficiaries--many of whom have limited financial resources--with prescription drug expenses that exceed $100,000 per year. Meanwhile, prescription drug prices continue to reach extraordinary new heights with no signs of slowing.

Until recently, the response to these alarming numbers has mostly been limited to talking about the problem. Fortunately, this all changed when the Centers for Medicare & Medicaid Services (CMS) announced plans for a demonstration project that modifies how Medicare Part B pays for prescription drugs. Since 2005, Medicare Part B has paid for drugs provided in physicians' offices and hospital outpatient departments based on the average sales price plus 6 percent. Experts have raised concerns that this methodology may encourage the use of more expensive drugs--regardless of effectiveness--since 6 percent of an expensive drug generates more revenue for the provider than 6 percent of a lower-priced drug.

CMS' five-year demonstration project includes two phases. The first phase would change the 6 percent add-on to 2.5 percent plus a flat fee to help eliminate any excess financial incentive for providers to prescribe high cost drugs over comparable low cost ones. The second phase would implement value-based purchasing--or paying for drugs based on how well they work--for a limited number of prescription drugs. Many of the proposed value-based purchasing tools are already in use in the private sector.

There are already indications that CMS can save money by encouraging the use of less expensive but comparable prescription drugs. For example, one manufacturer developed two drugs that are molecularly similar but not identical. Both are commonly used to treat certain causes of blindness with no difference in clinical outcomes, but one drug is substantially more expensive. Multiple studies have indicated that Medicare Part B--as well as taxpayers and beneficiaries--could save billions of dollars by switching patients to the less expensive but equally effective drug.

CMS' proposal represents a thoughtful, measured approach to modernizing the way that Medicare pays for prescription drugs. It includes multiple opportunities for public input, adds a new exceptions process that will allow providers and Medicare beneficiaries to obtain medically-necessary drugs, and will keep beneficiary cost-sharing responsibilities the same with the option of reducing or waiving them entirely. More importantly, health care providers will retain the ability to choose the treatment that best meets the needs of their individual patients.

AARP recently submitted comments to CMS supporting its proposal to improve the quality of care for Medicare beneficiaries. With Medicare Part B spending on prescription drugs doubling in less than a decade, it is incumbent upon CMS to find ways to ensure that treatments are chosen based on how well they work and not their price tag. The outlook for the taxpayer- and beneficiary-supported Medicare program is bleak if CMS does not find ways to hold down prescription drug spending.