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Managing Medicare's Costs

Medicare's Part D and $4 Drugs

When Wal-Mart announced in September 2006 that it would charge $4 per prescription for almost 300 generic drugs, it was the first volley in competition among the discount chains to bring cost-conscious prescription drug shoppers into their stores. At the time, observers pointed out that people who get their prescriptions filled at a store’s retail pharmacy often buy other products while they are there. So, even if a retailer loses small amounts on its generic drugs, it can make up the difference in other sales.

Wal-Mart’s 2006 announcement said that the $4 pricing would at first apply only to the 65 Wal-Mart, Sam’s Club, and Neighborhood Market stores in the Tampa Bay area, but within three months the program was available in 49 states (Wal-Mart does not have pharmacies in North Dakota). Since then, other retailers have introduced and steadily expanded their generic drug discounts so as to compete with Wal-Mart. Both Target and Kroger, for example, offer $4 prices for 30-day supplies of some generic drugs.

For people who have Medicare, the spread of $4 generic pricing may seem mildly interesting but irrelevant to their needs. For one thing, almost all Medicare beneficiaries must remain in a plan that has creditable coverage or else they will face future penalties (the exceptions are people with Medicaid). And few plans offer $4 pricing for generics.

As an alternative, retirees might enroll in a prescription drug plan but not use the plan when they can find a lower price elsewhere. In fact, since the Part D benefit was launched in 2006, some retirees have sought to reduce costs by purchasing their refills at the lowest price possible regardless of the plan they’re in. And off-plan purchases, as studies have shown, are frequently used by retirees in Part D plans whose drug spending takes them into the coverage gap known as the doughnut hole, where they must pay the plan’s full cost for generic drugs.

But retirees should be cautious, since there’s a risk for those with drug costs high enough that they could spend their way all the way through the doughnut hole. Because off-plan purchases do not count toward catastrophic coverage, retirees could wind up saving a few dollars on generics but costing themselves much more by delaying or sacrificing catastrophic coverage benefits.

Otherwise, retirees with Part D plans may be able to trim their drug costs by buying $4 generics. And some people in employer plans may also be able to reduce their Rx costs slightly. But in each case, retirees should buy off-plan only if they are certain they won’t reach a plan’s catastrophic limit or (in employer plans) out-of-pocket maximum.

Because 70 percent of all prescriptions are for generic drugs, people who use this tactic will have ample opportunities to save small amounts. For retirees who take several drugs, this approach would typically mean filling certain (usually brand-name) prescriptions through their plans while purchasing other (usually generic) prescriptions at the $4 discount pharmacy price.

Before buying off-plan, retirees should know how much they will save, if anything. Wal-Mart and Humana are jointly sponsoring a national Part D stand-alone plan (the Walmart-Humana Preferred Rx Plan) that sells some generics for less than $4, so in this and perhaps other cases people will lose money if they purchase off-plan.

When savings are to be had, they are minimal – typically in the $1-3 range for each 30-day refill. People who take three or four generic drugs might, depending on their plans, save $100 or so annually. And, to get the $4 retail price, people will need separate prescriptions. Although the potential savings are small, in some instances they could be worth the additional effort. The simplest and most effective way for people to cut their prescription drug costs, though, is during annual open enrollment to switch to the lowest-cost plans for the drugs that they take.

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