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Managing Medicare's Costs

Medicare's Part D: High costs and green shoots

It’s hardly news that during the past decade many retirees have been financially hurt by soaring prescription drug prices. The 19 million people who have Part D stand-alone drug plans, for instance, have seen their premiums climb at an average annual rate of 7.2% since Medicare began offering drug coverage in 2006.

People who are 65 and older use almost three times as many drugs per person as those who are younger, with each Medicare beneficiary taking 4.1 prescription drugs on average. Surprisingly, a fair number of individuals pay more for prescription drugs during retirement than they do for all other kinds of medical care, even though Rx drug costs are only one-fifth of a typical retiree’s healthcare spending.

The risk is for those retirees who take expensive drugs and are in plans that have weak catastrophic protection. This year the Part D catastrophic limit is $4,700, which applies to stand-alone plans and Medicare Advantage prescription drug plans. Add to that the $320 standard deductible and the average annual premium of $470 for stand-alone plans and the actual worst case is closer to $5,500 a year.

Technically even that is not an out-of-pocket limit, because people must continue to pay small amounts for refills after reaching the catastrophic limit. So, there’s a substantial risk in this single category of retiree healthcare spending even though it represents only 20% of retiree healthcare costs.

Still, in the last few years there’ve been several encouraging signs for retirees. Before 2011, Medicare beneficiaries paid full retail prices for prescription drugs purchased in the coverage gap known as doughnut hole. But thanks to a provision in the Health Reform law, people with Part D plans who reach the doughnut hole in 2012 will pay only 50% of the cost of brand-name drugs and 14% of the cost of generic ones. More than 29 million Medicare beneficiaries have Part D plans (19 million in stand-alone plans plus another 10 million in Medicare Advantage plans with Part D coverage).

Another positive sign is that popular brand-name drugs are losing their patent protections in droves. That opens the door for generic equivalents that cost one-tenth as much. The foremost example is Lipitor, the best-selling prescription drug of all time, which saw its patent expire five months ago. There are already two generic substitutes for Lipitor on the market, with more expected before the end of the year.

But it’s not just Lipitor. In 2011 Zyprexa and Levaquin went over what’s sometimes called the “patent cliff,” and together they had accounted for almost $4 billion in sales the year before. Blockbuster drugs like Flomax, Effexor XR, Lovenox, and Aricept lost their patent protections in 2010, as did the hugely popular Prevacid in the fourth quarter of 2009. Yet to come in 2012 are the patent expirations of five major blockbusters – Plavix, Seroquel, Singulair, Actos, and Enbrel — which together rang up more than $20 billion in sales last year.

A recent report from the IMS Institute for Healthcare Informatics, a pharmaceutical consulting firm, said that expiring drug patents in 2006-2009 were responsible for a one-third drop in the costs of prescription drugs in eight of the ten therapeutic drug classes that have the most Part D prescriptions. And expiring patents are one reason that the percentage of people reaching the doughnut hole has declined slightly. The most recent data are for 2009, when according to a Kaiser Family Foundation estimate, 12 percent of Medicare’s beneficiaries reached the doughnut hole

Meanwhile, generic drugs represent 78% of all prescriptions filled, according to a study last year by the Government Accountability Office (GAO). Because they must continually compete for market share, generics often reduce their prices, to the benefit of consumers. Thus average retail prices for generic drugs fell by 31 percent from 2005 to 2009, according to the AARP Rx Price Watch Report released earlier this month.

These two trends – expiring patents for popular brand-name drugs and increased competition among generics — are starting to be reflected in the prices people actually pay at the pharmacy counter and in Part D premiums. As reported in the journal Health Affairs last August, government economists found that in 2010 the nation’s prescription drug spending grew by a mere 3.5%, down from 5.3% in 2009. And in 2012 the average premium for a Part D stand-alone plan grew by 3.8% according to the Kaiser Family Foundation, the smallest annual percentage increase since Part D began.

People with Medicare, especially those with Part D plans – can save thousands of dollars during their retirements if they actively manage their drug costs. Here’s a list of basic steps retirees should take:

1) Use generic equivalents whenever possible. This advice is so common that it’s hard to believe people don’t do it. But the GAO study mentioned above said that if generic drugs are substituted for brand-name drugs every time there’s a generic equivalent available, then 93% of all prescriptions (vs. the current 78%) would be for generics, saving $900 billion a year in prescription costs.

2) If generic equivalents aren’t available, consider using a less expensive substitute drug that treats the same condition. The Consumer Reports Best Buy Drugs site lets you see if substitute drugs are available and also compares their costs and effectiveness with similar drugs, including the one you’re currently taking.

3) Re-evaluate all available plans during annual open enrollment, comparing their prices for the drugs you take to your plan’s prices.

4) When appropriate, use tactics like switching to mail-order or (in a few cases) splitting pills to save money. ◊◊

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