Lower drug prices could eliminate coverage gap in Medicare prescription drug plan

July 21, 2004

Medicare could eliminate the coverage gap in its prescription drug benefit if it paid pharmaceutical prices comparable to those paid by citizens of Canada, the United Kingdom and France, according to a report by researchers from the Johns Hopkins Bloomberg School of Public Health and Pennsylvania State University. In their report, the authors propose that the amount paid for drugs in Canada, the United Kingdom and France is a reasonable international benchmark for pharmaceutical prices in the United States and is similar to the level of price discount necessary to eliminate the so called "doughnut hole" in the coverage gap and still keep Medicare spending at the same level. However, the potential impact of manipulating drug prices in the U.S. could decrease the funds drug companies invest in research and development, which may limit the number of new drugs introduced into the market. The study, "Doughnut Holes and Price Controls," is a July 21 Health Affairs web exclusive. The complete article is available, free of charge, at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.396.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 does not pay for a percentage of participants' prescription bills if they total $2,250 to $5,100. This gap in coverage is often known as the doughnut hole. The doughnut hole, according to the researchers, was designed to hold Medicare drug spending below $400 billion over a 10-year period.

Lead author, Gerard Anderson, PhD, a professor in the Department of Health Policy and Management at the Johns Hopkins Bloomberg School of Public Health, said, "Congress will have to make a choice. There is the potential for seniors to have substantially better access to pharmaceuticals, if drug prices are lowered. However, the trade-off could be that fewer new drugs would be introduced into the market because drug companies wouldn't be able to afford as much biomedical research."

The researchers compared the average wholesale price of 30 drugs from the United States that are also sold in other countries. They calculated the cost of pharmaceutical drugs at average wholesale price and at a 20 percent discount, which is approximately the discount negotiated with the pharmaceutical companies by private insurers administering the Medicare drug benefit. Compared to U.S. drug prices, the prices were 52 percent lower in Canada, 59 percent lower in France and 47 percent lower in the United Kingdom. The researchers said these countries provide a benchmark for the drug prices Medicare could achieve. If Medicare could meet this same benchmark, then the coverage gap could be eliminated.

The authors created two models to simulate prescription drug spending in 2006. The first model mirrored the recently passed prescription drug plan. The second model was identical to the first, with the exception that it included a 45 percent drug price discount. In this model, the coverage plan hole was closed. Using the first model, drug spending would be $101.9 billion, whereas, under the second model, total spending in 2006 would be $73.6 billion. More than $44 billion would be financed by Medicare in both models, indicating that Medicare spending would not increase.

In order to reduce individual spending by Medicare participants, the United States would have to negotiate with drug companies to lower prices. However, the current prescription drug legislation has a provision that restricts the federal government from negotiating prices with drug companies. The potential trade-off, according to Dr. Anderson and his colleagues, is a loss of pharmaceutical research and development of new drugs. U.S. manufacturers produce nearly half of the major drugs marketed worldwide and a change in their profits may also affect investment into the industry and consequently pharmaceutical innovation.
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The study was supported by the Commonwealth Fund and the Robert Wood Johnson Foundation National Program Partnership for Solutions.

Dennis G. Shea, with Pennsylvania State University, and Peter Hussey, Salomeh Keyhani and Laurie Zephyrin, with Johns Hopkins University, co-authored the study.

For the latest public health news or to receive news releases from the Johns Hopkins Bloomberg School of Public Health via email, visit www.jhsph.edu/Press_Room.

Johns Hopkins University Bloomberg School of Public Health

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