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Understanding the "Doughnut Hole"
Lower Drug Prices Could Eliminate
Coverage Gap in Medicare Prescription Drug Plan
Could also decrease the funds drug companies
invest in research and development.
July 21, 2004 - In 2003
citizens of Canada, the United Kingdom, and France paid an
average of 34-59 percent of what Americans paid for a similar
market basket of pharmaceuticals. If the Medicare program
were to pay comparable prices for pharmaceuticals, it would
be possible to eliminate the "doughnut hole" gap in its prescription
drug benefit and keep Medicare drug spending within the overall
limits established by Congress, according to a report by
researchers from the Johns Hopkins Bloomberg School of Public Health and
Pennsylvania State
University.
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What
is "Doughnut Hole?" |
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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. |
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Another View |
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Closing The Doughnut Hole: No Easy
Answers
Using
cost-effectiveness analysis would be a better strategy than
opening up drug importation into the United States.
By Patricia M. Danzon
The price
differentials reported by Gerard Anderson and colleagues are not
fully representative and are probably biased upward. If Congress
does seek to reduce drug prices, there are no simple, effective,
and efficient strategies. The most likely is drug importation,
which would be ineffective at lowering U.S. drug costs and would
pose sizable safety risks, yet it would reduce research and
development (R&D) costs and access for foreign consumers.
Careful cost-effectiveness analysis would be more appropriate
than trying to import other countries’ price controls.
Income-related subsidies are a better strategy for dealing with
excessive cost sharing for low-income seniors.
Click to full story |
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This provides Congress
with a clear choice: reduce the level of cost sharing and
improve beneficiaries’ access to pharmaceuticals, or allow
the pharmaceutical industry to use the higher prices to fund
research and development and to engage in other activities.
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.
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.
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.
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