DECEMBER 01, 2005
Joseph L. Fink III, BSPharm, JD

The effect of the implementation of Medicare Part D prescription drug coverage on the generic drug market was discussed recently in a report issued by SG Cowen & Co, LLC. Founded in 1918, SG Cowen is an investment banking and investment research firm based in New York that focuses on the health care industry, as well as others.

The Food and Drug Law Institute quoted from the Cowen report this way: "SG Cowen says the new prescription drug benefit program has caused investors to be cautious about large pharmaceutical companies because of the buying leverage the federal government gains, but generic drugs could see a positive ‘tailwind'from the program. SG Cowen says sales growth for generics could increase 3% to 5% through 2010, with people covered by both Medicaid and Medicare representing a one-time boost for companies heavily discounting to Medicaid."1

The report originated with the business magazine Forbes: "In its coverage of major US pharmaceuticals, SG Cowen said the new Medicare prescription drug benefit program will not impact Big Pharma profits as much as some anticipate.

"Investors are wary of the Medicare drug benefit, said SG Cowen, given uncertainty regarding price discounts that may be demanded by the government. ‘The fact that the US government could purchase 50% of all drugs sold in the United States, and the resulting leverage this offers relative to discounts demanded, is a longer-term concern. This apprehension has led investors to avoid big-cap drug stocks,'the research firm said. ‘Our analysis suggests that the Medicare Drug Benefit likely will be neutral to slightly negative in 2006 and 2010 for branded pharmaceuticals, but not as unfavorable as some investors believe.'"2

One main focus of the Cowen report was the coalescing of purchasing power in the federal government due to the implementation of Medicare Part D. While the prescription discount card initial phase of the program has been implemented with lower enrollments than expected, the Bush Administration has mounted public relations campaigns to make sure those who are eligible for the benefit take advantage of it.

The Prescription Drug, Improvement, and Modernization Act of 2003 was signed into law December 8, 2003, creating Part D of Medicare to join the other programmatic offerings:

  • Medicare Part A Hospitalization insurance
  • Medicare Part B Medical insurance (physician services)
  • Medicare Part C Medicare managed care (Medicare/ Advantage)
  • Medicare Part D Medicare prescription drug program

The initial enrollment period for beneficiaries in Part D began November 15, 2005, and ends May 15, 2006.

The Centers for Medicare & Medicaid Services has worked with the legislation, and these provisions of the prescription drug plans will be in effect when the plan is fully implemented in 2006:

Standard Coverage

  • $420 annual premium
  • $250 deductible
  • 25% coinsurance on charges $250 to $2250
  • Initial coverage limit of $2250
  • Catastrophic coverage after $3600 in out-of-pocket costs [equal to $5100 in Part D drug costs (5% coinsurance over that amount)]

Broader Coverage for Low-income Beneficiaries

  • No premium and reduced cost-sharing due to subsidies
  • Dual eligibles will not pay premiums or deductibles or have a coverage gap
  • $1 copayment for generics; $3 for brands if at Federal Poverty Level (FPL)
  • $2 copayment for generics; $5 for brands if at 100%-150% of FPL

Beneficiaries with lower annual prescription drug costs will not experience savings with this program structure; indeed, they will experience a net loss. The breakeven point is $800 in annual prescription drug expenditures, the point at which savings will start to materialize for the enrollee. This reflects the philosophy that the program is primarily to protect against catastrophic expenses. To assure that both high expense enrollees and those with lesser medication costs will enroll, the program includes a penalty in the form of increased premiums for those who do not sign up during their initial period of eligibility. This is to attract to the program's pool of beneficiaries, both those with low and high medication costs, to spread the risk and ensure the economic viability of the program.

The firms that offer Part D coverage are permitted to use formularies, which could further stimulate use of generics, within strict limitations:

  • There must be a Pharmacy and Therapeutics (P&T) Committee that develops and reviews the list, a majority of whom are practicing physicians or pharmacists.
  • The P&T Committee must have at least one practicing physician and one practicing pharmacist who has expertise in the care of elderly or disabled patients.
  • The committee's decisions must be based on the strength of scientific evidence and standards of practice.
  • The formulary must include drugs within all therapeutic categories and classes of covered Part D drugs.
  • The US Pharmacopeia has developed the list of categories and classes to be used for P&T Committee decisions.
  • Plan sponsors can change the therapeutic categories and classes of drugs on the formulary only once per year, unless the secretary of Health and Human Services allows otherwise for new therapeutic uses.
  • The plan sponsor must provide information about the formulary to beneficiaries, pharmacists, and physicians and must inform these people before changing the coverage status of a drug or changing its preferred or copayment status.

Even as confusing as the twists and turns of its coverages may be, Medicare Part D still has the potential to greatly reduce cost barriers and improve access to medications for eligible beneficiaries. Governmental and other organized prescription drug benefit programs have shown great interest in stimulating the use of generics with either policy mandates or financial incentives. The financial incentives, in the form of reduced copayment amounts, are already a feature of the portion of the Medicare Part D program for low-income enrollees.

Dr. Fink is professor of pharmacy, professor of public health, and professor of public policy and administration at the University of Kentucky in Lexington.

For a list of references, send a stamped, self-addressed envelope to: References Department, Attn: A. Stahl, Generic Pharmacy Report, 241 Forsgate Drive, Jamesburg, NJ 08831; or send an e-mail request to:

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