In 2008, Medicare spent nearly $2.4 billion dollars on Lipitor and over $2.3 billion on Plavix. Medicare tracks how much money is spent on drugs purchased through Part D drug plans, and the chart below is from the Medicare website.

http://www.cms.gov/dashboard/downloads/partDdash.asp?agree=yes&next=Accept

According to Medicare data, more money is spent each year on drugs that treat cholesterol problems than any other class of drugs, at a total cost of over $6 billion.  Antipsychotic drug spending is next, at around $5.6 billion, followed by drugs for diabetes at $4.68 billion. Medication for high blood pressure comes in fifth with just over $4 billion in cost.

Total drug spending by Medicare in 2008 was $68.3 billion, with 75% of that spent on brand name drugs rather than generics.  With brand name drugs costing ten times more than generics, one can see the importance of moving to lower cost drugs for both the Medicare budget and individuals’ budgets.

Medicare subsidizes 75% of the cost of Part D plans, while monthly premiums paid by enrollees cover the remaining 25%.  Part D plans are offered through insurance companies which are paid, on average $720 each year per enrollee, and $2,159 each year for people who get help with their drug costs (Low Income Subsidy). Insurance companies also receive more money for high cost enrollees through “risk adjusted payments”.  Employers who offer drug coverage for their retirees receive, on average, $646 each year from Medicare. This information comes from kff.org October 2010 fact sheet: http://kff.org/medicare/7044.cfm

The Medicare“dashboard” with Part D drug information allows for a search by state.  In Arizona, just over $1 billion was spent on drugs by Medicare in 2008, with nearly $98 million spent on cholesterol drugs. Over $68 million was spent on drugs to treat diabetes for 98,000 people in Arizona.

Prescription drug spending in the United States totaled $250 billion in 2009.  $78 billion of the total was spent by the federal government, or one of every three dollars.   During negotiations over health care reform, drug companies agreed to give a 50% discount on their brand drugs to seniors who go into the Part D donut hole.  This change starts in 2011, and there has been a lot of talk that drug companies were raising prices to lessen the effect on their bottom lines – and reduce real savings for seniors.

Back when Democrats were in control of Congress, they commissioned a study of pricing trends for brand and generic drugs, and the report is now in. It turns out that prices did not increase significantly from 2009 to 2010.  Instead, they rose steadily each year during the four-year period from 2006 to 2010.

One group of brand drugs saw prices rise on average 6.6 % each year, while another group of drugs rose at an average annual rate of 8.3%.  These increases may seem modest, but when you consider the four-year period, price increases totaled between 25% and 32%.

While brand name drug prices increased, generics went down an average of 2.6% each year from 2006 to 2010.  When the study looked at brand drugs with generic substitutes, the brand drug prices rose only 2.6% per year.  So it would seem that competition from generics forced the brand name drug companies to hold down their prices.

The full report can be found here, and I’ve provided information on some widely used drugs below.

The price for Plavix rose on average 7.1% each year from 2006 to 2010.
2011 price: $190.78

Lipitor rose on average 6.1% each year.
2011 price: $151

Lantus (insulin) rose 13% each year from 2006 to 2009, but then rose only 5.7% from 2009 to 2010.
2011 price: $104.63

Advair hfa, an inhaler, rose on average 8.3 % each year from 2006 to 2010.
2011 price:  $221.39

Flomax rose at a rate of 17.6% per year from 2006 to 2010, with a 25% increase from 2009 to 2010.
2011 price:  $142

NOTE: With a Part D drug plan, a person’s co-pay for these drugs would likely be  $40 to $50 if the drug is a tier 2, or “preferred brand”. This means  significant savings for the senior – but Medicare is actually paying for the rest of the cost of the drug.

For the full report, go to http://www.gao.gov/products/GAO-11-306R

I wanted to find the cost to Medicare for Part D, the drug plan for Medicare beneficiaries that went into effect in 2006.  I googled “Part D Medicare budget” and got very good information.

In 2010, Part D made up 13.4% of the Medicare budget, or 68 billion dollars.  So even with seniors paying premiums for their Part D plans that range from $15 to $90 per month, Medicare still paid out $68 billion in 2010 to pay for their drugs!

Then I came across an opinion piece From Forbes magazine (Nov. 20, 2009). The entire piece can be read by clicking on this link, but here are some parts I found particularly interesting:

Bruce Barlett wrote in Forbes:

…Recall the situation in 2003. The Bush administration was already projecting the largest deficit in American history–$475 billion in fiscal year 2004, according to the July 2003 mid-session budget review. But a big election was coming up that Bush and his party were desperately fearful of losing. So they decided to win it by buying the votes of America’s seniors by giving them an expensive new program to pay for their prescription drugs.

Recall, too, that Medicare was already broke in every meaningful sense of the term. According to the 2003 Medicare trustees report, spending for Medicare was projected to rise much more rapidly than the payroll tax as the baby boomers retired. Consequently, the rational thing for Congress to do would have been to find ways of cutting its costs. Instead, Republicans voted to vastly increase them–and the federal deficit–by $395 billion between 2004 and 2013.

However, the Bush administration knew this figure was not accurate because Medicare’s chief actuary, Richard Foster, had concluded, well before passage, that the more likely cost would be $534 billion. Tom Scully, a Republican political appointee at the Department of Health and Human Services, threatened to fire him if he dared to make that information public before the vote. (See this report by the HHS inspector general and this article by Foster.)

…the drug benefit had no dedicated financing, no offsets and no revenue-raisers; 100% of the cost simply added to the federal budget deficit, whereas the health reform measures now being debated [in 2009] will be paid for with a combination of spending cuts and tax increases, adding nothing to the deficit over the next 10 years, according to the Congressional Budget Office. (See here for the Senate bill estimate and here for the House bill.)

….It astonishes me that a party enacting anything like the drug benefit would have the chutzpah to view itself as fiscally responsible in any sense of the term. As far as I am concerned, any Republican who voted for the Medicare drug benefit has no right to criticize anything the Democrats have done in terms of adding to the national debt. Space prohibits listing all their names, but the final Senate vote can be found here and the House vote here.

Bruce Bartlett is a former Treasury Department economist