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A Project of The Annenberg Public Policy Center

More Mediscare

Newspaper ads from a conservative group make the disputed claim that "Obama's Medicare Plan Will Increase Medicare Premiums." The "plan" it refers to is actually designed to produce lower prices for low-income Medicare Part D beneficiaries and taxpayers. And whether drug companies would increase prices to others in response is a matter of conjecture, not fact. Experts have differing views. And the sponsor of the ad — whose sister organization produced a study supporting the claim — won't say who's financing these messages.

The ads and mailers from the American Action Network also make the greatly exaggerated claim that the legislation would "Balance the Budget on the Backs of Seniors." Even if the bill achieves the estimated reduction in government spending, it would amount to an incredibly small fraction of the total deficit.

The materials are being published and distributed in 22 districts represented by Republicans in 14 states, and they ask voters to call the lawmaker and "Urge Him to Keep Fighting to Preserve the Medicare Part D Prescription Drug Benefit." The American Action Network was launched in 2010 by former GOP Sen. Norm Coleman of Minnesota. A sister policy organization, American Action Forum, is headed by Douglas Holtz-Eakin, a former director of the Congressional Budget Office and adviser to Sen. John McCain's 2008 presidential campaign. AAN says it will spend about $1 million for the print materials and Web ads; it does not have to disclose its donors, and spokesman Jim Landry said the group would not do so when we specifically asked whether this campaign was being funded by the pharmaceutical industry.

The mailers include alarming language, saying that "Obama is trying to radically change" the Medicare drug program and that the "devastating" impact would include an increase in prescription drug premiums "for millions of seniors" of "up to 40%." But there's little indication in the advertisements as to what this is all about, or acknowledgment that the 40 percent increase claim comes from a study produced by a partner of the conservative group behind these messages.

The Medicare Drug Savings Act

The messages are referring to the Medicare Drug Savings Act of 2011 (H.R. 2190), which was introduced by Democratic Rep. Henry Waxman of California on June 15. Related legislation was introduced in the Senate on the same day by Sen. John D. Rockefeller. In stark contrast to the AAN ads, House Democrats describe the bill as one "that would save the government billions by reducing Medicare Part D drug costs for taxpayers" and "eliminate a sweetheart deal for brand-name drug manufacturers that allows them to charge Medicare higher prices for millions of low-income enrollees." Democrats on the House Energy and Commerce committee say the measure is expected to save $112 billion over 10 years, according to the CBO, and, they say, it "Would Help Avert Republican Efforts to End Medicare."

That's a reference to the House Republican budget, which proposed more substantial changes for Medicare, turning it into a subsidized private insurance program starting in 2022 — but as we've said before, it wouldn't put an end to a government program for seniors' health insurance. Democrats have made misleading statements about the GOP plan; now, it's conservatives' turn to attack legislation backed by Democrats with disputed claims.

The Democrats' bill would require drug companies to pay a rebate for prescription drugs sold to low-income Medicare Part D beneficiaries. Most of the low-income beneficiaries are dual-eligibles, meaning they're eligible for both Medicare and Medicaid. Prior to Part D's creation in 2006, those beneficiaries received drug coverage through Medicaid, which requires drug manufacturers to pay a rebate. The Medicaid rebate is generally a better deal than what Medicare drug plans secure through negotiations with manufacturers. So, the legislation is designed to implement a Medicaid-like rebate for the dual-eligibles plus other low-income beneficiaries on Medicare Part D. In other words, the government — and beneficiaries — pay less for drugs and the drug companies make less money. About 37 percent of Part D beneficiaries — 9.9 million seniors — receive low-income subsidies, and about 7.5 million of those are dual-eligibles, according to the nonpartisan Kaiser Family Foundation. Drug manufacturers would have to offer the rebates in order for their drugs to be covered by Medicare.

Would It Raise Costs?

So how does the AAN figure the rebates will cost seniors more when the aim is to lower costs? An analysis done by Holtz-Eakin and Michael Ramlet of the American Action Forum, AAN's policy arm, says the drug companies will pass along some of the cost of the rebates to beneficiaries, leading to higher premiums and out-of-pocket costs. But Gerard Anderson, director of the Johns Hopkins Center for Hospital Finance and Management, also reviewed the legislation and said he didn't see evidence that costs would be shifted to seniors. He said in a letter to Waxman that expanding the rebate to low-income Medicare beneficiaries would "lower the out of pocket costs and premiums for all Medicare enrollees," and that if drug companies sought to cut costs because of the rebate program, they would likely cut their marketing budgets. (Anderson worked in the Department of Health and Human Services under Presidents Carter and Reagan.)

When CBO looked at a similar proposal (see Option 25) in a report on ways to reduce the deficit, it didn't say anything about seniors' premium costs increasing. It did say that drug companies would likely charge "higher 'launch' prices for new drugs to limit the impact of the new rebate." But it expected that to mainly affect Medicaid. CBO said employer-based plans "would probably negotiate for larger rebates to offset" the increase in launch prices, but Medicaid would end up paying more for those new drugs. It also said there could be some impact, though likely not a significant one, on drug companies' research spending.

CBO, March 2011: A disadvantage of the option is that the net reduction in the prices paid for drugs under Part D might reduce the amount of funds that manufacturers invest in research and development of new products. Relative to current law, the option would not significantly reduce the incentive to develop "breakthrough" drugs because those drugs could be launched at prices that were high enough to largely offset the rebate. However, the new rebate would apply to LIS beneficiaries who are not dual eligibles, so the magnitude of the total required rebates would be larger than when dual eligibles received their drug coverage from Medicaid; consequently, the adverse impact on manufacturers’ incentives would probably be larger than it was prior to the creation of Part D.

We can't predict how exactly the legislation would actually affect drug prices or seniors' costs. But we can say that the AAN messages have been contradicted by Anderson, and views of the legislation vary greatly. The president of the Medicare Rights Center said in a letter to Rockefeller and Waxman that the bill was a "crucial cost-saving measure that will support other initiatives to reduce the deficit while protecting vulnerable populations who can least afford an increase in the price of health care." The center is a nonprofit consumer organization for Medicare beneficiaries, and its president, Joe Baker, is a former New York state deputy secretary of Health and Human Services under Democratic Gov. David A. Paterson. AARP also supports the legislation. The conservative American Enterprise Institute, on the other hand, agrees with AAF's cost-shifting analysis, saying: "Part D plans may not be able to negotiate prices as low as they were before the rebate policy, necessitating increases in premiums or changes in the benefit offered by plans (for example, through more restrictive formularies or higher copayments)." AAN also referred us to a briefing paper that said "[c]ommercial drug pricing may increase" as a result of these types of changes.

We also will note that while the ads say premiums would increase "by up to 40%," that's the upper estimate in the study, based on costs being passed along only to non-low-income beneficiaries. The Holtz-Eakin study says premiums would go up by 20 percent if "applied evenly across the Medicare population." And the study is less dire-sounding than the ads. The report concludes that the legislation "would likely raise monthly premiums for seniors by between 20 to 40 percent," rather than saying definitively, as the mailers do, that the "price controls would be devastating."

For perspective, the average monthly premium for Part D plans is expected to be $40.72 in 2011, a 10 percent increase from the 2010 average and a 57 percent increase from 2006's average premium of $25.93. That's according to a report by the Kaiser Family Foundation, which also said that while average prices were going up, there was variation in price changes among the plans offered.

Balancing the Budget

The AAN mailers make the provocative claim that this change to Medicare is a move to "Balance the Budget on the Backs of Seniors," words that appear next to a picture of an elderly gentleman hunched over and clutching his lower back. Not surprisingly, the legislation doesn't aim to balance the budget — at all. It's expected to save $112 billion over 10 years, and the deficit for 2011 alone is projected by the CBO to be $1.4 trillion. The 10-year cumulative deficit estimate, under current law, is $6.7 trillion. So lawmakers would have to do a whole lot more than extend Medicaid-type rebates to low-income Medicare beneficiaries if they want to come anywhere close to balancing the budget.

Democrats have touted the measure as a way to reduce spending and help cut the deficit. As we mentioned, the CBO looked at this idea as one option for reducing the deficit, and the president's bipartisan fiscal commission recommended implementing a version of the measure in its December 2010 report. Of course, the $49 billion the commission expected to save over nine years by extending rebates only to dual-eligibles was a very small fraction of the nearly $4 trillion in deficit-reduction the commission proposed.

AAN greatly exaggerates. If this legislation were truly aimed at balancing the budget by making changes to Medicare, it would fail miserably in that regard.

— Lori Robertson

Correction, Aug. 5: We originally wrote that the sponsor of the ad produced the study supporting the claims. American Action Forum, a 501(c)(3) organization that produced the study, is a sister organization of American Action Network, a 501(c)(4). Both groups have the same phone number and two of the same board members.