Personal Finance

This is what Medicare Part D has done to prescription costs

Key Points
  • Medicare Part D, the optional prescription drug benefit plan, was introduced in 2006.
  • The program has led to an overall reduction in drug prices, according to new research.
  • But industry competition affects how much seniors pay and the kind of drugs available to them.

If you're on Medicare, you're probably already familiar with Part D, the prescription drug benefit plan.

But you may not know exactly how the optional program — which has been available to seniors since 2006 — has affected drug prices.

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Today, a majority of individuals who are covered by Medicare have also opted into Part D coverage. About 43 million out of 60 million people covered by Medicare have a Part D plan, according to the Henry J. Kaiser Family Foundation.

The Boston College Center for Retirement Research recently took a look at how the program has influenced the price of prescription medications and their availability.

"Part D did lead to a reduction in prices," said Gal Wettstein, research economist at the Center for Retirement Research.

That comes as demand for drugs increased and people's utilization of them also went up.

But Part D has impacted the way the drug industry provides drugs — and the costs consumers potentially pay — in two key ways.

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Big brands dominate

One change prompted by Part D is that branded drug companies have tried to keep their products away from generic producers longer.

Those companies typically protect their products through a patent, which lasts for 20 years, or exclusivity granted by the Food and Drug Administration, which ranges from three to five years.

But a strategy called evergreening has helped those companies hold onto those protections longer.

Through that process, the drug companies pursue additional FDA approvals for new features added to the same original medications.

For example, the makers of Paxil, an anti-depressant, were granted approval for an extended-release version of the original medication.

So while the original medication could be copied by generics, the company still held onto exclusivity for the newest version of the drug.

Generic firms pull back

The Center for Retirement Research's report also found that generic drug makers face more competition among each other. And that benefits one key area of the market: insurers.

That competition, combined with increased evergreening from big names, could discourage the generics from the market.

"Evergreening can deter competitors from introducing generic alternatives," the report stated.

And that could have one effect: higher prices for consumers, as drug companies face less competition.

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Consequences for seniors

"The dominant effect is the decline in prices due to Part D," Wettstein said of the research. "The decline could have been bigger had different rules been in place."

Still, any changes by policy makers would need to carefully weigh all of the consequences for how prescription drug prices would be affected, he said.

Of note, Congress is looking to move on legislation to reform drug prices by year end. Last week, House Speaker Nancy Pelosi unveiled a plan that would enable Medicare to lower drug prices.

One area to watch: whether that reform will discourage generics.

"When you lower the profits that generics can make, there will be fewer of them, which in turn will somewhat mute the decline in prices," Wettstein said.

One way that seniors can help lower their bills now is to consider using an older version of a drug, even if that means they don't get an extended release version or it's less comfortable to take.

"Keep in mind that the cost might be substantially lower," Wettstein said. "It's just something that people can think about with their doctors."

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