Part D and Generic Substitution

Implications: Generic utilization rates in the Medicare Part D benefit are very high and increasing. Ironically, Part D may ultimately end up hurting brand manufacturers by accelerating already-rapid generic substitution rates as seniors approach the donut hole.

Analysis:

Part D has demonstrably improved access and reduced out-of-pocket costs for seniors with no drug coverage. (See PhRMA’s September 2007 study.) Part D has also slowed drug diversion from Canada, which improves patient safety.

However, the much-maligned “donut hole” also appears to be encouraging greater generic substitution. Check out a new OIG report called Generic Drug Utilization In The Medicare Part D Program., which examines 341 million prescriptions paid by Part D in the first half of 2006. During the first six months of the Part D program:

• Generic drugs were dispensed 88 percent of the time when generic substitutes were available
• 56 percent of all drugs dispensed were generics

As expected, people respond to incentives. Under Part D, seniors have strong incentives to keep their total drug costs below the lower end of the donut hole ($2,250). As a result, more seniors are trying to get the biggest bang for their buck by accepting generic substitution as well as shopping around at pharmacies. According to the New York Times article cited above, CMS estimates that generic dispensing rates are now 61.5%.  I wonder if brand drug makers may be having second thoughts about Part D.

This unexpected dynamic could slow momentum for dramatic changes to the Part D program. Democrats perpetually chatter about using “direct price negotiations” with manufacturers to fund the elimination of the donut hole. Although the structure of the Part D benefit makes such negotiations virtually impossible to implement, brand manufacturers will likely feel much more pricing pressure from Part D plans.

The next few years will see an enormous wave of new generics. In 2006, Part D cost the Federal Government $47 billion in 2006, which is $13 billion less than the original estimate of $59 billion. Generic drug substitutions were a prime contributor to the 2006 reduction and lowered future cost estimates. Look for further reductions in the estimated cost of Part D, especially if Average Manufacturer Price (AMP) gets linked to Part D. (See Will AMP be used to solve perceived Part D problems? – Council Site). 

I also expect to hear more about generic sourcing, as I discuss in Big 3 Wholesalers Ramp Up Sourcing from India (Council Site).