03/09/2009 05:12 am ET Updated May 25, 2011

Democrats Fire a Shot on Medicare Prescription Drug Coverage Reform

Are seniors about to get a new deal on prescription drugs from Washington?

Medicare recipients have been able to purchase drug coverage since 2006 under Medicare Part D, which provides for federal subsidy of prescriptions. The coverage is provided through hundreds of private insurance plans and they have become popular, with nearly 27 million beneficiaries enrolled and paying premiums deducted from Social Security checks.

But costs have been rising sharply; average premiums for the 10 most popular plans jumped 30 percent for the re-enrollment cycle for 2009. And some critics point to needless complexity facing consumers, who must choose among dozens of varying plan offerings -- many of which are revised annually.

Medicare Part D was the subject of intense debate when the enabling legislation program was passed in 2003, due to Republicans' insistence that the program be privatized. Democrats objected to the outsourcing, but even more important, they fought unsuccessfully against a provision of the bill that prohibited the federal government from negotiating with pharmaceutical companies to reduce the prices of drugs offered in the program.

Democratic lawmakers have been trying since then to remove that prohibition, without success. Now, with their party firmly in control in Washington, they're set to try again.

Democrats are introducing legislation that would create a Medicare-administered prescription drug plan that would compete with the hundreds of private plans. More important, the bill would require the Secretary of Health and Human Services to negotiate with pharmaceutical companies on the price of drugs offered in the government-run plan.

The bill -- called the Medicare Prescription Drug Savings and Choice Act of 2009 -- most likely will be considered by Congress as part of whatever broader healthcare reform legislation advanced by the Obama Administration.

If the proposed changes become law, a new government-administered drug plan could be offered as early as 2011. Proponents argue that it could produce a less expensive, easier-to-understand plan for consumers.

The price reductions would come from the elimination of plan marketing expenses, price negotiations with drug makers, and greater reliance on generic brands. A 2007 study by the health care advocacy group Families USA found that the Department of Veterans Affairs -- which runs its own program and negotiates with drugmakers -- paid a whopping 58 percent less, on average, than the prices paid by Medicare Part D programs (download a PDF of the study here). Some experts dispute the validity of comparing the VA and Medicare programs, but other studies have pointed to similar large potential savings.

The overall savings to Medicare and beneficiaries could be huge. Research by the Center for Economic and Policy Research pointed to $600 billion in potential savings over a seven-year period.

The bill's sponsors say some of those savings could be used to close the so-called "doughnut hole in Part D coverage -- the current gap in coverage that starts when beneficiaries exceed $2,510 in coverage for a given year. At that point, the beneficiary pays 100 percent of costs up to $4,500, when so-called "catastrophic coverage" kicks in.

I've posted more detail on the bill this week at RetirementRevised.