Medicare's Drug Problem

Medicare Part B has a drug problem. Program spending on prescription drugs has doubled--growing from $11 billion to $22 billion--over the past eight years. While taxpayers foot the majority of this spending, Medicare Part B beneficiaries are responsible for 20 percent of their prescription drug costs with no out-of-pocket limit. This cost-sharing structure can leave some beneficiaries--many of whom have limited financial resources--with prescription drug expenses that exceed $100,000 per year. Meanwhile, prescription drug prices continue to reach extraordinary new heights with no signs of slowing.

Until recently, the response to these alarming numbers has mostly been limited to talking about the problem. Fortunately, this all changed when the Centers for Medicare & Medicaid Services (CMS) announced plans for a demonstration project that modifies how Medicare Part B pays for prescription drugs. Since 2005, Medicare Part B has paid for drugs provided in physicians' offices and hospital outpatient departments based on the average sales price plus 6 percent. Experts have raised concerns that this methodology may encourage the use of more expensive drugs--regardless of effectiveness--since 6 percent of an expensive drug generates more revenue for the provider than 6 percent of a lower-priced drug.

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