Unlike traditional Medicare, which is run directly by the government, the new Medicare Part D prescription drug program depends on private insurers to provide drug coverage to Medicare beneficiaries. This reliance on private insurers has sparked a debate about the consequences of privatizing the delivery of Medicare services. Proponents, including President Bush, have argued that competition among private insurers will lead to “better coverage at more affordable prices.” Opponents have questioned whether private companies can match the efficiency and negotiating power of traditional Medicare.


Administrative costs of Medicare Part D are six times higher than the cost of traditional Medicare.



Drug manufacturer rebates received by Part D insurers are significantly smaller than rebates received by Medicaid.

This debate over the design of Medicare Part D has been largely theoretical. The actual costs incurred by the private drug insurers and the drug prices they negotiate are proprietary and closely guarded. This has left Congress and the public without access to the information needed to assess the performance of private insurers and to compare their performance with traditional Medicare.

At the request of Chairman Waxman and Reps. Braley, Cooper, Cummings, Higgins, Hodes, Kucinich, McCollum, Murphy, Towns, Van Hollen, and Welch, this report breaks new ground by analyzing proprietary cost and pricing data from the private insurers that operate the Medicare Part D program. The Committee obtained information on administrative expenses, sales costs, profits, and drug rebates from the 12 leading insurers offering Medicare prescription drug plans and Medicare Advantage drug plans. These 12 insurers provide Medicare drug benefits to over 18 million Medicare beneficiaries, almost 75% of the enrollees in Part D. The report is the first independent analysis to have access to this proprietary data about plan costs and drug prices.

The cost and pricing data obtained by the Committee reveal that use of private insurers to deliver Medicare drug coverage is driving up costs and producing only limited savings on drug prices. The report estimates that taxpayers and Medicare Part D beneficiaries could have saved almost $15 billion in 2007 if administrative expenses in the program were reduced to the level achieved by traditional Medicare and drug prices were lowered to Medicaid levels.

The report has five principal findings:


    • The Part D insurers have high administrative expenses. The administrative expenses, sales costs, and profits of the private insurers offering Medicare Part D coverage will cost taxpayers and beneficiaries $180 per beneficiary in 2007. Taking into account the costs to the government of monitoring the private insurers, total administrative expenses, sales costs, and profits will reach $4.6 billion in 2007, with the profits of the Part D insurers alone accounting for $1 billion. The administrative expenses, sales costs, and profits of the privatized Part D program are almost six times higher than the administrative expenses of traditional Medicare. These high expenses do not appear to be due to one-time “start-up” costs because the total expenses increased from 2006 to 2007.
    • The Part D insurers have not negotiated significant drug manufacturer rebates. The rebates negotiated from drug manufacturers by the private Part D insurers will reduce Medicare drug spending by 8.1% in 2007. In contrast, the Medicaid program receives rebates from drug manufacturers that reduce drug spending by 26%, over three times as much. The small size of the Medicare rebates and the transfer of low-income dual-eligible beneficiaries from Medicaid drug coverage to Medicare drug coverage will provide a $2.8 billion windfall to pharmaceutical manufacturers in 2007.
    • The Part D insurers receive rebates on drug purchases made by beneficiaries in coverage gaps. The Medicare Modernization Act requires that private insurers give Medicare beneficiaries “access to their negotiated prices,” including “all discounts, … rebates, [or] other price concessions.” When the Part D insurers obtain rebates, however, they do not pass them through to beneficiaries by reducing drug prices in coverage gaps like the “donut hole.” Instead, the dollars flow in the opposite direction: the private insurers receive rebates from the drug manufacturers on purchases paid out-of-pocket by beneficiaries. In 2007, the Part D insurers are expected to receive $1.0 billion in drug rebates from transactions in which beneficiaries in coverage gaps pay 100% of the drug costs.
    • The Part D insurers have established drug pricing formulas that leave beneficiaries and taxpayers vulnerable to price increases. In almost all cases, the private insurers use pricing formulas that pay pharmacies the drug manufacturers’ full list prices minus a fixed percentage and a small dispensing fee. These formulas have resulted in drug prices that are generally no lower than those already available through discount pharmacies and on-line drugstores, while leaving beneficiaries and taxpayers vulnerable to repeated increases in list prices by the drug manufacturers.
    • The Part D insurers have a mixed record in promoting the use of generic drugs. In 2007, 59% of prescriptions filled by Medicare Part D will be filled with generic drugs. This level of use of generic drugs compares favorably with Medicaid, which fills 54% of prescriptions with generic drugs. It does not compare favorably with the experience of the Department of Veterans Affairs, which fills 68% of prescriptions with generic drugs.

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