"Was Part D a Giveaway to the Pharmaceutical Industry?" by Joseph P. Newhouse, Erica Seiguer, and Richard G. Frank. - In the ongoing debate over the Medicare Modernization Act (MMA), critics have questioned the wisdom of forbidding the government to negotiate drug prices, and instead relying on competition among drug companies to secure business from private insurers as a means to contain prices. This new study by Harvard researchers on the Medicare Part D prescription drug benefit has found that prohibiting government negotiation may be only a minor problem if the rate of introduction of new, first-in-class drugs remains low, as it has over the past few years.

However, the researchers warn, if innovative drugs enter the market at the higher rates seen in prior decades--and have no clinical substitutes and thus no competitors--the government could face unacceptably high drug expenditures. Citing the experience with Prilosec and Celebrex, which were introduced in the 1990s and would have accounted for 5 percent of Medicare drug spending on the elderly, the authors say that new blockbuster drugs could pose a significant problem for reimbursement and spending control. "Our analysis suggests that the MMA is structured in such a way that for a small, but potentially nontrivial number of drugs, manufacturers have a degree of market power that substantially exceeds what they would have in an uninsured market," the authors conclude. "Whether federal officials could negotiate lower prices for such drugs-or whether another price-setting mechanism such as arbitration would be needed to reduce spending-is uncertain."

"Consumer-Directed Health Plans: New Evidence on Spending and Utilization" by Roger Feldman, Stephen T. Parente, and Jon B. Christianson -- This study, which looked at medical service use and spending over three years, found that a consumer-directed health plan (CDHP) offered by a large employer alongside a point-of-service (POS) plan and a preferred provider organization (PPO) was unable to control medical expenditures. Compared to the POS plan, the CDHP was 4.1 percent more expensive in 2001, 26 percent more expensive in 2002, and 22.6 percent more expensive in 2003; notably, CDHP enrollees spent considerably more on hospital care than POS enrollees. The PPO performed somewhat better than the CDHP, but was more costly than the POS plan.

The analysis by University of Minnesota researchers extends their earlier work on CDHPs, a type of insurance that combines a personal care account (PCA) with a high-deductible insurance plan, and in theory, should give consumers an incentive to economize use of health services. In the study firm, once employees reached the deductible-a gap ranging from $500 for singles to $1,000 for families-there was 100 percent coverage. "Thus the benefit design of the CDHP provided a substantial incentive for medical care consumption," the authors note. Findings indicate that this CDHP had too little out-of-pocket cost-sharing, the authors conclude.

INQUIRY is a peer-reviewed scholarly publication. Now in its 42nd year, it is published quarterly by Excellus Health Plan, Inc. Press releases and article abstracts are available at www.inquiryjournal.org.