As work on the federal budget for fiscal year 2006 moves into the final stretch, Congress is weighing options for cutting federal Medicaid spending by $10 billion over the next five years. The choices that Congress makes will have a profound effect on the 53 million vulnerable children, elderly, people with disabilities, and other adults—all with low incomes—who depend on Medicaid for health insurance coverage.
Interested parties—legislators, providers, non-governmental organizations—have been examining alternatives for achieving these savings. Some, arguing that Medicaid is a bloated program that needs to be trimmed, have supported proposals to cut back on the number of people covered by Medicaid and/or the services available to those who are enrolled. Some even suggest that part of the savings should come from making the poor pay more for their health care.
A growing number of stakeholders are promoting a very different alternative: modernizing and reforming the way Medicaid pays for prescription drugs. Medicaid’s prescription drug spending increased by 19 percent annually from 2000 to 2002, making it the fastest-growing component of Medicaid. Reducing Medicaid’s drug costs would result in significant program savings. Unlike many other options being considered, this approach could save Medicaid billions of dollars—without reducing access to critical medications for people who rely on Medicaid. While support for reducing payments to drug companies is broad, including AARP, the AFL-CIO, and the National Governors Association, the drug industry is lobbying hard against this option.
To find out if payments to drug companies could be reduced without harming either Medicaid enrollees’ access to medications or the companies’ ability to conduct necessary research and development, Families USA examined industry profits and spending patterns. Our conclusion is that the industry can well withstand a reduction in Medicaid payments. Traditionally, the drug industry has argued that any reduction in its revenues will come at the expense of research and development. As this report shows, these companies spend more on marketing, advertising, and administration than they spend on research and development. Overall, the industry is extremely profitable: One-year profits for the leading company alone exceed the total five-year savings target for Medicaid. The industry is also exceedingly generous to its top executives. The argument that all cuts in revenue must come at the expense of research is not supported by the numbers.
The choice could not be clearer: Congress can leave the drug companies unscathed and cut back on health care for the poor, or it can reduce payments to drug companies and protect the health of the most vulnerable Americans.
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