The US federal government is planning to outlaw a pricing system which allows health insurance plans to charge Medicare enrollees much higher prices for choosing a brand-name prescription drug when a cheaper generic version is also available.

This year, 30 health insurers offering 63 drug plans available under the Medicare Part D benefit which provides seniors and disabled people with prescription drugs will be operating the system, known as reference-based pricing, says the Centers for Medicare and Medicaid Services (CMS).

Under the reference-based pricing system, plan enrollees who insist on receiving a brand-name prescription drug when a cheaper generic version is also available are frequently charged the difference between the costs of the two drugs plus a co-payment, which can amount to the full price of the brand-name drug. In contrast, those who choose a brand-name drug where no generic equivalent exists are simply charged a co-payment.

When the Medicare Part D prescription drug benefit began in 2006, reference-based pricing was regarded as a useful tool for keeping costs down. However, under pressure from seniors’ groups and Members of Congress, the CMS has this month stated that the system is too complicated for plan enrollees to be able estimate accurately their out-of-pocket prescription drug costs, and that it plans to ban it from March 2010.

“The basis for this decision is our belief that reference-based pricing may be inherently misleading to beneficiaries and inconsistent with our goal of improving transparency,” said the CMS in a statement.

Seniors group AARP, which has been campaigning to get the pricing system abolished, also points out that the Medicare Prescription Drug Plan Finder website at Medicare.gov does not include the penalties incurred by enrollees in plans which use reference-based pricing in its estimates of their total prescription drug costs for the year. The Plan Finder is an important tool for beneficiaries as they shop for and compare prescription drug plans but Medicare has failed to inform consumers about all the increased costs they may face in 2009, said Cheryl Matheis, the AARP’s senior vice president for health strategy. “We all have a right to know what we are paying for our health care,” she added.

Co-payments for brand-name drugs have increased by $9 or more since 2000, while those for generics have gone up by less than $2 in that time, says AARP.