January 2007
Can Government Price Negotiation Work for the Medicare Drug Benefit?
Should the government negotiate the prices of pharmaceuticals covered by the new Medicare Part D prescription drug benefit? The incoming Democratic leadership in Congress has made Medicare price negotiation a top policy priority, but controversy rages over precisely what that might entail and whether it would reduce drug costs in Part D. Supporters of government negotiations point to the success of the U.S. Department of Veterans Affairs (VA) in obtaining low prices, but critics argue that Medicare would not do better than the current system of allowing private drug plans to make their best deal. Panelists addressed these and other issues at a January 19, 2007, conference at AEI.
Gerard Anderson
Johns Hopkins University
Medicare should negotiate for drug prices when markets are not working. The lowest price paid for a drug by a Part D plan should be compared to the prices paid by VA, the Medicaid program, and Canada on a drug-by-drug and dose-by-dose basis. This verification that the market is getting a reasonable price should be done semiannually by the Department of Health and Human Services (HHS).
Information on what a drug companies charge to individual drug plans is not available, but there is some evidence of market failures in existing data. An international comparison of prices for the thirty most commonly prescribed drugs (assuming a 20 percent reduction in average wholesale price as the U.S. market price) found that the United States was paying significantly more than the United Kingdom, Canada, or France. There was considerable variation across drugs, demonstrating the importance of comparing prices by both drug and dose. The Congressional Budget Office (CBO) has estimated that the average Part D plan pays higher prices than the Medicaid or VA programs.
The market seems to be working in lowering generic prices, but drugs for Medicare/Medicaid dual eligibles--who are now receiving drug coverage through Part D rather than through Medicaid--could be costing the Medicare program inappropriately. Prices for brand name drugs, particularly unique and protected classes of drugs, are also a concern.
The HHS secretary should begin negotiations where the price differential between Part D plans and other programs is the highest, using the bully pulpit and focusing on just a few drugs. This strikes a balance between arguments that negotiation would stifle innovation or be ineffective. Backup government price strategies could include reference pricing, price ceilings, reimportation, profit-sharing, or value-based purchasing. Medicare should not be paying the highest prices for drugs, and Medicare beneficiaries should not be the primary supporters of pharmaceutical research and development.
Michael Valentino
U.S. Department of Veterans Affairs
There are several myths about the VA pharmacy benefit. The assertion that VA only covers 30 percent of the drugs available in Medicare is not based on an accurate comparison. VA’s formulary is not the most restrictive in the marketplace, according to the Institute of Medicine. VA uses both older and newer drugs, and veterans do not live shorter lives. One analysis of the VA formulary, published by the Manhattan Institute, has numerous methodological flaws. Veterans do not receive substandard care, and by some measures receive superior care compared to coverage by private insurance. VA has both community and mail-order pharmacies, and automated dispensing allows more time for pharmacists to counsel patients and results in fewer mistakes. Newer drugs are not always better or safer, but VA reviews all new drugs immediately. Drugs that are not on the formulary are available to patients who need them. VA physicians have expressed satisfaction with the system, and VA gets higher marks than the private sector on customer satisfaction measures.
VA operates like a staff-model HMO, and it owns and operates its infrastructure. It does its own dispensing, formulary management, contracting, and other activities. The cost per prescription has been nearly flat for the past seven years. VA aims to promote appropriate drug therapy, to reduce geographic variability, and to increase the affordability of the benefit.
VA’s three main tools are contracting, utilization management, and distribution systems. Contracting is based on federally mandated prices as well as performance-based discounts and committed-use agreements. VA’s contracts are clinically driven and consider outcomes as well as cost, and formulary decisions achieve a high level of buy-in once they are implemented.
Joseph Antos
AEI
When scoring a bill on drug price negotiation, the CBO considers the presence of an incentive to use cost-management tools, the authority to use those tools, the administrative feasibility of using them, and any interactions and unintended consequences.
Formularies and preferred drug lists can be very effective in directing market share, and the pharmacy benefit management (PBM) business is successful because of PBMs’ ability to say "no." The ability to use tools to manage costs is an important factor for CBO. For example, the Graham-Miller Bill introduced in 2002 achieved a CBO score under the spending limit only by restricting its proposed Medicare drug benefit to covering just two brand drugs per class.
HR 4, the House bill calling for Medicare drug price negotiation, does not allow a formulary and therefore will have no impact. Other bills limit the drugs for which the government would negotiate, or call for a government-run prescription drug plan. Pricing regulations already in use for other programs, such as "best price" and other forms of mandated discounts and formula-based pricing, use flawed methods that may not result in lower costs. It will be difficult to tell if Medicare is saving money with any method, because such a determination requires knowledge of what happened to spending over the entire benefit.
Mark B. McClellan, M.D.
AEI-Brookings Joint Center for Regulatory Studies
The first year of Medicare Part D has gone well. Awareness, satisfaction, and cost numbers for the benefit are favorable. Price negotiation is taking place in the program as it does in the Federal Employees Health Benefits program and in the private sector. Competition has lowered cost projections for the program.
Any changes to the benefit should be considered carefully. The results of past attempts at price regulation, such as in Medicaid and Medicare Part B, provide reasons for caution. Price regulation can lead to higher overall prices for everyone. The highest satisfaction rates in the Part D program are among Medicare/Medicaid dual eligibles--beneficiaries who have experience with the Medicaid drug benefit.
In order to accurately compare VA and Medicaid prices to Part D prices, the administrative costs and pharmacy service charges included in Part D prices must be accounted for, as well as the breadth of formularies and prescriber-and-pharmacy networks. Regulating prices using a reference pricing system, such as the Medicaid best price system, retards competition, and makes prices go up for everyone. Price regulation is not an effective strategy for Medicare: for a program so large, Medicare would determine the reference price, not the other way around. Price regulation also subjects the government to a great deal of lobbying, as happens already under Medicare Part B, and has a negative effect on drug research and development.
Most of the Part D plans have broad formularies, and beneficiaries appear to prefer plans that offer a broader range of drugs. The public debate should be about whether saving additional money is worth the restrictions that would be necessary to achieve the savings. Using the bully pulpit is already possible under current law, thanks to additional data that is available. Benefit-design structures and beneficiary education can also keep costs down by encouraging the use of generic drugs.
AEI health policy program manager Elizabeth Walker prepared this summary.
