Should Medicare Negotiate Drug Prices?

We asked a panel of experts to analyze the impact such a move would have on drug prices. Opinions ran the gamut, from enthusiastic endorsement to qualified optimism to significant doubt.

ANALYZING THE POTENTIAL IMPACT

“Without changing anything with regards to the quality of health care, it would be the one thing that would significantly lower costs,” offers Anthony Morreale, PharmD, assistant chief consultant for clinical pharmacy services and health services research, Department of Veterans Affairs (VA).

To explain its potential impact of giving Medicare the power to negotiate drug prices, Dr Morreale, a member of the FRMC Editorial Advisory Board (EAB), cites estimates published in 2012 by Frakt and colleagues (Health Econ. 2012;21[5]:485-95). The analysis notes that the VA pays 40% less than Medicare does for prescription drugs. If Medicare was able to obtain the same prices as the VA, it would save a total of $14 billion per year, which breaks down to $510 per beneficiary.

One of the reasons the VA gets such steep discounts is that it excludes drugs from its formulary, which gives it bargaining power. The VA’s national formulary includes 59% of the most popular 200 drugs, whereas Medicare covers roughly 85%.

According to the analysis, if Medicare plans tightened formularies to the level of generosity available from the VA, beneficiaries would lose $405 of value per year associated with the loss of choice of drugs. “In other words,” explains Dr Morreale, “the beneficiary would be precisely indifferent between the loss of drug choice and $405 in cash.”

By that logic, he continues, “in principle, beneficiaries could be made whole with $105 left over,” given that Medicare’s assumed ability to negotiate results in an estimated savings of $510 per beneficiary.

Of course it’s an academic discussion at this point. Even the paper’s authors acknowledge “a generous assumption of costs-savings attributed to increased bargaining leverage associated with exclusion of more drugs from formularies.”

EASIER SAID THAN DONE

As with most issues in health care, it’s complicated and nuanced.

For starters, allowing Medicare to negotiate drug prices is easier said than done. By statute, Medicare is prohibited from doing so, and its formularies operate under specific requirements. For instance, Medicare formularies must contain at least 2 drugs for each treatment category. Moreover, they must contain “all or substantially all” drugs in 6 protected categories: anticonvulsants, antidepressants, antineoplastic, antipsychotics, antiretrovirals, and immunosuppressants.

“The program has worked, adding significant health benefits to the Medicare population, but it comes at a price,” offers Barney Spivack, MD, a member of the FRMC EAB. It will take Congressional action to give Medicare the authority to negotiate. Dr Spivack thinks the pharmaceutical lobby will dig its heels in. Additionally, AARP will not be thrilled with the idea of formularies with fewer choices for its members. The bottom line, he says, is that Medicare is not likely to be granted the authority to negotiate anytime soon.

But what if it was?

A PARTIAL ANSWER

“It’s a partial answer,” says Gary Owens, MD, president of Gary Owens Associates, a medical management and pharmaceutical consultancy firm. “It helps the Medicare population, and of course Medicare has a funding issue to solve. Doing something like this would certainly take care of that gap.”

But Dr Owens, a member of the FRMC EAB, worries that containing costs in one area will simply result in higher prices elsewhere. “If I’m a pharmaceutical company and Medicare negotiates the rate for my drug down, I’m going to try to make it up on the private side.”

He notes that hospitals did that very thing when Medicare moved to diagnosis-related groups (DRGs). “They went to private plans and negotiated higher rates.”

Dr Spivack agrees. “It would most assuredly drive up prices for those with private insurance.”

Norm Smith, president of Viewpoint Consulting, Inc, which surveys managed markets decision-makers for the pharmaceutical industry, worries about pushback from providers. He also thinks that setting up the structure for the Centers for Medicare & Medicaid Services to negotiate will be challenging. However, Dr Morreale says that he believes there are good models that can be replicated.

Nevertheless, Mr Smith, also a member of the FRMC EAB, thinks that the actual savings may be less than some think.

For one, pharmaceutical companies already pay 50% of the cost of branded drugs when beneficiaries are in the so-called “donut hole”—the gap in cover- age that begins after certain drug spending levels are reached ($3310 in 2016). Mr Smith estimates that drug companies pay about $1800 per year for beneficiaries who end up in the donut hole and reach its limits. “Are those rules going to change [when you allow Medicare to negotiate]? Are you going to take that 50% out?”

Plus, can Medicare really squeeze more from drug makers? “The people running the PDPs[prescription drug plans] have told me they are already getting somegoodprices,”said Mr Smith.“Who really knows if anyone can get a better price. People at the PDPs are not stupid.”

WORTH STRONG CONSIDERATION

But in Dr Morreale’s view, giving Medicare bargaining power is worth strong consideration—and he’s not so sure the savings assumptions in Frakt’s paper are overly generous. “Clearly Medicare has even more bargaining power than the VA does. Plus, imagine the leverage if you combine all federal entities. Add up all that volume, and you may be talking about $20 billion [in savings] a year. It’s why a lot of people have been advocating this for a number of years.”

Mr Smith comes back to less government involvement. “What lowers drug prices is the marketplace. Look at what happened with Sovaldi. They’re now giving 44% discounts to states and 42% to PBMs. Even the price of the new PCSK9 inhibitors are coming down—3 months after their introduction! That’s the market working.”

While the best driver of lowering drug costs is open to debate, its clear the public wants action. In Kaiser’s December 2015 health tracking poll, 44% of voters reported following news about rising prescription drug costs either “very” or “fairly” closely. In its August 2015 poll, 83% of all voters were in favor of allowing Medicare to negotiate drug prices. Even a majority of GOP voters—74%—approve of such a move.

As the presidential campaign kicks into another gear heading into primary season, it will be interesting to see how the candidates respond.