Tara O'Neill Hayes
May 21, 2018
Executive Summary
Some contend that the federal government should
negotiate drug prices directly to achieve lower prices for consumers, but this
proposal has numerous flaws.
- The
restriction on government negotiation only applies to Medicare Part D, in
which the federal government does not insure anybody directly; rather, the
private insurers negotiate on their enrollees’ behalf. Allowing the
government to negotiate would either lead to the elimination of plan
choice in Part D or to no greater savings than already achieved by the
private plans.
- Negotiating
involves both parties trading one concession for another benefit, and the
federal government can only obtain lower drug prices by restricting access
to drugs made by a manufacturer’s competitor. This strategy results in a
restricted selection of drugs available to patients, and it will not work
with monopoly manufacturers, who are the most likely to have high prices.
- Private
insurers are much better positioned to negotiate for drug prices as well
as use other innovative techniques to keep costs down.
The government has one tool that private
insurers do not have: the ability to mandate price discounts. In the past,
these mandates have created repercussions elsewhere in the market, and insofar
as calls for “negotiation” really are calls for more price controls, this
strategy will exacerbate existing problems.
Introduction
Calls for allowing the government to negotiate
drug prices have become louder and more frequent over the past few years as
more expensive drugs come to market and Americans struggle to afford them. Many
advocates have focused on the government’s inability to negotiate prices
directly with drug manufacturers, and to these advocates’ consternation,
President Trump did not include such negotiations in his recent drug pricing “Blueprint”.
Allowing the government to negotiate drug prices
is no panacea, however; it has numerous weaknesses. It fails to account for the
government’s limited leverage, the necessary consequences of such negotiations,
the limited effectiveness of such negotiation in certain circumstances, and the
advantages that private insurers have.
The Government and Drug Pricing
The federal government and its programs have a
complex relationship with drug pricing.
The prohibition on government negotiations only
applies to the Medicare Part D program. Furthermore, negotiations with drug
manufacturers do occur in Part D: They are conducted by the private insurers
offering Part D plans (as detailed below).
In the other federal programs that cover
prescription drugs for individuals, the government does not (except in rare
circumstances) negotiate prices but rather sets ceiling prices based on
specific formulas. In the case of Medicaid, the Veteran’s Administration (VA), TRICARE, and other federal purchasers, these
formulas are tied to the average price of those drugs in the commercial market.
The law requires drug manufacturers to offer the government either the best
price they offer to anyone else, or a rebate of up to 23 percent in Medicaid
(plus an additional rebate if the price of the drug increases faster than
inflation)[1] and
at least 24 percent in the other federal programs—whichever provides the lowest
price.[2] Drug
manufacturers must agree to these terms for each of these programs, or their
drugs will not be covered by any of them and they will lose access to
approximately 90 million patients.
The government’s approach to reimbursement for
drugs covered by Medicare Part B—which are primarily physician-administered
drugs, as opposed to self-administered drugs picked up at the pharmacy
counter—is much different and completely devoid of any incentive or mandate to
obtain lower prices.[3] Rather
than requiring drug manufacturers to provide a steep discount, the government
allows providers to purchase the drugs themselves (using whatever negotiating
power they have to get the best price). Medicare then reimburses the provider
an amount equal to the average sales price of the drug in the commercial market
plus a 6 percent add-on administration fee. The Government Accountability
Office, among others, has repeatedly noted the need to revise this Part B
reimbursement formula due to the incentive it creates for providers to use more
expensive drugs.[4] In
fact, the president’s Blueprint to reduce drug prices speaks to this exact
problem and includes multiple proposals to address it.
To call any of these arrangements a
“negotiation” would be incorrect. Negotiating drug prices, as in any
negotiation, necessarily requires trade-offs: both parties must relinquish
something of value to the other party (otherwise, it is not a negotiation, but
rather a commandeering). The government can only effectively negotiate lower drug
prices if it is willing to give up something in return. A company dependent on
profits for existence will only be willing to trade lower prices (so long as
the price stays sufficiently above the cost to produce) for increased
quantities sold, in order to maintain its revenue. Thus, the government must be
able to guarantee increased sales to the company offering the reduced price,
which can only be done by restricting sales to other companies. In other words,
the only way for the government to negotiate a lower price for one drug is by
restricting access to its competitors.
Trade-offs
The government does occasionally use true
negotiation, particularly in the VA. The VA will agree to buy a drug in a
particular class exclusively from one manufacturer in exchange for an even
greater discount than what is required by law. But as expected, the data
demonstrate these negotiations result in significant access restrictions for
veterans and the other individuals covered by the VA’s formulary, and some
beneficiaries may lose access to the only treatment option that works for them
as a result.
A 2013 study by The Lewin Group analyzed
coverage of the top 300 most commonly used prescription drugs in the United
States. The study found that the two Medicare Part D plans with the highest
enrollment cover 97 percent and 95 percent, respectively, while the VA covers
only 78 percent of the most commonly used drugs.[5] A
broader study that assessed VA access to all 4,300 drugs covered by Medicare
found that the VA covered less than one-third of those drugs.[6]
Legislation recently introduced by Senators
Murphy (D-CT) and Merkley (D-OR) recognizes the necessity of accepting
trade-offs in order to negotiate drug prices. The legislation would expand
Medicare by creating a public option that would be available for anyone to
purchase.[7] Under
this plan, the Secretary of Health and Human Services would be authorized to
negotiate prices directly with drug manufacturers. In order to do so, the
legislation would also allow the secretary to impose a coverage formulary and
drug utilization management tools, both of which would restrict access to
certain drugs. In determining which drugs to include on the formulary, the
secretary would have to consider the drug’s current price, its launch price,
the prevalence of disease and usage of the drug, the drug’s approved
indications, the number of similarly effective alternatives, the budgetary
impact of covering the drug, evidence of the drug’s safety and effectiveness,
and the quality and quantity of the clinical data used in the Food and Drug
Administration’s approval process for the drug. These same factors would be
used in deciding which drugs patients could access without any restrictions and
those which patients could only access after exhausting other treatment options
or receiving prior authorization, determined on a case-by-case basis.
These tools are precisely those already used by
the many private insurers who offer Part D plans and commercial drug coverage
in order to negotiate prices. The government would have no greater negotiating
power than that of the insurers. In fact, the insurers are better suited to
handle these negotiations on behalf of their patients, because insurers have
both experience negotiating reimbursement rates as well as have actual patients
enrolled in their plans. Those who believe the government would have greater
negotiating abilities because they would be negotiating on behalf of all beneficiaries
rather than a fraction of them, as the insurers are, forget that the government
does not actually insure a single patient in Part D and thus has no real market
access to bring to the negotiating table. As AAF highlighted in 2014, Part D’s prices
turned out to be lower than the price caps that were proposed as an amendment
to the bill that started the program back in 2003.
The negotiating tactics used by private insurers
highlight a central point in the problems with government negotiations:
Negotiations work best in a market system when competition is present.
Negotiating steeper discounts in exchange for exclusive coverage only works when
a drug manufacturer faces competition, yet when manufacturers face competition,
they already have incentives to reduce their price so as not to lose
customers—making the negotiations themselves far less effective. When a
manufacturer has no competition (and thus faces no real market pressure to
lower the price), the government’s only leverage is to deny the manufacturer
any sales in that market. Of course, this is equally a threat to patients, as
beneficiaries will lose access to the only treatment option that exists if an
agreement is not reached; for many, this will be unacceptable. Therefore, the
most effective tool for negotiating lower drug prices may be largely
ineffective for the drugs that patients most need the price negotiated.
How the Government Could Negotiate Prices in
Part D
There are essentially only two circumstances in
which the government would have any leverage to negotiate prices effectively on
behalf of Medicare beneficiaries, and they both require a radical change to the
current Part D structure.
In the first circumstance, the government could
negotiate on behalf of all beneficiaries, while still allowing them to enroll
with private insurers. As a result of these negotiations, the drug prices would
necessarily be equal for all beneficiaries, and the government would have to
impose a national formulary with uniform rules and coverage restrictions.
This structure and the resulting restrictions
would have a couple of negative consequences for individuals and the system as
a whole. First, these restrictions would have negative consequences for all
beneficiaries, but they would certainly hurt some more than others. As
discussed, the VA uses this kind of negotiation, with sharp restrictions on
which drugs beneficiaries can access. Further, current practices allow certain
insurers to negotiate lower prices for certain drugs than other insurers. If
the government killed all price variation by negotiating directly, the only way
for drug manufacturers to maintain current revenues (assuming no change in the
quantity of drugs sold) would be to set a price somewhere between the current
lowest and highest prices. Thus, beneficiaries currently enrolled in the plans
that have negotiated the lowest prices would see price increases. Individuals
with other forms of insurance would likely face price increases as well, as
drug manufacturers would compensate for reduced prices in Medicare with higher
prices elsewhere.
The federal government has tried imposing lower
prices in Medicaid through the “best price” program and the 340B program, yet
manufacturers simply recouped their money by raising prices elsewhere. After
the “best price” program began, prices still rose—and rose most sharply for
those drugs that Medicaid beneficiaries used the most.[8] The
expansion of the 340B program, another program that mandates
drug manufacturers provide steep discounts, is also correlated with increasing
drug prices.[9] Mandating
steeper discounts in Medicare would have a similar effect.
The second impact of government negotiation in
this scenario is that there would be very little left for a private insurer to
offer, and thus very few factors upon which insurers could compete against each
other. Given that competition among insurers is the foundation of the Part D program’s success, taking away such
tools would completely undermine the program, and most if not all private
insurers would leave. Today, seniors have 23 different plan options from which
to choose, on average.[10] This
provides enrollees the ability to find a plan well-suited to meet their
specific needs, which is a primary reason the Part D program has long enjoyed a
satisfaction rate of nearly 90 percent.[11] If
seniors suddenly had only one option—the government-imposed plan—all the
benefits of having so many choices would be eliminated.
In the second circumstance, the government would
enroll patients directly in a public option available alongside other Part D
plans. Yet, the government would still have no more leverage to negotiate
prices than a private insurer who has enrolled just as many patients, as the
Congressional Budget Office has noted on several occasions—unless, of course, it
imposed the same requirement as that in the other government programs and
threatened the loss of access to nearly half the nation’s population. (Again,
let’s not confuse government coercion with negotiation.) Furthermore, private
insurers, because of their financial risk, have much greater incentives than
the government to utilize other tools that help improve patient health and indirectly
lead to additional savings. The government does not
have the same profit motive as private insurers, and that motive drives
insurers to innovate more and negotiate well. A public option likely would not
provide the same quality as private insurance plans over the long term.
Conclusion
In various federal programs, the government
primarily obtains lower prices for prescription drugs than the commercial
market by mandating them and threatening the loss of 90 million potential
customers. These mandated discounts have resulted in increased prices paid by
the rest of the health care market. When the government does truly negotiate
with drug manufacturers for lower prices, it trades discounts for significantly
fewer choices for patients.
[5] http://www.lewin.com/content/dam/Lewin/Resources/Site_Sections/Publications/PhRMAVAFormulary2013.pdf
[10] https://www.kff.org/medicare/issue-brief/medicare-part-d-a-first-look-at-prescription-drug-plans-in-2018/
[11] https://www.hlc.org/news/new-national-survey-nearly-9-in-10-seniors-satisfied-with-medicare-part-d/
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