When Medicare was enacted in 1965, Congress statutorily prohibited
government interference in the practice of medicine. That
prohibition has largely been ignored in practice, and today
Medicare doctors endure a complex and cumbersome administrative
pricing system for the more than 7,000 physician services that
beneficiaries receive.[1] This system fails to reduce costs, limits
access to medical care, threatens patient choice, and ignores
value. Imposing this same model on the Medicare prescription drug
benefit by instituting government price "negotiation" would lead to
similar consequences.
In the Medicare Modernization Act of 2003, Congress stipulated
that government would not interfere with private sector price
negotiations for drugs. Recently, the House of Representatives
passed legislation to overturn this ban on government interference,
and the Senate is considering similar action.
The House's action is puzzling in view of the drug cost
reductions already achieved through private negotiation. Secretary
Michael Leavitt of the Department of Health and Human Services
(HHS) has voiced serious doubts that his department could negotiate
better prices than providers and consumers in the competitive
marketplace.[2]
Secretary Leavitt's doubts are well founded. Medicare beneficiaries
with common chronic conditions (whose prescription drug use is
highest) enrolled in Medicare prescription drug plans (PDPs) are
seeing significant savings in their prescription drug costs.[3] Furthermore,
the nonpartisan Congressional Budget Office (CBO) doubts that
federal price negotiation would lead to reduced spending or
significant savings.[4]
Under the House bill, the Secretary of HHS does not have the
power to really "negotiate" drug prices in the normal sense because
his use of drug formularies would be prohibited. That means that
the only viable way for the government to reduce drug spending
would be similar to how it controls physician spending today: fix
and administer prices. [5] Given the troubled history of
administrative pricing in the Medicare physician payment system, it
is stunning that Members of Congress would want to import this
process into the Medicare drug benefit program.
The Lessons of Medicare Physician Payment
With the Balanced Budget Act of 1997, Congress introduced the
sustainable growth rate mechanism (SGR) that currently governs
payment to physicians in the Medicare program. SGR ties annual
Medicare physician payment updates to changes in the national gross
domestic product (GDP). Administrative pricing has proven to be a
flawed system. Specifically, it:
- Fails to reduce costs. Setting prices has historically
resulted in predictable changes in behavior; in trying to make up
losses for artificially low prices per procedure, physicians
increased the volume and intensity of services. So costs continued
to rise. From 1997 (which is when the SGR method started measuring
expenditures) through 2005, per-beneficiary spending on services
paid for under the physician fee schedule grew by 65 percent, or
about 6.5 percent per year.[6]
- Limits access. Although Congress voted to prevent a 5.1
percent payment cut to physicians in 2007, the administrative
pricing system remains in effect. The cumulative cuts under the SGR
system are predicted to reach 34 percent by the year 2015.
Reductions of that magnitude will likely lead to a significant
cutback in the availability of physicians' services. Fully 82
percent of physicians say they will need to make significant
changes to their practices that will affect access to care if these
cuts go into effect.[7] In any case, whether the commodity is a
service provided by a physician or a drug developed by a
pharmaceutical company, paying less will never increase the
quantity on offer.
- Threatens choice. Decisions that affect health care
spending occur at the individual patient-physician level. A
centralized planning system, with blunt bureaucratic instruments
like the SGR linked to arbitrary national targets that have little
or nothing to do with the market for physicians' services, severely
threatens choice at the individual level. If physicians stop seeing
Medicare patients, patient choice will be severely
compromised.
- Ignores value. Administrative pricing systems pursue a
simple-minded objective: cut costs. Costs, however, are only half
of the value equation. In Medicare physician payment, the SGR
mechanism has no link to the quality of the services provided and
contains no incentives for physicians to provide, or for patients
to demand, better quality of care.
Administrative Pricing in the Drug
Benefit Program
If the government administers drug pricing, problems analogous
to the mess in the Medicare physician payment system will arise,
including:
- Failure to reduce costs. Administrative pricing for
drugs in the Medicare program would involve blocking access to
certain drugs or reducing the availability of certain drugs. This
would show savings to the bottom line of the Medicare program but
would also likely increase out-of-pocket costs for beneficiaries
and lead to predictable changes in behavior. Physicians may change
treatment behavior, prescribing less expensive but less effective
medications to address patients' cost concerns. A less effective
drug may necessitate prescribing additional medications or require
additional visits to the doctor or unnecessary hospitalization,
which would increase overall Medicare spending.
- Limiting access. The ostensible point of enacting the
Medicare drug benefit was to increase access to needed prescription
drugs for America's seniors. But if the government sets drug
prices, those drugs that the government deems too expensive will
not be available to beneficiaries who can not pay out of
pocket.
- Limiting choice. Currently, the Medicare drug benefit
program makes use of prescription drug plans that negotiate prices
in the marketplace. Unlike Medicare, these plans can truly
negotiate, since they are willing to use the tool of refusing to
purchase drugs they feel are overpriced for the market they are
serving. Today, if Medicare beneficiaries are dissatisfied with the
outcome of a particular plan's price negotiations and the range of
drugs available, they can simply switch plans. Currently, there are
1,875 stand-alone plans nationwide.[8] With administrative pricing, that choice
will largely disappear. The only alternative for seniors would be
to pay out of pocket for uncovered drugs or settle for less
effective substitute drugs or other treatment.
- Ignoring value. Just like the Medicare physician payment
system, administrative pricing for drugs would pursue the goal of
short-term cost reduction and ignore the longer-term implications
of inferior treatment of certain illnesses with less expensive,
less effective medications. These longer-term effects are important
not only in terms of health care spending, but also in terms of
quality health care for America's seniors.
Conclusion
Private negotiation and competition in the Medicare drug program
has thus far achieved significant savings for America's seniors.
Recently enacted House legislation (H.R. 4), however, would require
the Secretary of HHS to "negotiate" drug prices for Part D Medicare
beneficiaries, overturning the prohibition on government
interference in private negotiation. Since the Secretary could not
use a formulary, under the House bill, the conventional tool for
negotiation would be denied to him, and thus a system of
administrative pricing or price controls would be his only option
left to achieve further cost reduction.
As senators weigh the merits of such an approach, they should
keep in mind that the Medicare physician payment system-a
combination of administrative pricing and price controls-is a mess.
It should serve as a warning. Administrative pricing for more than
7,000 physicians' services has failed to reduce Medicare spending,
lacks the proper incentives to promote value, and threatens
personal choice and access to quality health care for America's
seniors. The maladies of this physician payment system should not
be allowed to infect seniors' access to drugs.
John S. O'Shea, M.D., MPA, is Health
Policy Fellow in the Center for Health Policy Studies at The
Heritage Foundation.