The House of Representatives is poised to enact a confusing and
contradictory Medicare drug policy. Under the Medicare
Modernization Act of 2003, the Secretary of Health and Human
Services is forbidden from interfering with private sector price
negotiations for pharmaceuticals in Medicare Part D. With the
Medicare Prescription Drug Price Negotiation Act of 2007 (H.R. 4),
sponsored by Rep. John Dingell (D-MI) and backed by the new House
leadership as part of its 100-Hours agenda, Congress would
substitute government negotiation of drug prices for existing
private sector negotiations. As the Congressional Budget Office has
confirmed, however, government negotiation would not result in
lower program costs relative to private negotiations. H.R. 4 does
leave the door open, however, to government using its other
regulatory powers to intimidate drug makers into granting greater
price concessions.[1]
Today's Competition Benefits
Seniors
Medicare Part D is structured to leverage the power of
competition to drive down costs while ensuring seniors have the
drugs that they need. In Medicare's existing drug competition
model, private health plans secure discounts through the
establishment of their formularies that cover some drugs and not
others and may favor some drugs over others. Pharmacy Benefit
Managers (PBMs) negotiate on behalf of private plans and make deals
with drug companies when they decide the price is appropriate for
the competitive market. When PBMs decline to purchase certain
drugs, the drug companies can negotiate with other private drug
plans to offer their drugs. And if one plan's drug formulary omits
a needed drug, or if a drug's formulary price is not competitive,
seniors can choose a different drug plan. The drug formularies of
any health plan, therefore, are subjected to the tough test of a
competitive market, where private health plans compete with one
other for consumers' dollars.
With intense market competition-a reality in the new Medicare
Advantage and Prescription Drug Plan programs-insurers have a
powerful incentive to respond to consumers' needs and to maintain
broad access to affordable drugs. Accordingly, Medicare
beneficiaries today have broader access to the right drugs at the
best prices through real, competitive market forces-perhaps more so
than any other group of Americans.
Private competition and negotiation has worked well beyond
expectations. Because of tough negotiations between private health
plans and pharmaceutical companies, intense market competition has
led to low prices and good drug selections for seniors, as well as
substantial savings for taxpayers.
Based on Centers for Medicare and Medicaid Services (CMS) data,
senior and disabled Americans have saved, on average, an estimated
$1,100 dollars in drug expenses per year under Part D.[2] Average monthly
Medicare drug premiums are roughly 40 percent below initial
projections,[3]
and program costs over 10 years are estimated to be 30 percent less
than expected. This adds up to a total savings of $189 billion
dollars,[4] most
of which is directly attributable to lower drug costs due to
successful private negotiations.[5]
Introducing Government
"Negotiation"
Part D's performance is impressive, but House leaders
nonetheless believe that the government can do better than the
market in pricing and distributing pharmaceuticals, and secure even
deeper savings, if it is able to negotiate drug prices. Moreover,
they believe that they can accomplish lower drug program costs and
lower prices for beneficiaries without limiting beneficiaries'
access to drugs through a government formulary.
H.R. 4 contains several key provisions. It would require the
Secretary of Health and Human Services (HHS) to intervene in drug
price negotiations and negotiate the price paid by private health
plans to pharmaceutical companies.
It then strikes the current law that the Secretary "may not
require a particular formulary or institute a price structure for
the reimbursement of covered Part D drugs." In its place it
substitutes that nothing about the requirement for the Secretary to
negotiate prices "shall be construed to authorize the Secretary to
establish or require a particular formulary."
Formularies are often used to control drug costs. Most notable,
in this respect, are the restrictive formularies of the Veterans
Administration drug program, which is often touted as a model for
Medicare drug pricing. By denying all of its beneficiaries access
to certain drugs, the VA can force drug manufacturers who want to
be on the formulary to make deeper price concessions.
Finally, the Secretary would be required to report to Congress
on the status of his negotiations with pharmaceutical companies to
achieve lower drug prices on June 1, 2007, and every six months
thereafter.
In sum, H.R. 4 would require the Secretary to negotiate directly
with pharmaceutical companies to secure lower drug prices but deny
him the use of a drug formulary, which is the principal means of
negotiating lower prices.
H.R. 4's negotiations, then, would not bring savings; savings
could come only from denying seniors access to drugs from
manufacturers unwilling to accept the government-set price-a door
that the legislation's vague language leaves ajar.
In two analyses, the nonpartisan Congressional Budget Office
(CBO) has denied the likelihood of reduced spending or significant
savings through federal price negotiation alone. Moreover, current
HHS Secretary Michael Leavitt doubts he can outperform existing
private plan negotiations while retaining Medicare beneficiaries'
existing broad access to drugs.[6] Concerning the impact of H.R.4, CBO
confirms the Secretary's assessment:
CBO estimates that H.R.4 would have a negligible effect on
federal spending because we anticipate that the Secretary would be
unable to negotiate prices across the broad range of covered part D
drugs that are more favorable than those obtained by PDPs under
current law.[7]
Risk-bearing private plans, however, have both the "tools and
the incentives to negotiate drug prices that the government, under
the legislation, would not have. H.R. 4 would not alter that
essential dynamic." [8]
How Government "Negotiation" Might
Work
The potential for government "negotiation" to extract lower drug
prices would depend on the HHS Secretary's ability and willingness
to say "no deal" to a pharmaceutical company and pursue an
alternative course of action, such as denying reimbursement for
their drugs. That, as opposed to Medicare's market clout, is what
ultimately determines negotiation power. But with Medicare then
serving as the sole-or monopsony-purchaser for beneficiaries,
government "negotiation" would not be negotiation as it is used in
the private sector; rather government "negotiation" would become an
exercise of government power to fix prices and exclude from the
market any company offering a drug at a higher price. In effect,
this exclusion would be a de facto price control scheme, because
the government could deny pharmaceutical companies access to the
millions of seniors and disabled citizens who comprise the Medicare
market.
Conclusion
Despite promises from the House leadership that the government
can deliver lower drug prices and reduce drug spending, H.R. 4 will
deliver on neither unless it denies seniors access to drugs. As CBO
has confirmed once again, there is no tangible evidence that
congressional repeal of the non-interference clause would yield
savings superior to the existing system of competition and private
negotiations.
The federal government cannot really "negotiate" drug prices in
the Medicare program; it can only "set" prices, which it does today
for hospital and physician payment and other medical goods and
services delivered through Medicare. But government price setting
is only as effective as the accompanying enforcement mechanism.
H.R. 4 would remove the existing clear prohibition against
government price setting. It instead tells the Secretary of Health
and Human Services to go out and negotiate, but immediately caveats
that command with vague language that leaves unclear whether the
Secretary has anything to negotiate with. Finally, it tells the
Secretary to report back at regular intervals on the success of his
"negotiations." Not surprisingly, CBO projects that this charade
will not result in savings. H.R. 4 is a prescription for
failure.
Greg D'Angelo is Research Assistant
in, and Robert
E. Moffit, Ph.D., is Director of, the Center for Health Policy
Studies at The Heritage Foundation.