There’s a lot of truth in the old joke about the problem with Republicans and Democrats: Republicans need a heart and Democrats need a brain. As Democrats prepare to take control of Congress, they appear eager to prove the joke by pursuing legislation to require government “negotiations” on prescription drug prices in Medicare Part D.
The idea has emotional appeal, so let’s see if there is any evidence to support the idea. (If you come from the Bumper Sticker School of Health Policy, stop here. The facts will only confuse you and don’t easily make for emotive talking points.)
Non-Interference Requirement in MMA:
In the Medicare Moderation Act, the massive 2003 legislation that created the Medicare Part D drug benefit among other Medicare reforms, Congress prohibited the Centers for Medicare and Medicaid Services (CMS) from interfering with drug pricing in the competitive market. Part D prescription drug plans – Medicare Advantage drug plans (MA-PDs) and prescription drug plans (PDPs) – would battle among themselves to cut the best deals with pharmaceutical manufacturers and pharmacies and openly compete for enrollees.
The statute at controversy, found at section 1860D-11(i) of the Social Security Act, is short and sweet:
(i) NONINTERFERENCE. In order to promote competition under this part and in carrying out this part, the Secretary:
(1) may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors; and
(2) may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.
Estimated Savings of Federal Drug Price Negotiations:
Supporters of federal staff negotiating drug prices argue that it would generate billions of dollars in savings for taxpayers and seniors. However, the Congressional Budget Office (CBO) – the highly respected, non-partisan fiscal advisor to both houses of Congress and the agency that officially scores the cost and savings of all legislative proposals – agrees with top health economists and Medicare experts that federal price negotiations will save precisely zip.
Following passage of MMA, Senate leaders asked CBO to examine the effect of striking the ‘noninterference’ provision. CBO reported:
We estimate that striking that provision would have a negligible effect on federal spending because CBO estimates that substantial savings will be obtained by the private plans and that the Secretary would not be able to negotiate prices that further reduce federal spending to a significant degree. Because they will be at substantial financial risk, private plans will have strong incentives to negotiate price discounts, both to control their own costs in providing the drug benefit and to attract enrollees with low premiums and cost-sharing requirements.
CBO was then asked if the federal government could save anything if CMS centrally negotiated prices with makers of single-source drugs. (Single-source prescription drugs are brand-name drugs that have no generic equivalent on the market and are generally available from only one manufacturer.) Again, CBO concluded that savings are unlikely, unless of course federal officials are willing to play hardball and restrict patient access to therapeutically unique drugs until the manufacturers agree to government price demands:
Most single-source drugs face competition from other drugs that are therapeutic alternatives. CBO believes that there is little, if any, potential savings from negotiations involving those single-source drugs. We expect that risk-bearing private plans will have strong incentives to negotiate price discounts for such drugs and that the Secretary would not be able to negotiate prices that further reduce federal spending to a significant degree.
Nevertheless, there is potential for some savings if the Secretary were to have the authority to negotiate prices with manufacturers of single-source drugs that do not face competition from therapeutic alternatives. Private plans offering a prescription drug benefit to Medicare beneficiaries will have less leverage in negotiating discounts for drugs without therapeutic alternatives than they have in price negotiations for drugs that do face such competition. (In that regard, the Medicare plans will be no different than private health plans that offer prescription drug coverage to other populations.)
Under current law, there already are significant pressures that limit the prices that manufacturers charge for drugs – whether those drugs face competition from therapeutic alternatives or not. Those pressures include the prospects that plans will not cover a drug (or will substantially limit the amount they pay for a drug) and that manufacturers will provoke a backlash (potentially including legislation) if they set prices too high. Moreover, the creation of the Medicare drug benefit has given federal officials greater opportunity and incentive than under prior law to bring pressure on manufacturers – for example, by influencing public opinion and policy makers–if the prices that manufacturers set for single-source drugs that are not subject to competition from therapeutic alternatives are perceived as being too high. Giving the Secretary an additional tool–the authority to negotiate prices with manufacturers of such drugs – would put greater pressure on those manufacturers and could produce some additional savings.
Ample Evidence Against Federal Drug Price Negotiations:
Not only would federal price negotiations save little or nothing compared to the increasingly competitive private marketplace, there are host of other arguments against the idea.
In a fascinating new study – The Human Cost of Federal Price Negotiations: The Medicare Prescription Drug Benefit and Pharmaceutical Innovation – Benjamin Zycher, Ph.D., an economist and senior fellow at the Manhattan Institute’s Center for Medical Progress, carefully “estimates the impact that federal negotiation of prescription drug prices would have on pharmaceutical research and development (R & D) investment through 2025.”
Dr. Zycher concludes that, while federal price negotiations could save some Medicare dollars, “the longer-term human costs of government price-negotiation…are likely to be large and adverse.” Most notably, the data show government mandated negotiations would dramatically reduce the development of new, life-saving drugs (about a dozen annually), resulting in “…a loss of 5 million expected life-years annually, an adverse effect that can be valued conservatively at about $500 billion per year, an amount far in excess of total annual U.S. spending on pharmaceuticals.”
In Compromising Quality: The High Cost of Government Drug Purchasing, Edmund F. Haislmaier provides a crisp, devastating critique of the idea of federal drug price negotiations. He disects the core myths and outlines how it would only serve to threaten quality and access.
Proponents of government price negotiations assume that Medicare has more bargaining leverage than the private sector. In Why the New Congress Should Not Fix Drug Prices, researcher Greg D’Angelo does a nice job dismantling this faulty assumption.
Wait, It Gets Worse:
Many advocates of federal negotiations point to the VA’s prescription drug program as an example of how to reduce drug prices. As I have explained to many audiences, comparing the VA approach to Medicare Part D is not even an apples to oranges comparison. It’s more like comparing apples and poodles – and makes as much sense.
A groundbreaking study, by Frank R. Lichtenberg, Ph.D. of the Columbia School of Business, should put such comparisons to rest. In Older Drugs, Shorter Lives? An Examination of the Health Effects of the Veterans Health Administration Formulary, Dr. Lichtenberg shows the VH approach is not about prices or genuine negotiations. With the VA’s tight budget, it is all about restricting veterans’ access to new (and many old) medications to save dollars and hit budget targets.
The VA’s highly restrictive national formulary excludes 62% of drugs approved by the FDA during the 1990’s and 81% of new medications approved since 2000. Even worse, the drug benefit designed for our nation’s veterans does not pay for a staggering 78% of new, high-priority prescription drugs approved by the FDA on an expedited basis since 1997 because of their life-saving impact. By comparison, commercial health plans, Medicare Part D drug plans, and state Medicaid programs cover the vast majority of new drugs and move quick to add coverage for most drugs given fast-track by the FDA.
Dr. Lichtenberg’s 2005 study shows that the VA’s prescription drug system – seen by many as the “model” for Medicare Part D – reduced the life span and survival rates of vets since its 1997 introduction. Note to Congress: Death is always cheaper than life but rarely preferable.
So, let’s recap. Even putting aside the dangers of a massive increase in government power, fact it would dramatically reduce consumer and physician decision making, fact it would shift costs to other payors, and fact it would inevitably lead to economically disastrous price controls, the federal government negotiating drug prices will likely save little or nothing – unless Congress wants to severely restrict patient access to new and existing medications, thereby shortening lives, reducing quality of life, and increasing costs well beyond any savings. And that’s if it’s even feasible for CMS to do it. Trust me, it’s not.