Experts debate Medicare negotiation legislation

February 19, 2007

Legislation to mandate government negotiation on Medicare Part D drug prices has now passed the U.S. House of Representatives and been introduced in the Senate. And the debate has intensified across Washington. At a recent think tank session, Gerard Anderson, Ph.D., a health finance expert who has worked with Congressional Democrats, called for a law to let the government "trust in the markets, but make sure that they are working."

The Department of Health & Human Services (HHS), he said, should actively research, and make available semi-annually, information on the prices paid by Medicaid, Veterans Affairs (VA), and Canada drug-by-drug and even dose-by-dose. Then, if the markets are not working for Medicare beneficiaries, HHS should use its "bully pulpit" to call for reductions for those drugs with the largest price differences. Anderson, a Johns Hopkins University health policy professor who spoke at the think tank session last month at the American Enterprise Institute for Public Policy Research (AEI), also said he would want to know "the lowest price any Part D plan is paying for a particular drug-the best price the market has been able to achieve."

Indicating concern that government negotiation would become a government mandate, Antos pointed to an earlier law requiring sellers to give Medicaid their "best price." Both CBO and the General Accounting Office later found that prices rose first for people outside Medicaid and then for Medicaid itself, he said. "If you are told by law that you have to give your absolute rock-bottom price to a very large part of the market, then you are going to rethink what kind of discount you can give to the rest of the market," he pointed out.

Mark McClellan, M.D., CMS head until last fall, agreed, saying the effect with Medicare would be even greater because that program represents a greater market share. As with Medicaid, he explained, if manufacturers know they will have to give Medicare the same discount they give other programs, they will be much more resistant to giving any discounts to anyone.

McClellan, currently a visiting fellow at an AEI-Brookings Joint Center, said, "If you use AWP [average wholesale price] as a reference, the drug manufacturer is going to raise AWP. Why? Because it is going to affect 50, 60, 70% of their market. It's going to increase the prices to the VA. It's going to increase the prices to the Medicaid program.... All you have done is retard price negotiation and price competition through this regulatory approach."

He also argued, "The tighter the formulary, the more you can drive down prices in negotiations." But, he pointed out, Medicare beneficiaries seem to be choosing plans with a broad range of drugs, decreasing the potential for negotiating price reductions. "Medicare formularies do tend to be broader than most of the aggressive Medicaid preferred drug lists and the VA."