Who's for and against negotiated prices?

April 2, 2007

The shift from Republican to Democratic control of Congress ensures ongoing debates about requiring Medicare officials to negotiate directly with pharmaceutical firms for lower drug prices. The Medicare Modernization Act (MMA) expressly forbids interference from the HHS secretary in negotiations between manufacturers and pharmacies or PDP sponsors, and prohibits the establishment of a formulary or price structure for reimbursement under Part D.

President Bush stated that he would refuse to sign any bill requiring price negotiation, maintaining that the benefit has strong incentives for plans to seek price discounts to control costs and attract enrollees through lower premiums and reduced cost-sharing.

It is the opinion of the Congressional Budget Office (CBO) that direct negotiation with pharmaceutical companies would have a negligible effect on spending for the Medicare prescription benefit. CBO maintains that the government would not have the leverage to lower prices unless Medicare, like the VA, had the power to establish a formulary that restricted the number and types of drugs available. CMS reported that nearly a million veterans who were eligible for prescription benefits through the VA elected to enroll in Part D. Presumably these veterans were willing to pay the Part D premium in exchange for a wider choice of drugs.

HHS secretary Michael Leavitt contends that the market power of millions of individual consumers in the private sector is apt to obtain greater discounts than government officials who would be responsible for bargaining prices for more than 4,400 different drugs covered by Medicare.

Part of the difficulty in resolving this debate is that Congress does not have access to information about the prices that have been negotiated by PBMs and the Medicare drug plans. Although prices paid by the plans are reported to CMS, the agency will not disclose that information. FTC, along with CBO and the PBM trade association, supports the position that public disclosure of prices will reduce the ability of the plans and PBMs to obtain substantial discounts. The House Oversight and Government Reform Committee has asked the Medicare drug plans to disclose data that will allow the committee to examine their profits and the degree to which discounts are passed to beneficiaries.

It is undeniable that Medicare beneficiaries who formerly obtained their prescription benefits from Medicaid or the VA are now getting medication at a higher price than under the previous coverage. A potential compromise could require negotiation on behalf of Medicare where savings are greatest and politically justifiable. For example, a bipartisan Senate bill could direct the HHS secretary to seek price concessions when (1) a brand-name drug is the only product available in a particular therapeutic class, (2) the drug's development was dependent on government-funded research, or (3) a Medicare-approved plan requests assistance.

Even limited negotiation will face opposition from those who are concerned that short-term savings will produce undesirable effects in the long run. Opponents claim that price reductions and restrictive formularies lower drug prices below those set by the market, reducing the incentives for the capital market to invest in research and development of new medicines for treating chronic conditions common among the elderly.

THE AUTHOR is associate professor, Department of Pharmacy Health Care Administration, University of Florida College of Pharmacy.