Medicare May Not Be Able to Lower Costs Even if it Could Negotiate Prices

A popular piñata in Mexico this year is Donald Trump’s head. In the US one of the other big political targets is Medicare and its inability to negotiate prices with drug companies. Negotiating drug prices makes a great soundbite, but the unfortunate reality is that compelling Medicare to negotiate prices may not yield the promised savings. There are a few options to advance negotiations, but as policy they have limitations and the Congressional Budget Office has data that shows tweaking this system does not save money. Medicare Part D was a program passed during George W. Bush’s administration so the political spectrum of support for it extends from fatigue to open hostility.

“A Kaisar poll found having medicare negotiate for lower drug prices is supported by 83 percent of the public, including a majority of both Democrats (93%) and Republicans (74%).”

There is a consensus among voters, so Democrats and even Donald Trump love to tout the message of reforming Medicare Part D in front of raucous primary crowds. The politics of this rhetoric may be undeniably positive, but the options for Medicare are flawed and possibly futile. The most easily enacted reform would involve allowing, Sylvia Burwell, the Secretary for Health and Human Services to negotiate with drug companies on Medicare’s behalf. Obama’s most recent budget proposal included this provision. This would be a simple solution, but there are challenges:

Notably, Congress added language to the MMA, known as the “noninterference” clause, which stipulates that the HHS Secretary “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”

Medicare Part D was written to prevent future efforts to save the program money and the lawmakers wrote obstacles into the law. This is cynical even by Bush era standards. There have been efforts to eliminate the “noninterference” clause that go back almost as far as the law itself. Establishing the framework for negotiations would not be easy even if the non-interference clause could be repealed.

The Congressional Budget Office, “has said that in order to obtain price discounts, the Secretary would need authority to establish a formulary that included some drugs and excluded others and imposed other utilization management restrictions, in much the same way that private Part D plans do. And yet, CBO has questioned whether the Secretary would be willing to exclude certain drugs or impose limitations on coverage, as private plans do, “given the potential impact on stakeholders.”

In other words, the politics of Medicare denying coverage for a treatment would become radioactive. Think of the controversy around the non-existent “death panels” of the Obamacare debate. Without the ability to walk away, drug companies would know that Medicare has no leverage in price negotiations. The HHS would suggest a lower price and the company would immediately go to the court of public opinion and accuse the secretary of rationing. Call your Representative! The “stakeholders” in this case are motivated seniors and not a demographic group politicians tend to ignore. Veterans are another group that make for good politics and Veteran’s Affairs does negotiate for lower drug prices.

The VA is the shining example of a public payer that regulates drug costs. The benchmark for their negotiations is based on private payer’s negotiations. The VA will not pay any higher than the lowest price negotiated by insurance companies. This illustrates how limited the public benefit programs are in negotiating price reductions without the work already being done in the private marketplace. But it is worse. The VA example has even more flaws. The New York Times published the results of a study about the behavior of seniors covered by the VA.

It “found that if Medicare limited drugs the way the V.A. does, it could save about $510 in drug spending for every beneficiary every year. But those beneficiaries would lose access to many drugs they were previously taking. In fact, many older patients who get their health insurance from the V.A. also sign up for Medicare drug plans to cover medicines that the V.A. won’t.”

The VA is an excellent program, but it does not exist in a vacuum. Medicare serves as its backup. The VA gets to say no because Medicare still always says yes. Like the other political talking points the VA example is fool’s gold. It looks a lot more valuable than it really is, but that does not change its political appeal. Only raw numbers and studies from the CBO take some of the lustre off of its appeal. However this information is only currency for political wonks. The crowds that come out to the rallies only hear the sugar coated talking points and absorb their “truthiness” because they sound so good.

Saving money on pharma is not going to be easy, not in the public sector and not in the private marketplace. When he hears that baseball is too “hard,” Tom Hank’s character in A League of Their Own says, “It’s supposed to be hard. If it wasn’t hard, everyone would do it. The hard is what makes it great.” Saving money for payers on prescription drug liabilities may be hard, but it’s what RxREVU does.