Negotiating drug prices

Politicians of both parties like to call for Medicare to negotiate drug prices but it never happens because the actual politics of it suck. This matters as President Elect Trump led off his press rant today with a line that he wants to get a better deal on Medicare drugs. The reason is that any attempt to get a better price means the paying party needs to have a quasi-credible threat to say no and walk away.

Austin Frakt and other VA researchers analyzed what a negoatiated Medicare Part D benefit could look like if it was allowed to negoatiate like the Veterans’ Administration. There is upside and downside:

In the paper, we compute the savings to the Medicare program and the loss of value (formally, consumer surplus) to beneficiaries due to tightening Part D formularies to the level found in the Veterans Health Administration (VA). (A formulary is a list of drugs covered by a health plan.) We measure formulary generosity as the percentage of the 200 most popular drugs covered. The VA’s national formulary covers 59% of the top 200 drugs while Medicare PDPs cover between 68% and 93% of those drugs, averaging about 85% covered. So, if Medicare plans looked more like the VA, a lot fewer drugs would be covered….
If Medicare drug plans restricted their formularies to the level of generosity offered by the VA and obtained VA-like drug prices by doing so, we estimate that the program would save $510 per beneficiary per year or a total of $14 billion per year (2009 prices).

However, in tightening formularies, beneficiaries would lose low-cost access to many drugs. That loss of choice is worth something, and it can be monetized using econometric techniques. Doing so, we estimate the loss of choice to be valued at $405 per beneficiary per year. Because the savings ($510 per beneficiary) exceeds the loss of value to beneficiaries ($405), they could, in principle, be made whole with $105 left over (= $510 – $405). This could be done by lowering premiums, for example.

The VA gets good prices because it says no a lot. The downside of the VA saying no is that its beneficiaries don’t get all of the potential drugs that they could want.

Health Affairs has a blog from Lee, Gluck, Curfman that examines the current mechanics and politics of getting better drug pricing in Medicare:

The existence of other, lesser-known laws on the books further complicates the issue. Any future president will have to deal with these laws for Medicare’s drug price control efforts to be successful. The most significant of these lesser-known legal provisions originated as CMS guidance implementing the MMA and was subsequently made law in the ACA. This provision requires Part D drug plans to give access to all or nearly all drugs on the market in six protected classes—ranging from anti-retroviral drugs to antidepressants—until CMS promulgates a regulation to change the designated classes. Although originally intended to discourage drug plans from discriminating against patients with certain conditions, such as patients with HIV, this restriction has limited drug plans’ negotiating power by reducing their ability not to cover drugs that are priced above their value. These two legal provisions—the ban to help the pharmaceutical industry and the protected classes to help patients—restrict what CMS can do to control drug prices.

Recent attempts to make modest changes reflect the fierceness of the politics around this issue. In 2014, the Department of Health and Human Services (HHS) tried to make progress with the protected-classes provision by proposing to create a process to remove some drugs from the protected list. That effort, a much less radical change than repealing the negotiations ban, floundered due to industry and consumer backlash.

The recent Medicare Part B demo to change how injectable drugs are paid for failed due to massive industry opposition. The politics of drug price reform are nasty as the benefits are fairly diffuse and the pain is concentrated on either extremely well funded entities (PhRMA), well trusted entities (doctors and hospitals) or very sympathetic public faces who can cry on command for the local 6 o’clock news.

I don’t think there will be anything more than a commission to have a commission to study whether or not a white paper is needed.

25 replies
  1. 1
    Yarrow says:

    So….is this negotiating drug prices for the Medicare that they’re going to replace with vouchers? How’s that going to work?

  2. 2
    cervantes says:

    Why not do what NICE does? Use a cost-effectiveness standard. If a drug is too costly for the benefit it provides, don’t buy it. Either the company agrees to lower the price, or yeah, consumers don’t have access to it, but it wasn’t worth it anyway.

  3. 3
    Yutsano says:


    Why not do what NICE does?


    And it gets controversial in Britain too.

  4. 4

    @Yutsano: Exactly… anything that vaguely has a chance of saying no is deemed inherently EVIL in the American context

  5. 5
    FlipYrWhig says:

    @cervantes: I think you mean “pencil-pushing government bureaucrats denying a miracle cure.”

    Any chance of banning direct-to-consumer medication advertising? That shit is a scourge.

  6. 6
    Pogonip says:

    @FlipYrWhig: THAT should be a priority of any incoming administration, getting Congress to ban those ads.

    I would not be a bit surprised to learn that a lot of these heavily-advertised drugs are super-expensive placebos.

  7. 7
    ruckus says:

    I’ve taken drugs that the VA formulary does not allow for a chronic problem and so I know them to work better than the generic that I can get. My overall health does suffer to a degree. I have no idea how to change this other than someone has to pay more. I can go to a private doc and pay full pop or accept the generic,it just depends on my wallet.

  8. 8
    MJS says:

    No offense, and I know that we’re all capable of scrolling down to read additional posts, but highlighting what Trump said about negotiating drug prices in his press conference is like discussing whether or not he opened it with, “Good Morning”. It was thrown out there to distract from the pee-stained elephants in the room, and really doesn’t warrant any discussion, at least not at this point. Pretending Trump has any legitimate policy proposals that need to be examined before he’s even sworn in risks legitimizing him.

  9. 9

    @MJS: Guess what, as mcuh as we don’t like it, he does have agenda setting power. Let’s deal with that reality as we fight him

  10. 10
    lgerard says:

    The original Part D bill passed by both the House and the Senate had a requirement that all savings derived by insurers negotiating with drug providers be passed along to consumers. That requirement mysteriously disappeared during the conference committee. The urge to protect the interest of pharmaceutical manufacturers is strong.

    I am waiting for the day when some Senator stands up on the floor of the Senate and asks the simple question: Why do American citizens pay a higher price for drugs sold by a British pharmaceutical company then British citizens do?

  11. 11
    MJS says:

    @Richard Mayhew: Because we’re going to undermine his power by pointing out the inconsistencies and nonsensical nature of his proposed policies? That ship sailed a long time ago. His continued war with the intelligence community, and his newly opened war on CNN will be far more important in that regard than any alleged policy proposal he has, which are always subject to change, depending on who he last listened to. This is a rabbit trail he’s laid out for the press (who are NOT capable of walking and chewing gum).

  12. 12
    Calouste says:

    @Richard Mayhew: Unless you want to spend 100% of the GDP on medical care, you’ll have to say “no” at one point.

  13. 13

    @MJS: We need to do both. I know my limits. I am best at policy side work. I will support those who can do other work better than I can.

  14. 14
    Skepticat says:

    Thanks for this. I’ve always wondered about these mechanics, and now I have at least a tiny glimmer of insight.

  15. 15
    TriassicSands says:

    I get medications from both the VA and Medicare Part D. The VA formulary is definitely limited when compared with the Part D formulary, but in both cases, I’ve been prescribed drugs that were not in the respective formularies. And in both cases, the drugs have been approved when the doctors provided a valid medical reason for the choice of the prescribed (more expensive) drug over the formularies’ preferred (less expensive) choices.

    Since this has only happened in a few cases, and I’ve always gotten the drugs I needed, I can’t say that this would be the case for the wider population. I would venture this: if you need the drug you’re much more likely to get it than if you prefer the drug. In both formularies, the “deciders” look at medical necessity.

    One last point. The doctor must dot all the i’s and cross all the t’s or the request will be turned down, even if the i or t in question is relatively trivial.


    If a drug is too costly for the benefit it provides, don’t buy it.

    The problem with this is simple. People are individuals and respond to different medications very differently. Often the difference is in side effects. So, if a drug, for example the statin Lipitor (atorvastatin) works for the vast majority of the population, but causes an intolerable side effect in even one person, the fact that Lipitor is now generic and cheaper than Crestor (not yet generic) wouldn’t help the person with the intolerable side effect. The way both systems work now is the doctor can request an exception and if s/he can present a valid medical reason for Crestor over generic Lipitor, the provider will most likely approve the more expensive, out-of-formulary drug.

    The lesson is this: If you have a valid medical reason for needing (not preferring) an out-of-formulary drug, don’t simply accept “no” for an answer and let it go. Go through the reconsideration process and make sure the doctor does everything necessary and does it all correctly.


    Unless you want to spend 100% of the GDP on medical care, you’ll have to say “no” at one point.

    I agree…except it is possible to make exceptions on the basis of individual need (not preference). That means there has to be a “decider,” which every demagogic Republican will call a “death panel.”

    Personally, I think the FDA makes a mistake today in approving virtually any drug that makes it through the trials. In some cases, as for cancer treatments, the drug may only prolong life by a month or two at the cost of $80,000 to $100,000. One difficulty here is that the prolongation of life is an average and the drug could mean an extra year or two years (maybe more?) for some individuals, but we have no way of knowing who those individuals would be. Here it is worth considering what the treatment is for. If the drug prolongs the life two or three months (on average) of a terminal prostate cancer patient, I’d say deny the drug. Prostate cancer is often fatal, but not often quickly. If a patient dies (like my father did) six years after diagnosis, the extra couple of months makes little difference. On the other hand, if the patient has pancreatic cancer and the drug can extend life by two or three months that is a significant increase for that disease and gives the patient valuable time to get affairs in order and properly say goodbyes. It will always be a tough call when death is involved.

  16. 16
    Barbara says:

    @lgerard: For one thing, that language is ambiguous, especially in the context of a benefit that usually imposes specific dollar copayments. What does it mean to pass things through to the beneficiary in that context? And if you require 100% of negotiated savings to be passed through you risk removing the incentive to actually negotiate savings. They are still required to give people the benefit of the negotiated price when the covered person pays out of pocket. And Part D plans still price based on their actual costs, so in that regard, savings are passed through. But you are right, that very simple language was removed.

  17. 17
    MPAVictoria says:

    In Canada a (semi) independent organization known as CADTH ( assess new drugs and provides a coverage recommendation to the provincial drug plans. Additionally, the Provinces and the Federal Government have recently come together in The pan-Canadian Pharmaceutical Alliance to use their combined purchasing power to negotiate better drug prices. Additionally the Patented Medicine Prices Review Board examines the prices of newly patented drugs and, if it finds them to be excessive, can mandate a lower price.

    Because of these measures drugs in Canada are about 30-40% cheaper than in the US. And we remain one of the more expensive places to purchase drugs when compared to other countries beside the US.

  18. 18
    eldorado says:

    there isn’t any need to drag the drug companies ceo’s, their family, kids and the dog out into the street and just shoot them in the head. because odds are, the dog didn’t do anything wrong.

    but we could just nationalize the companies.

  19. 19
    enplaned says:

    Health authorities of other countries routinely get lower prices for their citizens on drugs than are charged in the US. What this means is that US consumers effectively subsidize those of Europe, for instance. This makes sense for drug companies because selling it for less in Italy or Germany or whatever is still additional profit, assuming it’s greater than the cost of production.

    I’d like a simple law — the price per gram (or whatever) for a drug in the US can be no more than what is charged in any other industrialized nation (which still allows for selling at lower prices in underdeveloped nations). If that means that pharma companies do their best to jack up prices elsewhere, I am OK with that. No reason why the citizens of Germany should be subsidized by US consumers.

  20. 20
    Barbara says:

    @enplaned: I don’t think this framing is useful. We are not “subsidizing” Europe so much as manufacturers are able to maximize their profits in the U.S. because we don’t apply any pressure to try to get better pricing. My guess is that Europe and Canada will continue receiving more or less the same pricing they receive currently regardless of what the U.S. pays. There is no inherently correct level of profitability for pharmaceutical manufacturers or any other industry. There is what the market bears and is structurally primed to support.

  21. 21

    @Barbara: going to steal this logic and run it through the analogue of cost shifting in payer mix

  22. 22
    Barbara says:

    @Richard Mayhew: Well, not exactly the same because the inputs are so much more complex and the costs are more variable. There are not many countries that actually pay manufacturers at a rate that results in a loss.

  23. 23

    @Barbara: agreed but I have a basic skeleton that I want to sketch out to see where I go wrong

  24. 24
    Xantar says:

    @Pogonip: But without those ads I wouldn’t know about plaque psoriasis and methyltrexate!

  25. 25
    BethanyAnne says:

    For so long I’ve wanted research and production separated. Let’s offer bounties for drugs that address conditions. Then produce them with either government production lines, or with prices that governments bid on. Essentially put the profit where the risk is, and let the governments of the EU pay for drug development, too, rather than riding on our willingness to pay whatever the companies charge. Plus, when the companies set whatever price they want, and the government just pays without negotiation, isn’t that awful close to a definition of corruption?

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