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.