Walid Gellad and others have a short research letter in JAMA Internal Medicine this week on the cost of prescription drugs under various payments schemes. This team simulated the differential spending between what Medicare Part D paid for the top-50 drugs and what the Veterans Administration paid for those drugs. The prices paid are significantly different:
Annual net Medicare Part D spending on the top 50 oral drugs ranged from $26.3 billion in 2011 to $32.5 billion in 2016 (Table). In 2016, if Medicare Part D obtained VA prices, the cost of these medications would have been $18.0 billion, representing savings of $14.4 billion, or an estimated 44%. The projected magnitude of estimated annual savings from 2011 to 2015 was similar, ranging from 38% to 50%.
The Veteran’s Administration uses aggressive formulary management. It makes take it or leave it offers when there are multiple drugs in the same therapeutic classes. It will not cover all drugs. The VA will be aggressive in pre-authorization, step therapy and other medication management techniques. The VA says “NO” a lot and it says it with great credibility. Therefore,the VA gets good prices.
Austin Frakt and colleagues performed a related analysis in 2011 where they asked the question of how would a VA formulary work on Medicare Part D and what were the welfare implications:
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….
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…..
Both studies are useful. They quantify the power of “NO”. They also implicitly highlight the challenge of building systems that effectively say “No, not at that price” because the VA gets good pricing because they limit choice. We, as a society, are enamored with choice. We don’t like seeing the option space pre-emptively constrained.
If we want lower drug prices it means empowering large scale buyers to credibly say “No” and then hold to that “No.” It means forgoing some drugs for some conditions and some states. Otherwise having Medicare negotiate prices for drugs that everyone knows that they have to buy is just a time consuming interpretative dance routine.