Saying No saves money

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.

27 replies
  1. 1
    Barbara says:

    Kaiser Foundation Health Plan also engages in aggressive formulary management, although it probably has more regulatory constraints than the VA.

  2. 2
    WereBear says:

    SOMETHING has to restrain the rampant drug company’s lust for profits, as we’ve seen with the price of insulin. This is NOT something that Wall Street gets to play with.

  3. 3
    MattF says:

    I have drug coverage from Express Scripts, and I get irked with them for generally requiring personal authorization from prescribers for non-generic medications. It is inconvenient at best, and dangerous at worst– it caused a delay in getting a blood thinner (Xarelto) that was prescribed for me in an ER.

    That said, insured patients get semi-reasonable prices. My sister takes the same medication, but falls into the Medicare D ‘donut hole’. She pays $15/tablet of Xarelto, I pay $0.50.

  4. 4
    Barbara says:

    @MattF: Xarelto is one among several new generation anti-coagulants and they are all heavily marketed, to consumers and to doctors. There is a good chance that if you had asked, the doctor would not have been able to articulate a good reason for preferring Xarelto over whichever competing drug (e.g., Eliquis) is in the best position in the ESI formulary. Doctors almost never have the data or tools needed to evaluate the comparative efficacy or safety of drugs in the same class. The Kaiser organization conducts this kind of review if it can and completely prohibits pharmaceutical companies from marketing to its doctors unless it reviews and approves the materials.

    ETA: Blood thinners present some of the harder issues for judging equivalence, but I think the biggest issues are for the older drugs. The newer ones are supposed to avoid some of these issues. Or at least that’s how they advertise themselves.

  5. 5
    MattF says:

    @Barbara: I have wondered exactly why Xarelto is so popular. I should note that it appears to work nicely for me– the alarming symptoms that prompted the prescription have mostly gone away.

    I should also note that there’s some disagreement among physicians about the correct length of the course of treatment, whether the standard (three weeks + six months) should really be life-long. One can guess what the manufacturer prefers.

  6. 6
    Barbara says:

    @MattF: I now encourage everyone who is prescribed an expensive drug to do two things. The first is to look at whatever formulary they are covered under to see if it is the best position, and if not what is, and see if that would also work. This is just the tiniest push back at the impact of pharma marketing on doctors, making the doctor explain why you need a drug that costs you much more than alternatives. The other is to look at the following website, which provides a good discussion of nearly every kind of commonly prescribed drug: Look at the links for competing drugs and latest news to see how Xarelto and Eliquis among others are being marketed. Also, the new drugs have no antidote for uncontrolled bleeding, unlike the older drugs. So if you have symptoms of unexplained bleeding, go to an ER immediately. This is how my mother died, except she never even tried to get help.

  7. 7
    Jeffro says:

    Nancy Smash just told trumpov he can’t come deliver the SOTU since the govt (including Secret Service and Homeland Security) is shut down. LOLOL

  8. 8
    Vince says:

    Nancy Pelosi just cancelled/postponed the State of the Union. I’m sure stupid will take that well.


  9. 9
    WaterGril says:

    @Vince: Not so. She RECOMMENDED that it be postponed or that Trump give his report in writing.

    Today, I wrote to @realDonaldTrump recommending that we delay the State of the Union until after government re-opens, as the @SecretService, the lead federal agency for #SOTU security, faces its 26th day without funding.

  10. 10
    Brachiator says:


    This is just the tiniest push back at the impact of pharma marketing on doctors, making the doctor explain why you need a drug that costs you much more than alternatives.

    Would it also help to discuss this with a pharmacist?

  11. 11
    rikyrah says:

    I saw a story this weekend about the outrageous price of insulin. Is there a way that you could write a story on it? Why is it so expensive? We have people whose lives depend upon it, and who are getting priced out. A lot of the story was about a 20 something young man who had Type-1 diabetes, and died cause he couldn’t afford the insulin. I was shocked by the prices that I was reading in the story.

    I believe it’s collusion between the three companies that control the insulin market in this country.

  12. 12
    FlyingToaster says:


    Doctors almost never have the data or tools needed to evaluate the comparative efficacy or safety of drugs in the same class.

    Not always true, so people should definitely ask.

    HerrDoktor and I ended up on the same BP med, each after starting with the most common, and seeing the side effects, and moving on to the next one, rinse, repeat, modulo known allergies (me). Our doctors are Harvard Med School affiliates, so they have a big flowchart of BP drugs, and you stop when you’ve lowered your blood pressure without debilitating side effects, tagged for your prescription coverage. That’s not true for every condition, but it certainly made a big difference to the two of us.

    There’s a lot of hit-n-miss, and doctors trying expensive new meds because other patients had miserable experiences with the existing ones (h/t, my SIL).

    When I was pregnant with WarriorGirl, my PCP switched me off of the generic thyroid med and onto the brand name; she had data from a study that showed a small but measurable improvement in TSH control under the brand name version, in a number of edge cases like immunity suppression. A month after WG was born she switched me back, since I was no longer an “edge case”.

    So the recommendation is to always ask. Sometimes there’s a good reason; other times it’s marketing or guessing.

  13. 13
    Ohio Mom says:

    My friend and neighbor is a pharmacist at the VA and her husband is a family practioner. It’s a joke in their family that the wife only knows about 50 year old medications, anything newer than that isn’t on the formulary.

    Yes, saying No says money; whether it saves lives or quality of life is a different question.

    I wanted a somewhat new genetic test to see if I should stay on my anti-hormonals for more than the five years originally prescribed after my breast cancer diagnosis. Five years is the estasblished protocol even though there is a lot of newer research that longer may be better.

    The insurance company said No, saving themselves several thousand dollars.

    I applied to the testing company’s scholarship program, had the onc send in a sliver of my tumor (which has been sitting in a hospital storeroom, encased in wax), and found out I have a very high chance of recurrence in the next five years if I do not continue on the anti-hormonals.

    So of course I am back on them, enjoying all the side effects because that is the trade-off. At least the instance is paying for the pills.

    I imagine that the insurance company’s calculations include the fact that in a few years I will be covered under Medicare and therefore, not their problem anymore.

    I have two other recent examples of money saved at my family’s expense, but that is enough for now.

  14. 14
    Felanius Kootea says:

    @Barbara: So sorry to hear about your mother.

    Some (mostly teaching) hospitals are increasingly taking up physician-pharmacist co-prescribing, since pharmacists have a wealth of knowledge about the actual drugs and effective alternatives that physicians often don’t. I wonder how good this approach is at reducing costs and unwanted side effects.

  15. 15
    Ohio Mom says:

    @rikyrah: Just about everything about treating diabetes is too expensive and/or not covered. The price of insulin is criminal, and often many of the needed accoutrements such as testing trips, alcolhol pads, etc., are not covered.

  16. 16
    lgerard says:

    As i recall, the original legislation creating Part D that passed both houses of congress had a clause mandating that any savings negotiated by insurers be passed onto consumers in the form of premium relief. The whole rationale for the law was tied to the “magic of private markets” that would bring lower prices..
    That clause magically disappeared in conference, with no explanation or without any attribution as to who championed that change.

  17. 17
    Barbara says:

    @Brachiator: Well, it might but the pharmacist would need to call the doctor to get approval to change the prescription. Pharmacists frequently do that when their customer expresses complete sticker shock at the price of a drug they have just been prescribed. Idaho is the only state that has enabled pharmacists to make certain product switches based on formulary status without prior approval of a physician, and I would imagine that most pharmacists are unlikely to do that on their own.

  18. 18
    Barbara says:

    @lgerard: No it didn’t disappear.

  19. 19
    Fleeting Expletive says:

    I just signed up for PartD and boy, do I have questions. This plan has a $40 allowance for OTC stuff, bandaids to vitamins, per quarter, and they sent me a catalogue.
    This may be a much bigger issue altogether: Why no diabetic supplies? OTC glucose testers , lancets & devices, TEST STRIPS? Insulin? What’s the history on this subject?
    Also, the Late Enrollment Penalty. What’s the history of that? Thank you.

  20. 20
    Barbara says:

    @Fleeting Expletive:

    Why no diabetic supplies? OTC glucose testers , lancets & devices, TEST STRIPS?

    Because to the extent those things are covered, it is under Part B, not Part D. As I say once more in my broken record fashion — Medicare has a rotten benefit design. Its various parts are siloed so that it is virtually impossible to get anything that approaches integrated or coordinated care unless you enroll in a Part C plan.

  21. 21
    Barbara says:

    @Fleeting Expletive: You should read the 2019 Medicare and You Handbook and search the word diabetes to understand what is covered under which part.

    You will find the following information:

    Diabetes supplies
    Medicare covers blood sugar testing monitors, blood sugar test strips, lancet devices and lancets, blood sugar control solutions, and therapeutic shoes (in some cases). Medicare only covers insulin if it’s medically necessary and you use an external insulin pump to administer the insulin. You pay 20% of the Medicare-approved amount, and the Part B deductible applies.

    Note: Medicare prescription drug coverage (Part D) may cover insulin, certain medical supplies used to inject insulin (like syringes), and some oral diabetes drugs. Check with your plan for more information.

  22. 22
    Mel says:

    @Ohio Mom: This.

    It’s easy to say that extremely aggressive formulary limits and multiple obstacles put in the way of patients obtaining a higher cost medication or a diagnostic test or procedure are a win financially – that is, until you or someone that you love is the person who needs and absolutely cannot access that lifesaving or quality of life improving medication, or that essential diagnostic test.

    To be clear, there is a good argument to be made for reasonable use of step therapy in most cases, and generics are always the correct first step, unless there is a clear reason to go for the name brand. Still, not all generics work for all patients, as OhioMom notes, and some generics (and some name brands) contain fillers, dyes, or other inactive ingredients that cause undesirable reactions in some patients. Medicine is not always a “one size fits all” proposition.

    That being said, what far too often happens is that low level employees at insurance companies end up being given the power to make initial and sometimes mid range decisions about whether or not a patient can access a particular medication, even in cases when the medication is on a formulary but is in a higher tier. Often, these employees do not have a science or medical background, and yet they are given the power to override doctors’ research based decisions about what course of treatment is safest and most efficacious for the patient. I have seen rejection letters written by insurance company employees who could not even spell the names of the medications or diagnosed conditions, and were unable to figure out dates and timeframes related to simple record keeping processes. To assume that those individuals know more about how medications work and more about an individual patient’s history and prognosis than the treating physicians do, or that the majority of practicing physicians have no real understanding of how drugs function in comparison to other drugs in their class, and thus merely write scripts based upon what a sales rep pushes them to do is, honestly, a bit absurd.

    Yes, there are appeals processes available when denials are issued, and those do eventually put the exception requests in front of an actual physician employed by and working for the insurance company’s interests, but the appeals process often drags on while patients are in limbo, at risk, under additional stress, and losing valuable time.

    Managing formularies and procedure approvals wisely just makes sense. But advocating for a draconian approach as the only or the best way to lower costs does NOT make sense. It just punishes patients and hamstrings the care teams.

    Perhaps a better approach is legislation that curbs pharmaceutical companies’ egregious profiteering in order to lower costs to insurers and patients, instead of assuming that the very best way to lower costs is to pay for fewer and fewer medications, and to throw up even more obstacles in the already difficult path that acutely or chronically ill patients are forced to tread.

  23. 23
    Mel says:

    @Ohio Mom: Thank you for sharing your experience. It’s incredibly important that the real, human impact of insurance companies’ “cost management” remains a big part of the discussion.

    I hope that you are doing well now, and I am so sorry that you had to go fight that fight at the same time that you were fighting to get well. Sending you a big hug.

  24. 24
    Barbara says:


    doctors’ research based decisions about what course of treatment is safest and most efficacious for the patient

    You are an optimist. Even those doctors who are basing decisions to prescribe newer and more expensive drugs on research are frequently relying on marketing materials dressed up as research that is bought and paid for by drug manufacturers. It’s a horrible situation, make no mistake, but the problem starts with the notion that prescribing decisions are more rigorous than formulary reviews when it is so obvious that they are not.

    Consider the case of COX-2 inhibitors, now gone from the market. A massive marketing campaign brought the market share of this class of new and improved NSAIDs to close to 60% of all use of such drugs, based on the idea that they were less abrasive to the lining of the stomach, and thus caused less bleeding. They were never approved by the FDA to make this claim, and after evaluation the Kaiser system rejected the notion that they should be first tier drugs, such that only 6% of Kaiser patients were using them when they were discontinued. Other insurers were sued for trying to do the equivalent via formulary management. Fast forward. Oh, it turns out COX-2 inhibitors are associated with significant increase in heart attacks and damage (a complication that was predicted by an FDA reviewer who was a professor of medicine at the University of Pennsylvania). So patients who were suing their insurers to get the drugs switched to suing the manufacturer for recklessly exposing them to the drugs.

    The point is, there is no system, there are almost never any rigorous studies that compare one drug to another, the FDA does not measure new drugs against old ones, most drug research is complete garbage, everyone in the industry knows it, and that’s why insurers go with price unless there is really strong evidence for one drug over another.

  25. 25
    jl says:

    @Ohio Mom:
    ” I imagine that the insurance company’s calculations include the fact that in a few years I will be covered under Medicare and therefore, not their problem anymore. ”

    You don’t have to imagine, the insurance company’s calculations very definitely do include that. It’s the “patch ’em up and pass ’em on” approach to treating older adults in the US system. There is both academic research, and my extensive personal anecdata from medical directors that the insurance and managed care money skunks on how they handle the problem. There is very good evidence that the chronic and extensive suboptimal treatment of older adults in the five years or so before they go on Medicare substantially increases the long run cost of their care. It’s one of the reasons I think lowering eligibility age for Medicare is a good policy.

    There is an actual problem, not just insurance and managed care organization greed. Any care that does not yield very visible short run benefits to the patient will not be valued in the next open enrollment period. So, organizations competing on price who do provide slightly more expensive care for older adults, but which is in the long run cost saving, fear losing market share if they have even a slightly higher price. Every penny per covered life per year is fretted and worried over. And unnecessary and inefficient ‘hard choices’ are made that increases the long run cost of Medicare coverage.

  26. 26
    jl says:

    And, if we don’t adopt Medicare for All (Go Australia!), then we have to do Obamacare right, and the best example of this is Switzerland (Go Swiss!).
    So, as quibble to the research. why the focus on the 500 most popular drugs? Do we know what the cost-effectiveness or cost-benefit of these drugs are? If we Go Swiss we would see, from the most recent stuff I have read (I admit I’m a little out of date):
    Cost-effectiveness and cost-benefit analysis and tests for any drug offered on a national formulary
    Five year reviews for all drug approvals (you can’t get a permanent approval for a drug in Switzerland)
    No inefficient had off from older adult to elderly care

    Australia’s Medicare system also has a cost-effectiveness test for medications on it’s Medicare formulary.

    Australia’s Medicare for all and Switzerland’s ‘Obamacare done right’ systems have produced some of the highest life-expectancies in the world, at all ages. They have benefited older adults, elderly and very elderly greatly compared to what has happened in the US.

    A lot of the ‘hard choices’ ordinary people in the US are supposed to face are just garbage. The US has an grotesquely inefficient system, in which the ‘hard choices’ we are forced to make often result ins less, not more, efficiency. But if giant corporations run everything and buy off the politicians, what else would you expect? The great mass of lesser people are forced to make a lot of supposedly (but not really) ‘hard choices’ that benefit everyone but themselves.

    And Switzerland, being slowly forced out of sketchy money laundering as a profit center is reindustrializing. Their pharmaceutical sector is one of the biggest and most influential in the world, and pharmaceuticals are one of their largest exports. So, their more rigorous treatment of drugs has not ruined the industry.

    OK, end of my rant.

  27. 27
    Ohio Mom says:

    @Mel: Thanks, I am actually doing well, five years out from my surgery. My cancer was the type that is “fed” by estrogen (“fed” being an oversimplification doctors give their patients); the treatment is to starve any remaining cancer cells hiding out with medication that prevents your body from making estrogen.

    Estrogen-positive cancer cells can lay dormant a long time — it’s not unheard of for a ER+ cancer to recur twenty years later. That’s in contrast to a type of ER- breast cancer where the risk reduces significantly after the first five years.

    The side effects of the hormone blocker are minor but annoying, I feel as creaky as an 80 year old. It is certainly do-able, especially considering the possible alternative.

    It haunts me though that if the genetic testing company hadn’t had a scholarship program, allowing me to have the test for a couple of hundred out of pocket, and if I had forgone paying the full three or four thousand (because that is a lot of money)… Well, taking care of Stage 4 cancer would have been really, really expensive and awful.

    Anthem rolled the dice here and they won, the ratf*ckers.

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