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No, Uncle Sam Can’t Negotiate Lower Drug Prices

Marilyn Serafini November 15, 2017

Congress has prohibited the government from bargaining for cheaper Medicare medications under Part D.

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The government is not allowed to negotiate prices for Medicare Part D drugs because it is against the law.

A strict prohibition has been in place since Congress created Part D in 2003 as part of the Medicare Modernization Act. At that time, the drug industry pushed hard to keep the government’s hand out of the process.

Today, drug company leaders argue that this was the right decision, and that drug costs have grown at a slower pace because the private sector is cutting the deals. Others, however, continue the fight to involve the government.

Leading the charge on behalf of the drug manufacturers in 2003 was then-Rep. Billy Tauzin (R-La.), who co-authored the modernization legislation while he was negotiating behind the scenes to become the head of the Pharmaceutical Research and Manufacturers of America – the drug industry’s main lobbying group. He left Congress in 2004 to head the drug industry association at a salary of $2 million per year.

After the prohibition on the government negotiating lower prices, Rep. Louise Slaughter (D-N.Y) wrote in the New England Journal of Medicine that there were “serious conflicts of interest among the bill’s primary authors.”

Many Democrats, along with others who want Medicare to negotiate prices, have long argued that Part D’s 42 million enrollees (29 percent of retail drug spending in 2015) give the program power to leverage lower prices. President Trump has also made that case.

The public overwhelmingly supports it, and policy makers continue to propose it, but pharmaceutical companies claim it just isn’t necessary. With prescription drug costs on the rise, more than 80 percent of Americans – including 68 percent of Republicans – said in a Kaiser Family Foundation poll last year that they wanted the federal government to assert its leverage.

Indeed, the government is the biggest purchaser of drugs for beneficiaries in such programs as Medicare, Medicaid, the Veteran’s Administration and for active duty troops and their families using the Pentagon’s Tricare health network. The VA and the Department of Defense both negotiate with drug manufacturers to get lower prices. Together the agencies spend $8 billion per year on medications and by law enjoy a 24 percent discount on a drug’s average price. Medicaid also commands significant rebates from manufacturers, as part of current law.

Drug-price negotiating authority for Medicare continues to pop up on broad lists of solutions as the debate over high drug costs intensifies, although positions haven’t changed. Congressional Republicans and Democrats are under constant pressure from the drug industry to prevent Medicare negotiation, said John Rother, president and CEO of the National Coalition on Health Care, which spearheads the Campaign for Sustainable Rx Pricing, representing consumer and payer groups.

“The industry doesn’t want negotiation, and it is the most powerful lobby in Washington,” Rother said. “There’s no other group that could match them in terms of political donations and the number of lobbyists.”

It’s not that PhRMA is opposed to negotiation, only that government involvement isn’t necessary, said spokeswoman Caitlin Carroll. Part D plans, she said, are sold through private insurers, which already negotiate effectively with drug makers on behalf of patients.

At an October 19 hearing of the Senate Health, Education, Labor and Pensions Committee, Lori Reilly, PhRMA’s executive vice president of policy, research, and membership said that prescription drug spending growth overall has “fallen substantially,” and was 3.5 percent last year. Because of negotiation and competition in the marketplace, she maintained, “spending on retail and physician-administered medicines continues to represent only 14 percent of overall health care spending, even though scores of new medicines are approved every year.”

Let’s take a closer look at Reilly’s argument, and at drug costs specifically in Medicare. To be sure, Part D drug plans have been successful in securing ever-larger monetary discounts from manufacturers, mostly in the form of rebates. The rebates do not go directly to the patient, though. The drug manufacturers pay them to other players in the supply chain. In 2006, the first year the Part D drug plans were active, rebates from manufacturers as a percent of total drug spending across the board were 8.6 percent.

Since then, the rebates have nearly tripled, reaching 23.8 percent of total drug spending in Part D this year according to a new Kaiser Family Foundation report that is based on the 2017 Medicare trustees report.

Yet, while rebates are larger, the average annual growth of prescription drug spending in Part D plans has risen as well, from 2.4 percent for the years between 2007 and 2013 to 4.4 percent between 2013 and 2016. It’s projected to reach 4.7 percent between 2016 and 2026.

Despite the growing rebates, it’s extremely difficult to determine who is benefiting from them. After the drug leaves the manufacturer, it winds its way through the supply chain before reaching the patient. Rebate information is proprietary to the drug manufacturers and others in the supply chain. But the information does not go to patients or the public, creating quite a bit of mystery regarding deals along the way.

Trying to follow the money – and rebates – complicates the question about whether the government could be more successful than the Part D plans at negotiating lower prices.

Rebates from the manufacturers may have increased under Part D as a percent of total Part D costs, “but there’s no sense as to whether it’s for brands, generics, which drugs, and which manufacturers,” said Bill Corr, senior advisor at Waxman Strategies.

Reilly, from PhRMA, specifically called out hospitals, which were not represented at the hearing, and pointed to a study that her group had just released which examined a group of drugs that hospitals commonly use and have high prices. PhRMA’s study, she said, found that hospitals charged two and a half times their acquisition cost for those drugs.

A major component in the supply chain is pharmacy benefit managers (PBMs). Insurers, including Part D plans, have contracted with PBMs in order to administer prescription drug programs and manage costs. You may have heard of them; some of the biggest are Express Scripts, CVS Caremark, and ProCare RX. Outside of Medicare, the PBMs seek to lower costs by negotiating rebates from the manufacturer, and discounts, and by creating preferred drug lists, called formularies. In exchange for providing deeper discounts, the manufacturers get preferential placement in formularies, which translates into more sales.

Medicare, though, doesn’t allow one of the biggest incentives for manufacturers to provide discounts: PBMs cannot promise the manufacturers preference of one drug over another in formularies because Medicare requires Part D plans to cover nearly all medications.

In March, Senate Finance Committee Ranking Democrat Ron Wyden, D-Ore., introduced the C-THRU Act to require PBMs in Medicare to disclose information about the amount of rebates and how much is passed on to health plans.

Reilly, at the HELP hearing, said that PBMs “secured over $100 billion in 2015 rebates and discounts [but that] unfortunately what’s happening today is that they’re often not making their way back to patients at the point of sale.”

But the fault isn’t with the PBMs, Mark Merritt, president of the Pharmaceutical Care Management Association, the association that represents PBMs, said at the hearing, and Merritt pointed the finger back to drug makers. “Mylan didn’t raise EpiPen prices by 400 percent because of the supply chain,” he said, instead attributing increases to supply and demand.

And as the finger pointing continues, Medicare Part D medication spending continues to rise with little relief in sight.

Read the rest of Tarbell’s series on Big Pharma and high drug costs.