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Senate bill pushing for government drug price negotiations is unlikely to save cash

The US Senate is debating a bill which proposes to allow the government to negotiate directly with drug developers over prices for Medicare Part D drugs. Although designed to reduce patients’ costs, a recent study indicated that government negotiation would bring only negligible savings in the absence of additional cost containment tool implementation, as Datamonitor’s Dr Mark Belsey discovers…

Following the introduction of Part D in January 2006, Medicare patients were provided with extensive access to out-patient drugs for the first time. However, the cost of the program to both the government and patients has been controversial from the outset, primarily because of the government's decision to contract out the plan to private healthcare insurance providers. As a result, there has been significant debate over possible ways to reduce costs, including one suggestion to allow the government to directly negotiate with drug developers over the drug price.

Last week, the Senate Finance Committee approved a bill (S3) introduced by the Committee chairman, Senator Baucus, which abolishes the Medicare Modernization Act (MMA)'s outright ban preventing the Department of Health and Human Services (HHS) Secretary from directly negotiating with drug developers on drug prices. The bill proposes that the secretary be allowed to negotiate, and as such, it is less strongly worded than a bill passed in January by the US House of Representatives (HR4), which specifically requires negotiation. These bills were introduced on the basis that direct negotiation between the government and pharmaceutical companies would drive down the cost of drug prices, given the significant potential bargaining power exerted by Part D.

Allowing government negotiation is a high-profile issue: since gaining majorities in the House of Representatives and the Senate, the Democrats have made it a key issue, and they are supported by significant lobbying from bodies such as the powerful seniors' advocacy group, the AARP. Furthermore, a Kaiser Family Foundation survey addressing seniors' experiences of Part D published in December 2006 indicated that the leading change to the program proposed by the seniors interviewed would be to allow government drug price negotiation. Supporters of the measure point to the significant discounts leveraged by the Department for Veterans Affairs (VA) and other governmental departments.

Conversely, those who are against direct government negotiation believe that the considerable experience in both patient management and in brokering favorable deals yielded by private insurance companies is helping to drive costs down, and that consolidation within the Part D plan providers has supplied the dominant companies with considerable leverage. Supporting this argument is a recent Congressional Budget Office (CBO) study commissioned by the Senate Finance Committee, which indicated that cost savings would be negligible unless accompanied by cost containment tools designed to reduce drug prices. Furthermore, the current HHS Secretary Mike Leavitt has indicated that he would be unwilling to negotiate, even if he was allowed to.

Nevertheless, without concrete evidence proving that negotiation is not effective in cost containment, it is likely that it will continue to be pushed. It is therefore interesting that S3 includes proposals to allow Congressional support agencies such as the CBO to access data on the rebates, discounts and other price concessions that are negotiated. Analysis of this data would then be fed back to Congress and the HHS, providing information on issues such as the impact on drug prices following negotiation.

The government's primary objective with Part D so far has been high levels of enrollment. However, over the longer term, rising costs of the program will mean that cost containment is increasingly prioritized. As such, there is likely to be increasing pressure to allow measures such as government negotiation. Dialogue on S3 is contributing to the significant debate over whether such measures are likely to be effective, and the issue is unlikely to be settled without evidence of the success of such measures. As such, S3 provisions to allow greater transparency on negotiated prices will help to establish a feedback loop to monitor this effectiveness.

Without the use of additional cost containment tools, the introduction of government negotiation is unlikely to have a significant impact on overall drug prices, and may actually lead to reductions in other government-negotiated drug discount programs, such as the VA discounts.

Waxman leads the call for greater transparency on Part D drug prices

Following the recent hearing of the House Oversight and Government Reform Committee, its chair Rep. Waxman, has indicated that he is pushing for greater clarity on the cost of drugs through Medicare Part D. This step adds increasing pressure on the government's decision to contract out Part D to private insurance companies, as Datamonitor analyst Dr Mark Belsey discovers…

With the introduction of Part D in January 2006, Medicare patients were provided with extensive access to out-patient drugs for the first time. However, the program has been controversial from the outset. One of the key contentious issues has been the government's decision to contract out the plan to private healthcare insurance providers.

Those opposed to this state that not only did the government miss out on a golden opportunity to use its size to leverage significant discounts, but also that the lack of transparency with the current scheme means that that it is difficult to determine whether all of the cost savings brokered by the private insurance companies are being passed on to Part D enrollees. Conversely, those who support the government's decision believe that the considerable experience in both patient management and in brokering favorable deals yielded by private insurance companies is helping to drive costs down, and that the consolidation within the Part D plan providers has provided the dominant providers with considerable leverage.

Supporters of the argument that the government has squandered the opportunity to negotiate substantial discounts point to the significant discounts leveraged by the Department for Veterans Affairs (VA) and other governmental departments. As a result, they claim that drug prices under Part D are comparatively unnecessarily high and only serve to boost drug company profits.

To try to remedy this situation, the House of Representatives recently approved a bill requiring the government to negotiate with drug developers over Medicare drug prices. This was one of the first steps taken when the Democrats gained control over the House in November 2006, yet despite the House's approval, the bill faces an uphill battle in being ratified because the President has already said that he will veto it if it is presented to him.

The counter-argument to this is the fact that it seems unlikely that the drugs industry would have continued to provide governmental organizations such as the VA with such substantial discounts if it was forced to reduce Part D prices to these levels. Furthermore, it has been suggested that the private plans' greater experience in both drug negotiations and the logistics of drug provision has been central to ensuring a better-organized and cheaper scheme.

Indeed, there is evidence that the private plans have successfully kept Part D costs down: plan premiums have been considerably lower in 2006 and 2007 than anticipated, and budget estimates have indicated that Part D is set to be considerably less costly than originally thought. This has been attributed to high competition between the plans, the high usage of generic drugs in the plans and the low bids proposed by the plans.

Despite the relative success of these plans in keeping costs low, there have been questions about the actual level of savings negotiated by Part D plan providers, and the extent to which these savings are being passed on to Part D beneficiaries. Rep. Waxman raised the profile of this issue last Friday when he indicated that he would be sending a letter to Medicare and to Part D plan providers to request information about the level of drug discounting. This is designed to make drug pricing more transparent, and help the government determine how effective plan providers are at brokering discounts.

Part D has radically altered the pharmaceutical market in the US. However, as cost containment becomes increasingly important, the government will be under greater pressure to justify its decision to contract out Part D to private providers. Proposals to increase the transparency of drug negotiations by Part D plan providers may help to alleviate some of these concerns. However it is unlikely that insurance plans will provide this profit-sensitive information without a fight.

Related research:

• Pricing & Reimbursement Series: Medicare Part D's progress so far
• Pharmaceutical Pricing and Reimbursement: Strategies for market access across the US

• The Pharmaceutical Industry 2008: Current and Future Trends and Strategic Issues Shaping Pharma