Lifting the Ban on Medicare Part D Negotiating with Drug Companies to Set Prescription Drug Prices. Political Talking Point or Attack on Market Forces?

Lifting the Ban on Medicare Part D Negotiating with Drug Companies to Set Prescription Drug Prices. Political Talking Point or Attack on Market Forces?

Many of the Democrats running for President promote the idea of authorizing Medicare Part D to negotiate directly with drug companies to set prescription drug prices. H.R.2000 - Medicare-X Choice Act of 2019, (known as the “Medicare for all that want it”, introduced on April 1, 2019 and co-sponsored by Representative Craig contains a clause deleting the current ban.

“The Medicare Modernization Act of 2003 (MMA), which established Medicare Part D, included a ban on such negotiation. In theory, if the Centers for Medicare and Medicaid Services (CMS) could negotiate with pharmaceutical companies, the agency could leverage its purchasing power to pay less for drugs. The idea has received considerable media attention over the past few months and has broad public support, reflected in a recent poll showing 87 percent of Americans have a favorable view of the idea. . . .

[F]rom its creation and through Bill Clinton’s presidency, Medicare lacked a prescription-drug benefit. It was not until 2003, under President George W. Bush, that Congress added the Part D benefit, through which Medicare pays for seniors’ prescription drugs. The enactment followed a controversial House roll call vote, which Republicans held open for several hours as party leadership maneuvered to secure enough votes for passage. One bargaining chip to attract market-oriented Republican votes was the so-called “noninterference clause”—a provision drug manufacturers had a major role in writing and getting through Congress—which banned negotiations between Medicare and pharmaceutical companies on drug prices and prevented the government from developing its own formulary or pricing structure. Instead of CMS negotiating on Part D plans’ behalf, prescription drug plans compete for enrollees and negotiate directly with manufacturers.” The Political and Legal History Behind the Ban on Negotiating Drug Prices, September, 2016.

“President Trump’s proposal to establish an international pricing index as a benchmark to control drug spending under Medicare Part B has once again raised the issue of allowing the government to negotiate the price of prescription drugs for Medicare.

Indeed, a recent Kaiser Family Foundation study estimates that drug prices are projected to rise 47% annually, and 92% of the public — both Republicans and Democrats — like the idea of allowing the government to negotiate drug prices. . . .

President Trump’s proposal in October 2018 was aimed at the Part B portion of drug purchases. The likely reason for this focus is that the government is forbidden from negotiating with pharmaceutical companies for drugs purchased under Part D. At first, this prohibition seems crazy. But after a long debate, Congress decided to provide drugs through private plans that compete for business based on costs and coverage. That structure means that each plan separately negotiates drug prices with the pharmaceutical companies. Concerned that inserting the federal government into these negotiations would interfere with this market-oriented approach, Congress included language that prohibited the Secretary of the Department of Health and Human Services (HHS) from negotiating directly with drug manufacturers on behalf of Medicare Part D enrollees (“the noninterference clause”).” Opinion: Should the government be allowed to negotiate drug prices?, January 2019.

But, would lifting the ban actually save any money?

• “Allowing the Secretary only to negotiate prices - without providing another tool to reduce prices - would not save a meaningful amount.
• The Congressional Budget Office (CBO) estimates that giving the Secretary authority only to negotiate prices will not generate significant savings unless the Secretary can also remove certain drugs from coverage or otherwise legally require reductions in prices. . . .
• If the Secretary were allowed to require brand-name drug manufacturers to lower the price of their drugs, Medicare Part D could save on average $11 billion per year, according to CBO. “Fact Sheet: How much money could Medicare save by negotiating prescription drug prices? from the Committee for a Responsible Federal Budget, April 2016.

The latter option was studied in the Options for Reducing the Deficit: 2015 to 2024, November 2014. Page 51. The explanation was:

“Before the establishment of Part D in 2006, Medicare beneficiaries who were also eligible for full benefits from Medicaid—known as “dual-eligible beneficiaries”— received drug coverage through Medicaid. That program requires drug manufacturers to pay state and federal governments a significant rebate on their sales to Medicaid enrollees. The rebate amount is currently 23.1 percent of the price that manufacturers receive for sales to retail pharmacies (known as the average manufacturer price). Additional rebates are required if a drug’s price rises faster than overall inflation.

When Part D of Medicare was established, dual-eligible beneficiaries were enrolled automatically in a low income-subsidy (LIS) program in Part D, which typically covers the premiums and most of the cost sharing required under the basic Part D benefit. Currently, the rebates for drugs used by LIS enrollees are established in the same way as those for drugs used by other Part D enrollees: through negotiations between private Part D plans and drug makers.

This option would require manufacturers of brand-name drugs to pay the federal government a rebate on drugs purchased by enrollees in the Part D LIS program, starting in calendar year 2017. . . .”

For this latter option to obtain the $11 billion savings calculated, it had to be assumed that Medicare would be able to negotiate much better prices than the Pharmaceutical Benefit Managers currently do. Whether this would happen is unknown.

In any event, the “Medicare for all that want it” would only allow the Secretary to negotiate prices, and savings, if any, would be negligible. While the slogan of “allow Medicare to negotiate drug pricing” sounds good, and appeals to the public in polls, this turns out to be merely a political talking point. Unless – unless this is simply a step towards Medicare – the government - to begin to set drug prices, a significant change in public policy. Price controls in other sectors, such as in housing rentals, have resulted in a shortage of supply. Price controls in pharmaceuticals would reduce the incentives to spend the millions of dollars over several years to create, test and get approval to sell new life savings drugs. As economists always say, “There will always be tradeoffs.”