Let Medicare Negotiate Drug Prices

by Daniel R. Hoffman, Ph.D.

Published May 2, 2014, 6:00 a.m. ET

Last year total spending on prescription drugs in the US increased 3.2% to $329.2 billion. That followed a 1% spending decline during 2012 (see here). These figures were compiled by a service supplier to pharmaceutical companies that claims the increase resulted from fewer patent expirations on expensive branded products. Well, maybe, but consider this.

Total spending on drugs increased despite the fact that the percentage of prescriptions that were filled with low-cost generics increased from 84% in 2012 to 86% last year. While generics filled a higher percentage of scrips, there was $4 billion more spent to fill brands last year than in 2012 as a result of price increases on patent-protected brands. Also there were more new brands approved for sale last year (36 new molecular entities) than in any single year for the past decade. But most important of all, total spending on drugs is rising because of pharma's effort to make more money from selling fewer pills by moving to high-priced specialty products.

In 2013, 2.3% of prescriptions accounted for 30% of the money consumers paid out of their own pockets for medications. The vast majority of money spent within that 2.3% of prescriptions was for expensive specialty therapies. This is corroborated by the fact that while visits to primary care physicians fell by 0.7% in 2013, visits to specialists rose by 4.9%, including 9.5% more visits to specialists by seniors.

So exactly how fast is spending on specialty drugs growing. On April 15 CVS Caremark, one of the largest pharmacy benefit management (PBM) companies, reported that among its clients, spending on specialty drugs increased by 15.6% in 2013. That contrasted with spending on traditional medications, which grew by only 0.8%. The largest PBM, Express Scripts, forecast that the country's spending on specialty drugs will increase an additional 63% between 2014 and 2016 (see here).

Given the spiraling costs of prescription medications, the question naturally arises as to what can be done to curtail pharma's rapacity? Last month USA Today published an editorial (see here) urging a modification of the Medicare Part D legislation to permit CMS, Medicare's managing entity, to negotiate drug prices. That's a reasonable first step.

When the Bush administration wanted to secure pharma's acquiescence to a prescription drug benefit for Medicare, they gave pharma the gift of including a provision in the legislation that prevented Medicare from using its large purchasing power to negotiate prices. That created the anomaly in which state Medicaid programs -- heavily subsidized by the federal government --demand minimum discounts on branded drugs and then bargain for further price reductions. As a result Medicaid obtains savings on medications that are three times larger than what private insurers get for Medicare Part D policy holders. The Veterans Administration can also negotiate drug prices and obtain savings similar to Medicaid's.

The Congressional Budget Office estimates that allowing CMS to negotiate drug prices for all Medicare beneficiaries could save the program $155 billion over ten years.

That's a start, but 57% of Americans are covered by non-government health insurance plans. That's why an independent consultant in West Chester, who consults for pharmas and wishes to remain anonymous for obvious reasons, claims that CMS should be allowed to negotiate drug prices for private plans as well. "In the current situation for specialty Rx products," he writes, "it might be the only seriously effective brake on [drug] pricing available to the country in the short term."

Ironically Republicans and their hard core of Tea Partiers should be the strongest advocates of giving Medicare the same negotiating discretion as Medicaid and the VA. Since federal spending and deficits are their major bugbear, one might think they would encourage a measure that can reduce government spending by more than $15 billion a year. After all, when fiscal conservatives scream about the growing national debt and annual budget deficits, the forecasts for Medicare spending provide them with their only real leg on which to stand.

Alas, don't wait for the bubbas down south and the Ayn Rand followers from the Great Plains to advocate market principles if that means allowing Medicare to negotiate drug prices. Their ideology of the unfettered market and rugged individualism are only a mask for their true purpose: increasing the wealth of their corporate masters and the top one/one-hundreth of one percent. Prominent among that group are the pharmas, Medicare's biggest beneficiaries. According to the Center for Responsive Politics and other federal data, ten drug companies spent more than $236 million to lobby Congress and the executive branch between 2009 and 2013 (see here).

So permitting Medicare to negotiate drug prices makes good sense, but a weak president and a divided Congress aren't likely to enact it anytime soon. Drug prices, it seems, must begin to cause far worse pain before there's an incentive to make them more affordable.