The Earth Is Moving Under Medicare And The Price Of Drugs ― But Slowly.

November 4th, 2022 by Tom Lynch

Prologue

This is a story, 16 years in the making, of government-enabled corporate greed. It’s complicated and somewhat dense. It has to be to go on that long. It’s a story of how one industry, the Pharmaceutical industry, has done Olympian good while achieving Titanic profit, which has been surgically excised, Midas-like, from the hides of American taxpayers who never felt the touch. The story ends with a different way, a better way, but a way we common folk won’t likely see.

The story

Medicare Part D, a prescription drug benefit plan for Medicare beneficiaries, became law on 1 January 2006 under the George W. Bush administration and a Republican controlled Congress. The legislation was enacted with no funding provisions whatsoever. Since then, Washington politicians have been arguing over whether this government program should be allowed to negotiate with pharmaceutical companies the prices it pays for drugs its members need. Medicare beneficiaries, all 64 million of them, and the public at large, have overwhelmingly supported such a move. Over the years, pharmaceutical companies have spent a king’s ransom donating to politicians to secure―should we say “buy?”―their votes in opposition.

What’s been the result?

  • A study published recently in the Journal of the American Medical Association concluded more than a quarter (27.2%) of Medicare spending is now for prescription drugs;
  • That would be $180 billion, as reported by the Medicare Payment Advisory Commission for 2020;
  • According to the Kaiser Family Foundation, the total we in the US spent on prescription drugs in 2017 was $333 billion; and,
  • The Rand Corporation studied and compared US prices to 32 other OECD countries (The Organization for Economic Cooperation and Development – the most developed nations) and reported our prices are “nearly twice those of other countries after adjusting U.S. prices downward to account for rebates and other discounts paid by drug companies.”

And now, the gravy train may be slowing.

In August 2022, Congress finally passed―without a single Republican vote―and President Biden signed, the Inflation Reduction Act, which, among other things, allows Medicare to move forward with drug price negotiations―sort of. Right about now, you may be asking what prevented Medicare from doing that all along since 2006 as a normal part of its drug-purchasing process?

As the Kaiser Family Foundation explains:

Under the Medicare Part D program, which covers retail prescription drugs, Medicare contracts with private plan sponsors to provide a prescription drug benefit. The law that established the Part D benefit included a provision known as the “noninterference” clause, which stipulates that the HHS Secretary “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP [prescription drug plan] sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”

In other words, although Medicare is buying drugs for its members, all 64 million of them, it has not been allowed to even hint that a lower price might be more fair and appropriate for the government to pay. That is the very definition of a “sweet deal” for drug manufacturers.

Giving the negotiation contrarians the benefit of a doubt they more than likely don’t deserve, their argument in opposition hangs on the slim thread that negotiations will lower the income of drug manufacturers, and that will, in turn, reduce the amount of money the companies invest in research and development to discover new life-saving drugs. My own opinion is that this argument is chock full of what makes the grass grow green and tall. And, by the way, the Congressional Budget Office agrees with me, although their analysists said it with a bit more eloquence.

And what does the aforementioned Inflation Reduction Act do, anyway?

It does a number of things, one of which is to lay down new rules for price negotiations. These are its major health care provisions, leaving out, for the moment, the negotiation issue. It will:

  • Require drug companies to pay rebates to Medicare if prices rise faster than inflation for drugs used by Medicare beneficiaries, beginning in 2023;
  • Cap out-of-pocket spending for Medicare Part D enrollees and make other Part D benefit design changes, beginning in 2024;
  • Limit monthly cost sharing for insulin to $35 for people with Medicare, beginning in 2023. This might be the most far reaching and important item in the entire legislation.
  • Eliminate cost sharing for adult vaccines covered under Medicare Part D and improve access to adult vaccines in Medicaid and CHIP, beginning in 2023;
  • Expand eligibility for full benefits under the Medicare Part D Low-Income Subsidy Program, beginning in 2024; and,
  • Further delay implementation of the Trump Administration’s drug rebate rule, beginning in 2027.

Notice the years in which these provisions take effect. In most cases, it’s 2023.

The negotiation provision of the Inflation Reduction Act:

  • Requires the federal government to negotiate prices for some drugs covered under Medicare Part D and Part B* with the highest total spending, beginning in 2026. Note the year.

This provision targets the most expensive drugs. Here’s how.

Under the new Drug Price Negotiation Program, Medicare will negotiate the price of 10 Part D drugs for 2026, another 15 for 2027, another 15 for 2028, and another 20 for 2029 and later years. The drugs to be chosen for negotiation will be selected from among the 50 drugs with the highest total Medicare spending. The number of drugs with negotiable prices  will accumulate over time.

So, beginning four years from now, the law goes after the most expensive Medicare drugs.

There are debatable reasons for delaying implementation until 2026, all dealing with operational processes. The period of negotiation between the Secretary of Health and Human Services and manufacturers of the selected drugs will occur between 1 October 2023 and 1 August 2024, and the negotiated “maximum fair prices” will be published no later than 1 September 2024 and will go into effect 1 January 2026.

This seems to me a rather long and drawn out negotiation process, but it is, after all, a political compromise.

The better way

And now for the better way.

There is another government health care organization that has never had a prohibition with respect to negotiating drug prices. It is the Department of Veterans Affairs. The VA.

In January, 2021, the Government Accountability Office released a study that concluded:

“the Department of Veterans Affairs (VA) paid, on average, 54 percent less per unit for a sample of 399 brand-name and generic prescription drugs in 2017 as did Medicare Part D, even after accounting for applicable rebates and price concessions in the Part D program.”

This means what the VA pays is in line with those other 32 OECD countries.

Moreover, the GAO found that 233 of the 399 drugs in the sample were at least 50% cheaper in the VA than in Medicare, and 106 drugs were at least 75% cheaper. Only 43 drugs were cheaper in Medicare than in the VA.

What are the operational differences between the two organizations?

For one thing, the programs pay for drugs differently. Medicare reimburses the Part D plan sponsors to pay pharmacies through the middlemen―Pharmacy benefit Managers, but the VA buys drugs directly from manufacturers. It cuts out the middlemen. The VA can get lower prices because it can:

  • Negotiate as a single health system with a unified list of covered drugs; and,
  • Use discounts defined by law that Medicare doesn’t have.

As in everything political, it all comes down to economics. The VA, with only nine million health care beneficiaries, as opposed to Medicare’s 64 million, could fly under the political radar and avoid congressional restraint. It was able to keep the congressional camel’s nose and, more to the point, its sticky fingers out of its tent.

Medicare is so big, it could never do that.

And here we are.

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*Medicare will also negotiate in a similar manner the prices of Part B drugs. These are drugs administered in physicians’ offices or hospital outpatient departments.

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