How Medicare’s Drug Prices Could Have Been Half What They Are

July 20th, 2023 by Tom Lynch

In yesterday’s Letter I described the torturous path taken by the Biden Administration to get to the point where Medicare would be allowed to negotiate the prices it pays for the drugs it provides to its beneficiaries. I wrote that pharmaceuticals now cost Medicare about a quarter of its entire spend for the 64 million people it insures.

The Inflation Reduction Act was the vehicle that finally ushered in negotiations, which are scheduled to begin next month, negotiations that will center on ten of the highest cost drugs and should result in lower prices beginning in 2026. In succeeding years, more negotiations will focus on more and more drugs. Given the huge dollars Pharma contributes to Washington’s politicians, stretching everything out as far as possible was a necessary compromise the President’s team made.

But Pharma, the US Chamber of Commerce and two big drugmakers, Bristol Myers Squibb and Merck, haven’t given up, not by a long shot. Within the last two weeks they have filed four lawsuits. They’re throwing everything they have up against the wall to see if anything sticks. If they succeed in derailing the train to lower prices, they will, with great big smiles, sit comfortably back in plush seats on board the gravy train they’ve come to know so well.

But while all of that plays out, I want to suggest a better result that could have happened long ago if only lawmakers had treated drugmakers differently.

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 the other 32 OECD countries I mentioned yesterday whose cost are half those of the US for Medicare.

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 an aside, I’ve always thought that one of the primary causes of high costs in both Medicare and group health insurance is the presence of Pharmacy Benefit Managers, the middlemen. But that’s a topic for another day.

As in everything political, all of this 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 couldn’t do that.

And here we are.