Billions at stake over Medicare drug prices

Allowing fed-negotiated prices could save taxpayers, but critics say it would reduce competition and hinder research.

Lobbying powerhouses

The pharmaceutical/health products and insurance industries, from 1998-2012:

  • Spent more money lobbying Congress and federal officials - $4.36 billion - than any other industries.
  • Spent $451 million on campaign contributions to federal candidates, political parties and outside spending groups.

Source: Center for Responsive Politics

Congress is looking to save money but has avoided a route that its own budget office says could save $137.4 billion by 2022.

It would mean defying an industry, however, that spends billions lobbying Congress and federal agencies.

Critics say the power of the pharmaceutical industry contributes to lawmakers’ unwillingness to overturn a 2003 rule that allows companies to charge far more for Medicare drugs than what the government pays to supply drugs to the Department of Veterans Affairs and Medicaid.

The pharmaceutical industry opposes proposals that would allow the government to negotiate lower prices, as does America’s Health Insurance Plans, the trade group representing the companies that provide the government-subsidized drug benefits known as Medicare Part D to 29.5 million people.

“PhRMA opposes implementing Medicaid’s failed price controls in Medicare Part D,” said Jenni Brewer, spokeswoman for the trade group, Pharmaceutical Research and Manufacturers of America (PhRMA). “Such policies would fundamentally alter the competitive nature of the program, undermine its success and potentially cost hundreds of thousands of American jobs.”

Together the pharmaceutical/health products and insurance industries have spent nearly $4.4 billion since 1998 lobbying Congress and federal agencies on Medicare and other issues, according to Federal Election Commission reports compiled by the Center for Responsive Politics.

During the same period, more than $451 million in campaign contributions to federal candidates, political parties and outside spending groups came from from the pharmaceutical manufacturing and insurance industries and their political action committees.

Reform advocates see a connection between all that money and a lack of action on legislation that could save taxpayers billions.

“I think the pretty obvious answer is the power of drug companies and their lobbyists. They have said quite clearly that this is not something they will accept,” said Marc Steinberg, deputy director of health policy for Families U.S.A., a non-partisan Washington-based health care consumer advocacy group.

“I think that message has been clearly heard on Capitol Hill.”


Medicare could greatly influence prices

Medicare Part D took effect in 2006. The private health plan companies negotiate prices with pharmacies and drug companies, bid to participate and then compete for seniors’ business. Any discounts the pharmaceutical companies agree to come in the form of rebates from the drug companies and are used to cut beneficiary premiums, offset taxpayer costs and bolster the private plan provider revenues.

But some economists say individual companies simply do not have the heft of the federal government to negotiate the kinds of drug discounts that are common in other government-run programs in the United States or in other wealthy countries.

“One of the reasons why the pharmaceutical companies do not want Medicare in particular to be able to negotiate prices is that it is a huge player, it is a big buyer of drugs,” said John Bowblis, assistant professor of economics at the Farmer School of Business at Miami University.

“If it sets the price it can get significant price reductions relative to current prices. And if it can do that, everybody else is going to try to get similar prices.”

With federal budget deficits at center stage in Washington, new efforts are under way in Congress and by an alliance of progressive groups to overturn the ban on federally-negotiated price reductions on Medicare drugs.

The stakes are high. The Congressional Budget Office (CBO) estimates that the government could save $137.4 billion by 2022 if pharmaceutical companies had to match Medicaid pricing for the 40 percent of low-income Medicare recipients who prior to 2006 would have been covered by Medicaid.

This year total spending for Part D is expected to reach $79 billion, with about $60 billion coming from the U.S. treasury, according to the Congressional Research Service, an arm of the Library of Congress.

For pharmaceutical companies Part D brought a growing market, as elderly people who previously could not afford pharmaceuticals suddenly had a government benefit that picked up the bulk of the cost. The base monthly premium is $31.17 and most beneficiaries are responsible for an annual deductible and co-payments or coinsurance, but some beneficiaries can pay a different price depending on the plan they choose and whether they have high or low incomes.

By 2010 about 23 percent of all dispensed prescriptions were for Medicare Part D, according to a 2012 study for the Kaiser Family Foundation by Jack Hoadley, research professor at Georgetown University’s Health Policy Institute.

“The pharmaceutical industry fights hard to maintain the ‘non-interference’ ban in each Congress. To date it has been successful in avoiding changes,” Hoadley said. “The latest push on the rebate proposal reflects a new effort to overcome the industry’s influence and to achieve savings for the Medicare program.”

Study: Medicaid pays less for drugs

A 2008 study of confidential drug pricing information by the U.S. House committee on oversight and government reform found that Part D paid, on average, 30 percent more for drugs than Medicaid, producing “a windfall worth over $3.7 billion for drug manufacturers in the first two years of the Medicare Part D program,” according to the report issued by Committee Chairman Henry A. Waxman, D-Calif.

In 2011 the Office of the Inspector General for the U.S. Department of Health and Human Services studied 100 brand name drugs purchased in 2009 and found the Medicaid rebates were three times greater than the Part D unit rebates, according to the IG report. In 68 cases Medicaid rebates were twice as high as rebates granted by the drug companies for Medicare drugs.

In 2009 the National Committee to Preserve Social Security and Medicare, which supports negotiation of prices for Medicare, compared Part D prices to those paid by the Department of Veterans Affairs and found the prices charged to the VA were 48 percent lower than Part D for the top 10 drugs in the program. The group estimates that allowing the feds to negotiate drug prices would save taxpayers about $24 billion annually, a figure cited by Sen. Al Franken, D-Minn., in support of legislation he co-sponsored in January to lift the negotiation ban.

“One of the things that is always remarkable about the whole negotiation issue is it has always been extremely popular, said Steinberg of Families U.S.A. “Why shouldn’t we be able to use (the government’s) purchasing power to get a bulk deal? It’s one of those areas where the American people are way ahead of Congress.”

More choice or reduced research?

Opponents of change say the Medicare drug benefit, known as Part D, is working well, gets high marks from seniors, and has proven to be less expensive than original estimates. They say that is due to competition among private plan providers and efficiencies inherent to privately-managed plans.

“I have concerns about making changes to a market-oriented program that has been both effective and efficient,” said U.S. Sen. Rob Portman, R-Ohio, comments echoed by Robert Zirkelbach, spokesman for America’s Health Insurance Plans.

“Because there’s so much competition in the marketplace, plans have an incentive to bid down to have a more attractive benefit package for seniors,” said Zirkelbach. “Choice is a good thing.”

Critics of reform proposals say government price negotiations will reduce drug choices for beneficiaries, lead to reduced research and development by pharmaceutical companies seeking to replace the revenues and cause drug prices to rise for people not covered by a government program.

“Price controls are very popular among people who are economically illiterate,” said Robert Moffit, senior fellow at the conservative Heritage Foundation’s Center for Policy Innovation. “As Margaret Thatcher said, the problem with socialism is pretty soon you run out of other people’s money.”

Supporters of the proposed changes argue that it makes no sense for taxpayers to pay more than necessary for drugs, even if the program hasn’t cost as much as originally estimated when Congress approved it in 2003. Part D spending is 30 percent lower than the Bush administration’s original projections, which supporters of privatized systems says shows competition works. But the Kaiser Family Foundation found in 2012 that those claims are overstated and point to a variety of economic and demographic factors at work - including enrollment that is lower than projected, the introduction of few blockbuster drugs and greater reliance on generic drugs.

Lawmakers respond

Members of southwest Ohio’s Congressional delegation give mixed reviews to the idea of government-negotiated pricing.

“We would be happy to further explore CBO and other recent reports on this issue,” said Meghan Snyder, communications director for U.S. Rep. Jim Jordan, R-Urbana. “Rep. Jordan is open to reforms that would save taxpayer money and respect the ability of doctors to tailor treatments for their patients while maintaining high quality care.”

U.S. Rep. Brad Wenstrup, R-Cincinnati, said “choice and competition” are key to Part D’s success.

“Anything that moves us away from these market forces will lead to higher costs and less innovation in the long-term,” Wenstrup said.

U.S. Rep. Mike Turner, R-Dayton, and House Speaker John Boehner, R-West Chester Twp., did not respond to requests for comment.

Sen. Sherrod Brown, D-Ohio, supports Franken’s bill and co-sponsored legislation in 2007 that would have allowed the government to negotiate bulk discounts.

“Senator Brown has long supported proposals to reduce the cost of prescription drugs and increase generic competition in the industry,” said spokeswoman Lauren Kulik.

Brown also supported a bill in the last session that would have allowed the government to take over Plan D from private providers. None of the prior bills became law, but Kulik said Brown believes that the federal government should be allowed to save seniors and taxpayers money through price negotiations, just as the Defense Department does with its TRICARE military health plan and the VA does for veterans.

Supporters of reform also disagree with opponents that seniors will lose the ability to take the drugs their doctors prescribe. It is true that other government programs may encourage the use of one drug over the other using tiered or preferred drug lists, and require higher co-pays for drugs that are not on the highest tier, or which are bought directly through pharmacies rather than mail-order or military installations and facilities.

But the savings from price negotiations are real. For example, since 2009 TRICARE, the government health plan serving 9.6 million military members, families and veterans, received $5.3 billion in negotiated rebates from pharmaceutical companies, said Kevin Dwyer, spokesman for TRICARE Management Activity.

Drug companies compete to get in that top tier with the lowest co-pays, saving the government money while not sacrificing beneficiary choice, said Rear Admiral Thomas McGinnis, chief of the TRICARE pharmaceutical operations directorate.

“In the TRICARE program everything is available,” said McGinnis. “We have full authority to negotiate with drug companies for great prices. We’ve been very successful doing that.”

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