Drug Benefit News, January 19, 2007

As expected, the full House passed legislation last week that gives HHS the authority to negotiate prescription drug prices under the Medicare Part D benefit. The initiative, however, is expected to face a much tougher time in the Senate, where some Democrats already have expressed skepticism about the government's ability to drive prices lower than what can be achieved by private health plans and PBMs.

Meanwhile, CMS issued a report from its independent actuaries that concluded mandated government negotiations "would not produce any savings." And President Bush has vowed to veto any bill that includes the government negotiations provision.

Nevertheless, the House voted 255 to 170 - including 24 Republican votes - on Jan. 12 to approve H.R. 4, a bill that removes the "non-interference clause" in the 2003 Medicare reform law that has prevented the government from negotiating prices. According to the legislation, the HHS secretary "shall negotiate with pharmaceutical manufacturers the prices (including discounts, rebates, and other price concessions) that may be charged" to Medicare Prescription Drug Plan (PDP) sponsors and Medicare Advantage prescription drug plans (MA-PDs).

The bill, however, does not authorize HHS to establish, or require, a particular formulary. The legislation also does not prevent a Part D sponsor from obtaining a discount or reduction of price for a covered Part D drug below the price negotiated by the government.

While some health plans have said direct negotiations could level the playing field among Part D sponsors - and lower costs for all participants - most industry stakeholders have roundly opposed the idea. Many critics of government negotiations point out that Part D already is providing drugs at costs that are well below initial expectations.

"We are very supportive of the competitive model on which Medicare Part D is structured," says Judith Cahill, executive director of the Academy of Managed Care Pharmacy (AMCP). Repealing the non-interference provision would introduce factors that are incompatible with a competitive model in the way it is structured and being administered today, she tells DBN. "The reason we're opposed to that change is because the program is working," Cahill says.

Recent satisfaction surveys find that in excess of 70% to 80% of beneficiaries are realizing Rx cost savings and improved access to the medications they need, she notes. In addition, premium levels in the first year and 2007 came in under budget, Cahill says.

Such arguments will now be taken up by the Senate, where Rx negotiations legislation is expected to face more obstacles, if not be killed outright through a promised filibuster. Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, which has jurisdiction over Medicare, held a hearing Jan. 11 on the issue. Baucus, who has opposed earlier Rx price negotiation measures, said he was open to the idea.

"The non-interference clause in the original Medicare Modernization Act is prohibiting us from pursuing constructive efforts to make the benefit work better for seniors," he said in a prepared statement. "The total prohibition on negotiation should be eliminated."

But Baucus also said the Part D program is working well for most beneficiaries. "I see nothing that warrants heavy-handed intervention in this market," he said. "We should proceed cautiously with any legislation. But we should proceed nonetheless." Among other things, Baucus said, "price controls and national formularies are clearly not the answer."

Leading Senate Bill Has Narrower Focus

Sens. Ron Wyden (D-Ore.) and Olympia Snowe (R-Maine) on Jan. 9 unveiled what will likely be the leading legislation on the issue. The bill, S.250, allows for government price negotiations, but also calls for some limitations. Under the legislation, the HHS secretary would be required to negotiate if:

• A pharmaceutical is a single-source drug, which means there is only one brand name of the drug available;
• A drug was created with substantial taxpayer funding for its research and development; and
• A private insurance plan requests help.

The legislation also says there can be no "price-setting or uniform formularies." The Wyden-Snowe bill is a revised version of last year's legislation that received 54 votes in the Senate. Any measure, they acknowledge, would need 60 votes to overcome a filibuster. Indeed, Sen. Chuck Grassley (R-Iowa), ranking minority member of the Senate Finance Committee, has said he would join other senators to filibuster the legislation.

HHS Doesn't Want the Authority

That would likely satisfy HHS just fine. Private competition, the department says, has driven down prices below initial expectations. According to CMS actuaries, Part D budget estimates show that payments to Part D plans are projected to be $113 billion lower than expected over the next 10 years, HHS said Jan. 8. Of the $113 billion reduction, $96 billion is a direct result of competition and significantly lower Part D plan bids, the department asserted.

CMS also said the average monthly premiums for the basic benefit will be roughly $22, down from $23 in 2006. The original estimate for 2007 premiums was $38, it added. Government negotiations couldn't drive prices lower, CMS contends. Independent actuaries at CMS that reviewed H.R. 4 concluded government negotiations would "have no effect on lower drug prices," CMS said.

The "inability to drive market share via the establishment of a formulary or development of a preferred tier significantly undermines the effectiveness of this negotiation," said Paul Spitalnic, a director in CMS's Office of the Actuary. "Manufacturers would have little to gain by offering rebates that aren't linked to a preferred position of their products, and we assume that they will be unwilling to do so," he said in a Jan. 11 prepared statement.

AMCP's Cahill asserts the push for direct negotiations reflects a lack of appreciation for the complexities involved in the purchase of medications. Formulary decisions involve a combination of looking at clinical attributes and value that medications offer to covered populations, she says.

The reason a health plan is able to negotiate a low price for a drug is because the manufacturer believes that by giving the health plan this price, the plan will support the use of that product, and therefore more product will be sold by the manufacturer, Cahill explains. "So there is leverage that comes with the volume of business that the manufacturer assumes they are going to be doing on behalf of that covered population for that particular health plan," she adds. "If I'm the federal government, what do I have to offer? I don't offer a prescription drug benefit. Where is my leverage?"

Still, some proponents of direct negotiations argue that Medicare Part D could have at least the same leverage as the Department of Veterans Affairs (VA). Prices under the VA's drug plan are 58% lower than those under the Medicare drug plans, says health advocacy group Families USA.

According to a Jan. 9 Families USA report, prices charged by the five largest Part D sponsors are 50% to 75% higher than the VA price for Celebrex, 51% to 82% higher for Lipitor (10 mg), 69% to 95% higher for Nexium, and 205% to 261% higher for Fosamax.

Families USA believes that access to drugs under the VA system and access to drugs under Part D are quite comparable, says Marc Steinberg, deputy director of health policy at Families USA. Both systems have an exception process for drugs not on the formulary, for example.

The price difference on the VA program provides a sense of the bargaining power that the government has, Steinberg says. "No one is saying that you'd want to import the VA system wholesale into Medicare Part D," he says. "But to get a sense of the magnitude of the savings that are left on the table by Part D, it is a very helpful comparison."

But Cahill counters that the price comparison between VA and Part D drug plans is "really looking at apples and oranges."

Substantial differences between the two systems include the fact that VA maintains its own formulary and uses a comparatively limited network of VA pharmacies, Cahill says. VA both purchases and distributes prescription drugs, she adds. By contrast, the Medicare program serves as an insurer that pays for care that is delivered to covered beneficiaries at a myriad number of sites by professions operating without a centralized system's oversight and guidance, according to AMCP.

Regardless of the technical arguments, some observers contend that the direct-negotiations initiative is much more about politics than pharmaceutical procurement.

Direct negotiations "is politically an easy win," says John Graham, director of health care studies at free-market think tank Pacific Research Institute. Graham, who opposes the idea, expects a bill will eventually pass both chambers. "I would anticipate a bill that is quite sloppily written just to go up to [President Bush] to veto, to make him [and other Republicans] look bad in '08," he says.