Statnews has a good argument while banal calls for Medicare to negotiate for better drug prices won’t do all that much:
But policy experts say the candidates and lawmakers are exaggerating how much power the government actually has to drive down drug prices on a large scale. The reality is that any attempt to negotiate with drug makers would be challenging, without any guarantees of an outcome that would make a significant difference to most consumers’ bottom line.
It also would almost certainly not involve Medicare officials sitting around a table, haggling with drug company executives over the price of every medication….he idea of negotiating with drug makers dates back to the creation of the Medicare prescription drug benefit in 2003, when Republicans — who controlled Congress at the time — wrote a section into the law that banned the Department of Health and Human Services from getting involved in talks over prices. Individual, private drug plans that provide the coverage for Medicare can negotiate — with some significant restrictions…
The Clinton drug prices plan hints that this is where she would put her focus, saying she would allow Medicare to negotiate prices “notably for high-cost drugs with limited competition….”
For drugs where there is more competition, the most likely approach would be to give individual, private drug plans more power to negotiate on their own — because their ability to say “no” is significantly restricted right now.
The current Medicare rules require drug plans to cover “all or substantially all” medications under six protected classes.
The basic problem for Medicare is a simple one. In order for anyone to ever get a good deal, they need to be able to walk away when offered a bad deal. Medicare currently is not allowed to do that. Medicare Part D is not allowed to do that. CHIP and Medicaid are not allowed to do that.
Austin Frakt authored a study that looked at the one significant healthcare purchaser, the Veteran’s Administration, that can say no. His team asked what would a Medicare Part D policy look like if it used the VA formulary:
we compute the savings to the Medicare program and the loss of value (formally, consumer surplus) to beneficiaries due to tightening Part D formularies to the level found in the Veterans Health Administration (VA). (A formulary is a list of drugs covered by a health plan.) We measure formulary generosity as the percentage of the 200 most popular drugs covered. The VA’s national formulary covers 59% of the top 200 drugs while Medicare PDPs cover between 68% and 93% of those drugs, averaging about 85% covered. So, if Medicare plans looked more like the VA, a lot fewer drugs would be covered.
But, the tighter the formulary (the less drugs it covers) the more bargaining leverage a plan has with respect to drug manufacturers. Plans able to restrict drugs from their formularies have the clout to say “no” to high prices. This is one, but not the only, reason the VA can purchase drugs at prices 40% below those paid by Medicare Part D plans. If Medicare drug plans restricted their formularies to the level of generosity offered by the VA and obtained VA-like drug prices by doing so, we estimate that the program would save $510 per beneficiary per year or a total of $14 billion per year (2009 prices).
It is a much more restrictive formulary but it is much less expensive. But it gets us back to the cost control dilemna:
You can have reasonable costs and quality care by restricting choices, you can have quality care and unlimited choices. It is very hard to have reasonable costs and unlimited choices. In unlucky or isolated areas, the actual choice set may be restricted to unlimited choices that are severely constrained because there is no other choice within a 3 hour drive at high costs and low quality.
The hypothetical VA formulary for Medicare Part D would save money by reducing choices. That is a viable choice, but it is a tough choice politically as providers and sellers will scream, and people who are hurt or fear that they will be hurt by the restricted choices will scream while the people who are saving a couple of bucks per month will shrug their shoulders and do nothing to counter-mobilize.
Using Medicare’s immense buying power to buy fairly undifferentiated goods is a good source of current cost savings. No one really cares that their oxygen tank comes from Medical Supply Corp instead of Bob’s Oxygen Farm. But as soon as their is either distinctive outcomes, differential side effects or brand loyalty, people will scream. And our system is kludging along to building a socially acceptable form of saying no to save money while maintaining the quality of care.
Sorry to go off topic, but I heard this Maine Public Broadcasting story recently and wanted to share.
Thanks for an informative posts.
I wonder if there is some confusion between the concept of economic cost and price in this post. A lot of the problem comes from patent drugs. And a growing problem is generic drugs with only one or two or three manufacturers. Neither one of those has to do with economic cost of producing the drug, but also involve market power, and problem of how to finance R and D for the drug.
I am not sure what the details are of how the VA bargains for drugs. Does RM know? In other countries, I think the most effective way of bargaining is to set a policy for all drugs on how much the purchaser is willing to pay, and the most common one used is reference pricing. This is common enough internationally, that I have read that it has upset the older existing policy of price discrimination by large pharmaceuticals. I have read bizarre diatribes on the genocidal immorality of price transparency by drug company officials (though in the context of a patent system for financing research, that ridiculous hyperbole has a tiny kernel of justification).
Does the VA use international reference pricing, or do they bargain over the price of each drug?
A high stakes bargaining strategy would be to announce that negotiations would start from the cost of manufacturing the drug, and go up from there. That would mean the negotiations started from a point of yoooge savings to the purchaser.
But, overall, in the context of current (historically very extreme) US IP and patent law, the savings might not be as large as expected while consumers retain current range of choice in drugs.
For generic drugs, the problem of high prices due to a thin and shallow supply chain is usually due to market power when one copany corners market, or plant shutdowns for variaous reasons. So, maybe should be more discussion of FDA policies? For the former, close loopholes and gliches in licensing system for generics, and improve system for evaluating bioequivlance. For latter, FDA should take the effect of its manufacturing standards and how they are enforced to include supply chain considerations, with more emphasis on preventing need for shutdowns, versus punitive actions to shut down because of safety or manufacturing standards violations.
High prices due shortages that stem from scale economics of drug manufacturing is harder problem. Growing problem is several small market drugs are produced in plant that produces one large market drug. If the company decides to discontinue the large market drug and the plant shuts down, all the small market production lines will be shut down too. I have no idea how to handle that in current system.
@jl: we could condition drug patents on making pills available to medicare/medicaid a specified values. I’m not sure how we would calculate those values, though.
” I’m not sure how we would calculate those values, though. ”
I have to brush up, but I think requiring patent holders to enter licensing agreementsf is part of the current US patent system. If that is the case, the mechanism is already there.
And a (maybe) final thought on this is, I think this may be a case where it would be a mistake to make ‘disappointing but adequate’ the enemy of the ‘good’.
If the progress the PPACA has made on medical care inflation continues, and long term trend of inflation in per capita Medicare expenditures follows that of per capita private expenditures, then limited results may be good enough. Limited progress in reducing drug expenditures will be an adequate part of program to ensure sustainability of Medicare.
I think one dimension of the drug expenditure problem is not the overall average expenditure, but the incidence of the expenditures, which is uncertain and arguably very unfair. In a patent system, the current and near-future purchasers of the new product bear all the R and D costs. This is OK, in fact there are fancy theoretical arguments (or BS, YMMV) showing that the patent system works very well. People can put off buying an iphone, for example. But is it fair, or even efficient, for only the current sufferers from a disease pay for the R and D of a drug they need to live, particularly if it is not easily preventable? Or, for an insurance company, which may have a larger than average proportion of those people in its covered lives, due to any number of reasons, and then the insurance company (to the extent the risk adjustment is not prefect) must try to get its enrollees to pay the average expenditure (leading to churn for many marginal enrollees).
So, what I am saying is that for overall expenditure control, the ‘banal’ proposal may not produce much, but whatever it produces will be useful, and worth pursuing in the context of of overall expenditure control.
But it may miss the mark in terms of the incidence of costs of R and D and additional monopoly rents, and the problems that incidence causes in the health insurance market. In that respect, it may be correct that the ‘banal’ bargaining proposal will not produce enough savings to make much of a difference.
The Ancient Randonnuer
And, of course, Medicare Part D and its less than optimal formulary are thanks to: The Legacy of Billy Tauzin: The White House-PhRMA Deal
Thanks again to the “Free Market” GOP.
So, having a sociopath for your governor is bad for your health.
In today’s news a 12 year old girl was shot and killed in what will be a legal police shooting in Pennsylvania. Constable comes to house for eviction. Dad answers door with rifle cop says he raised the rifle and the cop fired one shot. Went through dad’s arm and killed the girl.
There’s a reason the right wing gets freaked out when the guns as public health issue concept comes up.
From my experience, the FDA already leans very far toward keeping facilities open. FDA inspections are very, very tough- it’s considered a substantial accomplishment to make it through an inspection without any major findings- but it’s quit rare for one to result in a shutdown. The primary goal is to get companies into compliance, and an order to stop production is only likely to happen for egregious, willful, or repeated violations.
@Roger Moore: Good to know. I need to see if I can find out how many generic drug shortages due to plant shut downs are due to FDA actions versus economic considerations.
@Roger Moore: Yes it is.
It’s usually a twofold problem — there’s only one manufacturer for something basic, so when the plant has a contamination problem, there’s no alternative way to produce that item. G used to work for a place that did home infusion, and the one plant that made sterile water got infected (IIRC, with botulism). That meant that there was no sterile water available in the US, which meant that their patients who needed drug or nutrition infusions couldn’t get them. It was a giant mess for at least 6 months, and it happens all the time.
@jl: Dean Baker at CEPR often talks about this issue – patent protection of medicines – in his “Beat the Press” blog. Unfortunately, CEPR.net has been down about a week so I can’t drag up a link for you. :-(
In brief, we have made a choice to fund private drug R&D via monopoly profits generated using patents. We don’t have to do that (we could, say, have the NIH fund more drug R&D with the condition that the end-user price be limited to reasonable levels with reasonable terms).