Searching for Savings in Medicare Drug Price Negotiations

After many years of slow growth, prescription drug spending growth is on the rise, raising fiscal concerns for public and private payers and worries about affordability among consumers. The recent increase in drug spending growth is mainly due to spending on new breakthrough treatments for hepatitis C that came to market starting at the end of 2013, along with fewer opportunities to control spending through greater use of generic drugs. For Medicare, which accounted for 29 percent of national retail pharmaceutical spending in 20141, per capita costs in the Part D prescription drug program are projected to increase annually by 6.5 percent in the next 10 years, after rising at only 1.5 percent per year over the past eight years.2

In response to higher drug spending growth and heightened attention to drug prices, some policymakers and presidential candidates, including Donald Trump, Hillary Clinton, and Bernie Sanders, are proposing to allow Medicare to negotiate the price of prescription drugs—a proposal supported by 83 percent of the public, including a majority of both Democrats (93%) and Republicans (74%) (Figure 1).3 The Obama Administration’s recent proposed budget for fiscal year 2017 (and FY 2016) includes a more limited version of this proposal, allowing the Secretary of Health and Human Services (HHS) to negotiate prices for biologics and high-cost prescription drugs for Medicare beneficiaries.

Figure 1: A majority of the public favors allowing the federal government to negotiate drug prices for Medicare beneficiaries

Proponents believe that giving the Secretary of HHS the authority to negotiate drug prices on behalf of millions of Medicare beneficiaries would provide the leverage needed to lower drug costs, particularly for high-priced drugs for which there is no competition and where private plans may be less able to negotiate lower prices. Opponents believe the Secretary would not be able to get a better deal than private plans already do and that plans have greater leverage with drug companies because of their whole line of business, but, if the Secretary were able to negotiate lower prices, pharmaceutical companies would reduce their investment in pharmaceutical research and development.

This issue brief provides a short history of the concept of allowing Medicare to negotiate drug prices, describes various approaches, and assessments of their potential savings from the Congressional Budget Office (CBO), and considers the prospects for action in the future.

A Brief History of Proposals to Allow Medicare to Negotiate Drug Prices

The idea of allowing the federal government to negotiate prescription drug prices with drug manufacturers on behalf of Medicare beneficiaries has been raised in Medicare policy discussions for over a decade. In the years leading up to the enactment of the Medicare Part D prescription drug benefit in the Medicare Modernization Act of 2003, lawmakers debated whether the federal government should provide a drug benefit directly, but in the end opted to provide drug coverage through a marketplace of private plans that compete for business based on costs and coverage. Under Part D, private plan sponsors separately negotiate drug prices with pharmaceutical companies, establish formularies, and apply utilization management tools to control costs.

Notably, Congress added language to the MMA, known as the “noninterference” clause, which stipulates that the HHS Secretary “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”4 In effect, this provision means that the government can have no role in negotiating or setting drug prices in Medicare Part D. This is in stark contrast to how drug prices are determined in some other federal programs; for example, the statutory requirement for mandatory drug price rebates in Medicaid, and a requirement that drug manufacturers charge the Department of Veterans Affairs (VA) no more than the lowest price paid by any private-sector purchaser.

Though the MMA adopted a market-oriented approach to providing the Medicare drug benefit and prohibited any “interference” by the HHS Secretary with respect to drug prices, some lawmakers continued to press for authorizing the Secretary to negotiate drug prices, primarily by striking the “noninterference” language, a proposal favored by the vast majority of Americans in 2006.5 Nonetheless, bills proposing this change stalled in Congress in the face of strong opposition from the pharmaceutical industry, and equally strong resistance among Congressional Republicans to any effort to expand the role of government in Medicare’s drug benefit.

For the next several years, the push for Congressional action on drug prices waned as Part D benefit spending growth remained relatively flat—and lower than initially projected—with a large number of brand-name drug patent expirations and growing use of generic drugs helping to keep drug spending in check. Interest in this proposal also may have diminished once CBO concluded that proposals to give the Secretary authority to negotiate drug prices would have a “negligible effect” on Medicare drug spending (see below).

What are various approaches to allowing Medicare to negotiate drug prices?

Some proposals to allow Medicare to negotiate drug prices would simply strike the MMA’s non-interference clause, thereby giving the Secretary the option to negotiate drug prices on behalf of all Medicare beneficiaries, including those enrolled in private Part D plans.6 Proposals at the other end of the regulatory spectrum would establish a public Part D plan to operate alongside private Part D plans and administered by HHS under the oversight of the Secretary.7 Under this approach, the Secretary would establish a formulary for the public Part D plan and negotiate prices for drugs on that formulary.

A middle ground approach, and one that responds specifically to recent concerns over high-priced specialty drugs, would authorize the HHS Secretary to negotiate prices solely for a limited set of relatively expensive drugs, including unique drugs that lack therapeutic alternatives.8 The Administration’s recent proposed budgets include this approach, proposing to give the Secretary of HHS authority to negotiate prices for biologics and high-cost prescription drugs covered under Part D.9

What has CBO said about the potential for savings?

CBO has said that giving the Secretary authority to negotiate lower prices for a broad set of drugs on behalf of Medicare beneficiaries would have “a negligible effect on federal spending.”10 It based this assessment on its view that the Secretary would not be able to leverage deeper discounts for drugs than risk-bearing private plans, given the incentives built into the structure of the Part D market, where plan sponsors bid to participate in the program, compete for enrollees based on cost and coverage, and bear some risk for costs that exceed their projections.

Beyond simply removing the non-interference clause and allowing the Secretary to negotiate drug prices, CBO has said that in order to obtain price discounts, the Secretary would need authority to establish a formulary that included some drugs and excluded others and imposed other utilization management restrictions, in much the same way that private Part D plans do. And yet, CBO has questioned whether the Secretary would be willing to exclude certain drugs or impose limitations on coverage, as private plans do, “given the potential impact on stakeholders.”11 Savings could also arise if the Secretary were authorized to set drug prices administratively or take regulatory action against companies that did not offer discounts of a certain magnitude. CBO has not estimated the potential savings associated with these options.12

CBO has also suggested there is some potential for savings if the Secretary had authority to negotiate prices for unique drugs that lack competitor products or therapeutic alternatives13, which would include many of today’s high-priced specialty drugs and biologics. Although this approach was included in President Obama’s proposed budgets for FY2016 and FY2017, neither the Office of Management and Budget (OMB) nor CBO scored any savings associated with this provision.14

Why has this issue resurfaced and what are its prospects?

With Medicare Part D prescription drug spending growth on the rise, and strong public support for policymakers to take action to ensure the affordability of medications, policy options to lower drug prices, including allowing Medicare to negotiate drug prices, are being mentioned on Capitol Hill and on the presidential campaign trail. Other approaches not addressed here but also mentioned as ways to control drug costs include: greater drug price transparency, modifying regulations to speed generic drugs and biosimilars to market, value-based purchasing, reference pricing, reducing drug companies’ market exclusivity period, and extending the Medicaid drug price rebate to low-income Medicare Part D enrollees.

The potential to achieve savings from Medicare drug price negotiation depends on details that have yet to be specified by any of the presidential candidates who support the idea. While the future prospects for this proposal and other prescription drug savings proposals may depend on who wins the presidential election in November, which party controls the House and Senate, and whether their policy interests align, the issue of drug price affordability is likely to continue to weigh on the minds of consumers at the pharmacy counter.

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