Saving big bucks by negotiating Part D drug prices is a myth

You cannot have unlimited access to anything and also have the lowest possible prices.

You my have realized that when selecting a Medicare Part D plan beneficiaries are urged to check the coverage for drugs they take. Why is that? It’s because to get better prices for prescriptions Part D Plans negotiate and to have leverage they must limit the number of drugs they cover within the same class of drugs.  This is a fact that proponents of Medicare directly negotiating prices fail to mention

As you can see below, the much touted lower drugs costs for the VA are achieved by doing just that to the extreme covering only 59% of popular drugs. This is essentially the same concept as limited physician networks; you guarantee a higher volume of patients in return for lower prices … think Walmart and COSTCO.

Since the Medicare Part D program was established in 2003, a number of proposals have been put forward to give the Secretary of Health & Human Services (HHS) the authority to negotiate drug prices on behalf of Medicare. But according to the Congressional Budget Office (and affirmed by the Office of Management and Budget), these proposals would save very little money because the Secretary has very little negotiating leverage. Source: Committee for a Responsible Federal Budget

There are significant treadeoffs that politicians don’t talk about. You simply cannot have unlimited access and lower prices for everything. Oh yes, some would say that government should simply set prices for all drugs to control costs, but that has significant consequences as well.   Even if Medicare were to adopted restrictive formularies at lower prices, some of those savings would then be shifted to the private sector. Foreign governments can set prices in part because the US is the safety net, the steam release valve if you will, if that no longer exists we need to consider the implications on R&D. Government setting the price of anything is a slippery slope.

The private insurers that provide prescription coverage already have some leeway in deciding which drugs to include on their rosters, or “formularies” — but not absolute flexibility. They’re required to provide at least two drugs in each of several drug classes, but “all or substantially all” drugs in six protected classes: immunosuppressant, anti-cancer, anti-retroviral, antidepressant, antipsychotic and anticonvulsant drugs. The goal of this limitation is laudable, because it prevents insurers from cherry-picking customers by manipulating access to drugs for people with potentially costly conditions. But the rule also constrains their ability to threaten to walk away from the table when negotiating with drug makers.

The one government program that squeezes drug companies for discounts by using its authority to set its own formulary is Veterans Affairs. VA health economist Austin Frakt calculated in 2011 that the program covers about 59% of the 200 most popular drugs, while Medicare insurers covered an average of 85% and some firms as much as 93%. The VA is a big customer, and drug makers will offer significant discounts to stay on its list; Frakt calculated that the VA pays 40% less for drugs than Medicare. Indeed, the goal of Proposition 61, a drug-price initiative that appeared on last November’s ,California ballot, was to cut the state’s payments for drugs on the VA formulary to VA prices. The measure failed, in part because of a $109-million campaign mounted by drug companies to kill it.

There’s no doubt that reducing Part D formularies to the VA level would save lots of money for Medicare and its enrollees. Frakt placed the savings at an average of $510 per enrollee per year, which would be about $30 billion a year at current enrollment. But he and his colleagues also figured that the narrowing of choice would cost each enrollee an average of $405, narrowing the savings somewhat. Source: The LA Times January 2017

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