Pushing Down Drug Costs
By: Source: AARP Bulletin Today Date Posted: 2004-02-20 13:52:00-05:00
AARP is calling on Congress to change a section of the new Medicare drug benefit law that prohibits the government from negotiating prescription drug prices directly with the manufacturers—a provision that has sparked widespread anger among older Americans.
This item is high on a "to-do" list AARP has drawn up as ways to improve the legislation.
"The new law helps a lot of people," says John Rother, AARP's director of policy, "but it does too little to rein in drug prices and hold down costs, and we're determined to remedy that." [See AARP's To-Do List: 6 Ways to Keep Rx Costs in Check.]
The prohibition on direct negotiations has been seen as a huge win for the pharmaceutical industry. Many people view it as handing a blank check to drug companies that supply Medicare—and as a handsome payoff for more than $27 million the industry spent on lobbying Congress in the first half of 2003, according to official records.
Amid the complexities of the intended Medicare overhaul, "this is the provision that is readily understandable to seniors," Rep. Tom Allen, D-Maine, told the AARP Bulletin. "People just can't believe it. In some ways it's the most obvious flaw in the bill."
Though Medicare has long set payment levels for other health care providers, he adds, "with this law, the drug industry will continue to run free at the same time as it significantly expands its potential market."
Year after year, Allen has introduced bills that would allow the government to negotiate lower prices with manufacturers on behalf of all 40 million Medicare beneficiaries—just as it does for veterans and military retirees, and as it did most recently to secure large discounts on 3 million doses of flu vaccine.
Many Republicans argue that using the full market power of Medicare that way amounts to government price fixing. They often describe it as an "800-pound gorilla" that would crush the drug industry.
Paradoxically, though, experts across the political spectrum predict that the Medicare drug benefit will eventually lead to the price controls the industry dreads.
REPEATING HISTORY?
Jonathan Oberlander, a historian of Medicare politics at the University of North Carolina-Chapel Hill, says he's reminded of what happened to doctors and hospitals after Medicare was enacted in 1965.
The American Medical Association "spent more money to defeat Medicare than had been spent on any lobbying campaign in American history up to that point," he says. "The original Medicare legislation started with a clause prohibiting the federal government from interfering in hospitals' and doctors' fees. They, too, were written a blank check."
But when deficits and health care costs rocketed in the 1980s, the Reagan administration imposed a federal payment formula. "To me, there's no doubt that this is going to happen with prescription drugs, though [like Reagan] we won't call it price controls," Oberlander says.
The industry is well aware of the history. But "we hope we'll avoid price controls—and the way the [new] law is structured, we will," says Jeff Trewhitt, spokesman for the Pharmaceutical Research and Manufacturers of America. "The best way to achieve cost savings," he adds, "is through competitive private health plans [that] negotiate generous discounts."
ARRANGING DISCOUNTS
Under the new law, pharmacy benefit management companies (PBMs) will negotiate on behalf of private plans to secure discounts from drugmakers and pharmacists.
The largest PBMs, representing millions of people, wield considerable market power and use a number of tools to hold down costs. But experts disagree on the savings they could achieve for Medicare, with estimates ranging on average from 10 to 30 percent.
"The question is discount from what?" says Tom Allen. "A discount from the price set by the manufacturers? Their initial ability to charge whatever they want is the problem."
Democrats will try to repeal the provision forbidding the government to negotiate prices with drugmakers. "Every other government in the developed world has that power," Allen says. "Why shouldn't we?"
AARP takes a somewhat different tack. "We think Medicare should be empowered to negotiate prices," Rother says, "if competition among plans doesn't provide the expected level of savings."
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