Negotiating Price Negotiation: What the Democrats
Will-and Won't-Do to Revamp Medicare Part D
The new Congress wants to make federal price negotiation
under Medicare a reality. But it won't be easy. Big Pharma
should expect plenty of interference from the Democrats in
Part D, but it is hard to see a meaningful impact on prices
in the near term.
By Michael McCaughan
Acting Centers for Medicare & Medicaid Services
director Leslie Norwalk has a question: if the federal
agency is told the negotiate pharmaceutical prices for the
Medicare prescription drug benefit, who, exactly, is going
to do the negotiation?
The agency can't just hire a contractor to do it, since
essentially all of the private companies that do price
negotiation now already participate in the Part D program
either as drug plan sponsors or subcontractors to plans.
So, Norwalk told a Kaiser Family Foundation forum
November 14, CMS would have to "hire hundreds of people" who
could do the analysis and negotiations for the government—if
those people can be found.
As the exuberance of victory wears off, the newly elected
Democratic leadership of Congress is starting to grapple
with practical questions like those raised by Norwalk.
Talking tough about pharmaceutical prices played well on the
campaign trail—but will it translate into real pressure on
pharmaceutical prices?
The answer is likely to be no, at least in the 110th
Congress that convenes in January. There will be changes to
Part D and tough questions about drug prices to Medicare.
But there is virtually no way to make price negotiation real
in the next two years.
By then, Part D will have had three years to prove the
theory behind the program in the first place: that private
plans can negotiate deeper discounts than the government
would ever get. There are obviously no guarantees that the
principle will ever be proven. But if that is the case,
nothing can save Part D, and Big Pharma companies have
bigger problems to worry about than the current proposals to
graft government negotiations onto the benefit.
"Fixing" Part D by Focusing on Rx Prices
"We will begin by fixing the Medicare prescription drug
program, putting seniors first by negotiating lower drug
prices." That is the pledge of the new Democratic majority
in the House of Representatives, one of a list of promises
for accomplishments in the first 100 hours of their
majority.
To Big Pharma, that sounds scary. "Negotiating lower drug
prices" sure seems like shorthand for imposing price
controls under Medicare. That thought spooked Wall Street,
leading to a big sell off in drug stocks the day after the
November 7 mid-term elections.
But what exactly do the new leaders in Congress mean when
they talk about negotiating lower drug prices under
Medicare?
The answer is not as scary as the post-election headlines
suggest. For all the rhetoric about reducing drug prices,
the actual legislative ambitions of the new Democratic
majority are relatively modest, at least when it comes to
Part D. Even if the new Congressional leadership is able to
enact changes to Part D quickly, the impact will not be felt
right away—and then will only make a modest difference at
best in the overall pricing climate under the program.
There is every reason to expect that the new Congress
will repeal the provision in the Medicare prescription drug
law that prohibits the federal government from "interfering"
in price negotiations between plans and manufacturers.
But eliminating the so-called "non-interference" clause
is a long way from actual government price negotiations. It
is impossible to imagine the current administration meddling
in Part D pricing, so repeal of the clause in the Medicare
law will probably mean nothing in 2007 or 2008.
There are plenty of ideas among the newly installed
Democratic leadership that would require price negotiation,
but it is far less certain whether any would make it through
Congress in the next two years—much less be signed by
President Bush.
Still, if the Democrats succeed in legislating reforms to
Part D, the most likely outcome would be government price
negotiation only via a Medicare-run prescription drug plan
available to seniors. No one is talking about eliminating
the private drug plans already established in the
marketplace—or about repealing Part D altogether.
Big Pharma should definitely prepare for plenty of
interference as Democrats probe into all aspects of drug
pricing, and not just pricing under the new Medicare
program. That may set the table for big changes ahead—but it
is hard to see any route for the new Congress to whack drug
prices dramatically in the short run.
A "Kick Me" Sign on the Back of Part D
All this fuss about two sentences. In a bill running more
than 400 pages, the so-called "non-interference" clause is
less than 50 words: "The Secretary of Health and Human
Services (HHS) may not interfere with the price negotiations
between drug manufacturers and pharmacies and prescription
drug plan (PDP) sponsors. In addition, the Secretary may not
require a particular formulary or institute a price
structure for the reimbursement of covered Part D
drugs."
Since the day the Medicare Modernization Act was signed
into law in December 2003, critics of the private-sector
model drug benefit have seized on the "non-interference
clause" as proof that the entire Part D program is a
giveaway to drug companies.
The provision, critics claim, ties the government's hands
under Part D, preventing the 42 million Medicare
beneficiaries from fully leveraging their buying power via
direct negotiations with pharmaceutical manufacturers.
Of course, the "non-interference clause" has very little
to do with the lack of direct price negotiations under Part
D: the entire program is designed to let private insurance
plans conduct—and be at risk for—price negotiations with
pharma. The fundamental premise behind Part D is that
private plans will do a better job driving down prices than
the government can do.
Not everyone agrees with that premise, but enough did to
squeeze the MMA through Congress, so it is the law of the
land. A separate provision prohibiting HHS from negotiating
prices may have been helpful for industry (especially
biotech companies) to reassure investors that they were not
signing on to a price control system, but as a practical
matter it is not a provision that has made much difference
in the structure of Part D.
The "non-interference" clause, however, did make a
difference in the Congressional campaign. The provision was
a goldmine for many a Democratic candidate in 2006, who used
it to hammer home claims that the Republican architects of
Part D were more interested in protecting the profit margins
of Big Pharma than in looking out for the interests of
senior citizens.
But it is critical to recognize that the political
argument advanced by the Democrats focuses more on themes of
Republican misgovernance than it does on substantive
arguments that drug prices should be lower under Part D.
Consider how California Democrat Pete Stark, the incoming
chairman of the House Ways & Means Health Subcommittee
that oversees Medicare, framed the issue during the National
Medicare Congress held just weeks before the election. "I
can think of only Halliburton and a few others that have
government contracts without bidding," he declared.
Stark and incoming full committee chairman Charlie Rangel
will be the two primary architects of any legislation to
change Part D in the House. (See Exhibit 1.)
Why Price Negotiation Won't Work—at Least Not in the
Bush Administration
It is easy to see how the Democratic majority can score
political points in the price negotiation debate. It is much
harder to see how they can enact legislation that will
meaningfully affect the prices realized by manufacturers
under the Medicare program.
The simplest way for the new leadership to address price
negotiation would be to repeal the offending clause. By
striking the language, the Democrats can claim to have given
the HHS Secretary the authority to negotiate prices.
Of course, allowing price negotiation does not meant
anyone will start negotiating prices. There is simply no
chance that the Bush Administration would use price
negotiation authority under Part D even if the clause is
eliminated.
Thompson's successor as HHS Secretary, Michael Leavitt,
wasted no time after the election in making clear that he
has no interest in negotiating prices. Nor does he believe
the government can do a better job of price negotiation than
the Medicare plans are already doing.
Norwalk and other current and former Bush Administration
officials offer a range of arguments against government
price negotiation. But, at the end of the day, they amount
to this: the private sector model under Part D is working,
and will continue to work better than any program the
government can run.
Norwalk told the Kaiser forum that Medicare beneficiaries
are in good hands. The private plans offering Part D
coverage "are the same people that negotiate on behalf of
federal employees" as part of the government's health
benefit program. "People are talking about market power,"
she added. "Well there are lots of ways to look at market
power." Some of the big pharmacy benefit management
companies working in Part D "cover 60, 70, 80 million lives,
which is far more lives than the Medicare program has."
She also cited work done on the issue by the
Congressional Budget Office in 2004. CBO's analysis of
proposals to repeal non-interference concluded that giving
HHS negotiation authority would have a "negligible effect"
on prices. In a follow-up letter, CBO acknowledged that
there could be some savings from price negotiation focusing
specifically on single-source drugs with no viable
therapeutic substitutes—but the agency declined to offer
specific savings estimates without seeing a detailed
legislative proposal.
Those analyses were conducted before Part D began. The
deeper-than-expected discounts on drugs under Part D will
only strengthen CBO's position that price negotiation would
not save money.
CBO's stance is of more than academic significance: if
the agency does not believe there are savings to the
Treasury from price negotiation, then any bill giving CMS
that authority cannot carry any costs (such as the hiring of
new employees to conduct negotiations) without finding
offsets elsewhere in the budget.
That is why Norwalk's question—who exactly will
negotiate?—is so critical. It will cost the government money
to negotiate. If there are no savings from negotiation, does
the Congress really want to cut benefits elsewhere to pay
for it?
"Our wonderful employees in CMS, they are fabulous, but
none of them really have experience in negotiating prices
for drugs," Norwalk observed. "What we would normally do is
ask a contractor to do it for us."
But, as the new drug benefit begins its second year,
essentially all the players in the pharmacy benefit
managements sector are already participating, either as
stand-alone plan sponsors or in support of insurers who are
offering the drug coverage. (See "The Part D Bubble," The
RPM Report, November 2006 [2006500202].)
Or, as Norwalk puts it, "all the contractors who are good
at it are already offering plans." So CMS would have to
"hire hundreds of people" who could do the analysis and
negotiations for the government.
More Than You Bargain For
Even if CMS hired a skilled group of negotiators, you
have to consider "how Washington really works," Norwalk
said.
"Yesterday I got a phone call from a Congressman because
a drug that we do cover in a different setting, not in Part
D, he was concerned that we were reducing the price of that
drug and he wanted us to increase the price."
"This happens all the time in Washington. It is hardly a
surprise that lobbyists play a big role in reimbursementWe
are heavily lobbied and we have threats. Oh, we are not
going to give you any money. You can't implement that. That
is the real environment."
Or, as former CMS Administrator Tom Scully put it during
the National Medicare Congress in October, "you are not
negotiating with the company. You are negotiating with the
Senator from New Jersey."
How does that play out in the real world? Norwalk
suggests that price negotiation advocates look at the Part B
side of Medicare, which pays for products administered by a
physician, and is the primary payor for most oncology drugs.
"We used to pay Average Wholesale Price," Norwalk said.
"The other name for that was 'Ain't What's Paid.' In fact,
there were lots of lawsuitsbecause the reimbursement from
Medicare was so high for these drugs that they enticed
doctors to use it."
Indeed, even though the Part D payment system has been
changed to try to make payment align more closely with real
market prices, the lobbying continues undiminished. (See
"Redefining ASP???" in this issue.)
Undoing a "Sweetheart" Deal
Price negotiation advocates are not persuaded by those
arguments. Judith Stein, executive director of the Center
for Medicare Advocacy, responded directly to Norwalk's
concerns during the Kaiser forum. "I know it is not simple,"
she said. "Nothing about Medicare is simple."
But, Stein continued, government negotiation just makes
sense. "WalMart negotiates for WalMart. It doesn't have each
local store negotiate for its locality.I think that is the
model that we ought to follow for Medicare's 43 million
beneficiaries."
Stark, for one, says he will not be content with simply
repealing the non-interference clause. Choosing his words
carefully, he told the Medicare Congress that the law must
be changed to "require"—not "allow"—the HHS Secretary to
negotiate.
And the change is less a matter of economics than a point
of principal: "The only people who profit out of the current
plan are the pharmaceutical companies and the insurance
companies," Stark asserted. "The beneficiaries take the
hindmost. I'd like to at least give the beneficiaries a
little chance."
"Right now, it is stacked in favor of the people who
bought their way in by contributing to the Republican
Administration and a Republican Congress. They got a
sweetheart deal. I think, sweetheart, it's time to part our
ways."
A Medicare PDP
Stark, along with Charlie Rangel, the incoming chairman
of the full Ways & Means Committee, have already made
one concrete proposal: a Medicare-sponsored PDP that would
compete against private plans across the country. Stark is
the co-sponsor of a bill, HR 752, that would do just that.
Under the bill, the Medicare program would launch its own
national prescription drug plan, a Medicare PDP. And prices
would be set by negotiation between the government and
plans. (See Exhibit 2.)
.gif)
Stark describes the proposal as making Part D work like
the rest of the Medicare program, where beneficiaries have a
choice between many competing private Medicare Advantage
plans over the government run program. He insists that the
goal is not to replace the private plans, but to compete
with them.
"I could design a Medicare Part D plan so that the
private plans wouldn't have anyone sign up for them
anymore," Stark told the Medicare Congress. "That is not my
intention. But it is my intention to say that I think that
we could design a better program for many people than has
been designed by the current Administration."
Stark's comments can also be interpreted as a warning to
the managed care sector: Part D is already a lucrative new
business for many insurance companies, and they may need to
consider whether the creation of a Medicare PDP would head
off any more draconian proposals to eliminate the PDP market
altogether.
Stark offered a similar veiled warning to Big Pharma
companies. "I'm not sure" price negotiation "drives the
pharmaceutical guys as crazy as a national formulary," Stark
told the Medicare Congress.
In another words, Big Pharma companies should consider
whether they would rather see the Medicare program launch a
PDP—or face a complete takeover of the Medicare Rx program
with a single national formulary.
Stark is right to expect opposition from both pharma and
managed care plans to any substantive proposal to shake up
the Part D model. That in itself is a remarkable
development: pharma companies and managed care plans have
not often made common cause on health care issues. (See
"Part D Makes Payors Allies of Pharma Against Price
Controls," in this issue [2006500226].)
Medicare Reference Pricing
It is by no means certain that a Medicare PDP will be the
legislative route ultimately pursued in Congress. Democratic
staffers stress that the Medicare PDP bill (introduced in
February 2005) is at best a starting point, not likely to
emerge as a finished piece of legislation without further
revisions. (See "The Post Office versus FedEx?" in this
issue [2006500225].)
Stark is also interested in discussing a broader price
negotiation plan under which Medicare would set a ceiling
(reference) price that PDPs could use as an upper limit from
which they would seek lower prices. That could pass muster
with CBO: if the negotiation authority focuses specifically
on high-cost categories where government intervention could
make a difference, it could be scored as saving money for
the Treasury.
Still, the uncertainty about how the Democrats will try
to make price negotiation a reality underscores one of the
reasons why Big Pharma probably doesn't have to worry too
much about any near-term impact from the election. The
legislative process will take time—and with each month that
passes, the Part D program has more time to prove itself.
Assuming the leadership makes up its mind what bill to
push, it seems plausible that the Democratic majority in the
House would go along with a Medicare-sponsored PDP or some
other price negotiation plan. But the Senate is a different
story.
The Republican minority in the Senate is strong enough to
block legislation, since it takes 60 votes to break a
filibuster. But even within the Democratic majority, there
may not be consensus that price negotiation is the best
approach.
Sen. Max Baucus, who is taking over the Senate Finance
Committee, which oversees Medicare in the Senate, is one of
a handful of Democrats who voted in favor of the 2003 law
creating Part D.
Baucus has his own concerns about how Part D is working,
but he is focusing more on ideas to standardize the benefit
offerings to reduce the number of private plan options in
the market. A Medicare-sponsored PDP would increase
the number of plans nationally, so it may run into
opposition from Baucus.
Assuming the Democrats can agree on a program to
establish a Medicare PDP and succeed in pushing it through
the closely divided Senate, there remains the possibility of
a Presidential veto.
There are certainly strategies the Congress can use to
make a veto all but impossible—by attaching the Medicare
bill to some other vital piece of legislation—but in the
run-up to the 2008 Presidential election there will be some
Democrats who would rather force the President to take a
stand on price negotiation.
In other words, price negotiation may mean more to some
Democrats if it remains an issue for the 2008
campaign—rather than turns into an enacted legislative
solution.
How the Democrats Might Help Big Pharma
There is a huge silver lining for Big Pharma in the
Democratic push for price negotiation: any legislation
re-opening Part D will allow pharma companies to seek
changes too.
In 2006, Big Pharma did not want to push for any
improvements to the Part D legislation for fear of opening
the door to price negotiation. Now the situation is
reversed: when the Democrats push for price negotiation,
they open up the opportunity for changes to the bill that
Big Pharma would like to see—and, indeed, Democrats and Big
Pharma may even agree on some potentially significant
changes.
There is no question that pharma's first choice is to
leave Part D alone. That was the industry's position with a
relatively friendly Congress to work with, and is even more
the case today. (See "Part D Makes Payors Allies of
Pharma Against Price Controls," in this issue [2006500226].)
But there is also no question that pharma companies would
like to see changes to the program, especially ways to help
reduce the relatively high out-of-pocket spending many
beneficiaries still face under Part D. (See Exhibit
3.)
.gif)
"On every measure the program has offered more than has
been expected," Pharmaceutical Research &
Manufacturers of America SVP-policy, research and
strategic planning Rick Smith said during a November 2 media
briefing. But "I've yet to find any sphere in life that has
achieved perfection."
"I'm sure we are going to see proposals" to improve the
program, Smith said. "My view is that we work with folks who
want to maintain choice, competition and incentives for
innovation."
The question is, how many Democrats meet the criteria of
people pharma wants to work with? The answer may be more
than you think.
Tom Scully, for one, doesn't believe the Democrats are
seriously dissatisfied with the new Part D prescription drug
benefit. "If this was a Democratic benefit, it would be the
most celebrated social policy benefit in the history of the
world for what it has done for seniors," he told the
National Medicare Congress.
"Because it is a Republican benefit and Republicans don't
like to talk about health care and they don't want to talk
about what they've doneit turns out to be extremely
controversial," Scully said. But the fact is that "many,
many thousands of poor peopleare getting drug benefits this
year," and the Democratic leadership is not going to undo
those gains.
Scully played a key role in shaping the Part D
legislation before leaving the Administration at the end of
2003, so he is hardly an unbiased observer.
But, if he is right, the Democratic sweep in the November
7 elections could have a huge silver lining for Big Pharma
companies counting on Part D to remain a major market for
their medicines. Now that they are calling the shots,
Democrats don't have to attack Part D to score political
points. And it may be that the program will stop being
controversial now that the controversy has served its ends.
Consider incoming House Ways & Means/Health
Subcommittee Chairman Pete Stark's remarks about Part D
during the Medicare Congress. Stark began by noting that
some Republicans seem to regret voting for the program: "If
we brought it back to the floor, it would get repealed,"
Stark declared.
"I don't think we should repeal it. We've got it. Many of
us have wanted a drug benefit for years. Let's fix it."
Stark's recipe for fixing the program starts with giving the
government the authority to negotiate prices.
The fact remains, though, that Stark does not want to see
Part D go away. And it is at least conceivable that his idea
of "fixing" Part D does not have to ruin it for Big Pharma
or the private insurance programs currently involved in the
program.
A change in tone would by itself make a big difference
for pharma. If Democrats start finding more to like about
Part D, enrollment in year two could be more rapid than it
might be if the partisan attacks continue.
For Big Pharma companies, higher enrollment is a win on
two fronts: (1) the more people who join Part D, the less
likely that the Democrats will make major changes to the
program; and (2) the new enrollees are potential new
customers for medicines. (See "Big Stakes for Big Pharma
in the Push Towards Full Enrollment in Part D," in this
issue [2006500216].)
Moreover, the Democrats are more likely than the
Republican leadership to take active steps to increase
enrollment, via proposals that would suspend the late
enrollment penalty, eliminate the asset test to qualify for
generous low-income supports, or at least make it easier for
CMS to find eligible low-income beneficiaries by giving the
agency access to tax return data collected by the Internal
Revenue Service.
So there actually may be critical areas where pharma can
work with the new majority on improving Part D.
Don't Overlook Oversight
That is not to say the pharmaceutical industry won't face
pricing pressure under Part D. The new committee chairs in
the House especially will be using their subpoena power—and
the bully pulpit provided by the hearing dais—to ask tough
questions about exactly what the discounts are under
Medicare, and exactly how much profit is flowing back to
plans and manufacturers from the Treasury. (See "Part D
Pricing and Subpoena Power: What the November Elections
Could Mean for Wall Street," The RPM Report, October 2006 [2006500184].)
Stark is pledging aggressive oversight of the
Medicare—starting with hearings to figure out exactly how
the taxpayer funding is translating into profits for the
private sector. Stark's interest in the financing of private
Medicare plans extends beyond Part D, but the very
complexity of the answers will probably shelter plans from
major cutbacks in the near term. (See "Follow the Money,"
in this issue [2006500218].)
The hearing agenda for the new majority on House Ways
& Means will "start with Part D," Stark promised during
the October Medicare Congress. Part D, "it seems to me, has
the most problems that perhaps getting straight answers
would help us resolve."
Questions the House committee will look for answers to
include "how the drug plans get paid, what is charged,
whether the implementation is going well" and how marketing
of the benefit works. (See "Humana's Re-Balancing Act,"
in this issue [2006500222].)
Stark will not be the only one asking tough questions
about pricing under Part D. Rep. Waxman, the soon-to-be
chairman of the House Government Operations Committee, is
building an argument that the drug manufacturers have not
been contributing enough to lower drug prices for seniors.
One of Waxman's health aides has attended all major Part
D conferences this past autumn and asked tough questions on
the actual size of drug company discounts, as well as how
those discounts have been reflected (or ignored) in prices
to consumers. Waxman has been focused on how much of the
reductions in drug prices have come from retailers (about
two-thirds by most estimates) and how much from drug
manufacturers (one-third).
Oversight hearings on Part D will be no fun for Big
Pharma. Stark already knows the answers he is looking for.
In the program thus far, he told the Medicare Congress, "the
taxpayers and the beneficiaries are the losers. The winners
are the insurance companies and the pharmaceutical
companies."
The truth is that Part D has been a big boost for
the US pharma market—and manufacturers have done well both
from increased prescription volumes and a net price increase
for many important brands. (See "Big Pharma's Secret
Weapon," The RPM Report, July 2006 [2006500107].)
If the new leadership in Congress is able to use the
oversight process to tease out exactly how pharma companies
are benefiting under Part D, it could begin to build a
record to support more direct interventions on pricing down
the road.
For example, hearings could highlight the fact that
taxpayers are in some cases paying more to provide
pharmaceutical drugs under Part D to individuals who
previously received drugs under the Medicaid program (with
guaranteed "best price" rebates). (See "Pfizer's Lipitor
Sees Big Boost From Medicare," The RPM Report, September
2006 [2006500136].)
But price pressure under Part D was coming anyway.
Without any legislative changes, manufacturers are already
looking at a concentrated market in the PDP sector, where
two plans UnitedHealth
Group Inc.
and Humana
Inc.
control half the lives.
If the Democrats do create a Medicare PDP, it is hard to
imagine that it would aggregate the 5 million lives already
controlled by United. And it is harder still to imagine that
the Medicare program will be driven as relentlessly by the
desire to wring every penny of profit out of the program as
United will be.
After all, the Democrats are not bringing price
negotiation to Medicare—they are merely trying to give the
government a seat at the table.
"Non-interference doesn't mean no negotiations," PhRMA's
Smith said during the November 2 media briefing.
"Non-interference means private sector negotiation."
As 2007 begins it is clear that the Democratic majority
in Congress intends to interfere in Part D. It is far less
clear that interference will have a meaningful impact on
pharmaceutical prices.
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