The Senior Center for Health & Security

Congressional Medicare Meddling:
Cost Saving Negotiation or a Deadly Interference?

April 10, 2007

While there are many policy questions of critical importance to the United States, few are as important as those affecting Medicare, the government health care program serving millions of older Americans, the disabled, and the chronically ill. The newest and clearly one of the most successful elements of this massive national program is the Medicare Part D Prescription Drug Benefit. Created as part of the Medicare Modernization Act of 2003, the Medicare Drug Benefit provides comprehensive prescription coverage for 90 percent of all Medicare beneficiaries - more than 39 million older and disabled Americans. On average, Medicare beneficiaries are saving $1,200 on their annual drug costs and have seen a 54 percent reduction in their monthly out of pocket expenses.

Numerous surveys indicate that nearly eight out of ten seniors are satisfied with their Medicare Prescription Drug Plan, surely a new record for satisfaction with a government program of any kind. But now, with this popular program in its infancy, some Members of Congress want to change it, to have the federal government "negotiate" directly with the drug manufacturers, ostensibly to save costs. The question then becomes: Is this Congressional meddling in Medicare a true cost saver, or just a deadly interference that will harm millions of Medicare beneficiaries?

The Power of Competition

The key to the Drug Benefit's success has clearly been competition. Private insurance plans compete with each other to provide benefits tailored to meet the needs of a wide variety of personal health circumstances. Some plans provide basic coverage while others are more comprehensive. There are special needs plans designed to provide coordinated care for specific chronic conditions and managed care plans that coordinate a wide variety of preventative care with comprehensive prescription coverage. Seniors now have choices in choosing a plan that best suits their personal needs and circumstances.

After just one full year in effect, the new Medicare Part D benefit is proving the power of competition between the Medicare Drug Plans to be strong, as costs for patients and taxpayers have fallen significantly from original estimates. According to the Centers for Medicare and Medicaid Services' (CMS) Office of the Actuary (OACT), competition between the private plans reduced the average 2006 premium from the estimate of $37 just one year ago down to $25 - a one-third reduction in premium cost. Drug plan bids for 2007 came in at yet another 10 percent reduction from the 2006 levels, a cost savings of $13 billion, about 30 percent below the $43 billion projected for this year. The average monthly premium for 2007 has dropped to just $22 per month, which is 42 percent below the original estimate! Clearly the robust competition between the plans is working.

In the words of CMS's OACT, "compared with our previous projection, our assumptions regarding the level of discounts and rebates in 2006 have increased from 15 percent to 27 percent." Those rebates and discounts contribute to savings on new, innovative therapies as well as the most commonly prescribed medications. A recent Biotechnology Industry Organization (BIO) Part D comparative pricing survey found the current Part D prices for the breakthrough, single-source therapies to be, on average, 11.6 percent lower than the discounted prices at Costco, and 10.5 percent lower than drugstore.com prices. The savings available from the Part D plans surveyed were as high as 23 percent compared with Costco, and 26 percent when compared to drugstore.com for individual therapies. Further BIO surveys comparing Part D prices for their (25) innovative drugs and biologics to those at national chain retail pharmacies in California, Missouri, and Florida, found Part D across-the-board savings averaging 17 percent for the breakthrough drugs surveyed. The discounts obtained for the innovative drugs in the BIO survey were comparable to the substantial Part D savings for more commonly used brand-name drugs reported in earlier studies. Again, the average savings are real, across all classes of drugs, and all of the studies indicate that private competition is working well.

In fact, the Congressional Budget Office (CBO) has found that multiple, competing private-sector plans contain costs more effectively than a government-controlled benefit through competition and the plans' use of price discounts, rebates, and other tools. The present "noninterference" provision in the law keeps the government from taking over what is proving to be very effective cost-saving negotiations between the Part D plans and the manufacturers.

Limiting Choices VA Style

According to the CBO analysis, allowing the government to negotiate prices would not result in current Veteran's Administration (VA) prices for Medicare Part D. The VA system is a closed system for eligible and enrolled veterans who are low-income or who have a service related disability. The VA health care system provides the hospital care and employs the physicians. VA drug purchases are provided through a limited number of VA pharmacies or by mail order. The drugs, from a very limited formulary, are sold under statutory price controls, at least 24 percent under average prices. VA drug purchases were just 2.1 percent of U.S expenditures for outpatient prescription drugs sold in 2003, a tiny portion of the market. In comparison, Medicare Part D represents 40 percent of the U.S. prescription drug market. Because of that size, the experts say government "negotiations" would fail to provide lower prices.

CBO has publicly stated ("Prices for Brand-Name Drugs under Selected Federal Programs," June 2005) that repealing the noninterference provision will not generate savings. As they say in that report:

"The relationships among the prices reported in this paper are likely to hold only under current regulations and market conditions. Future changes in pricing regulations would be likely to change the relationship between those prices. That is because the price charged to any one purchaser for a particular drug represents strategic decisions on the part of the manufacturer, and that price would be likely to change if it was extended to other purchasers through regulation. For example, when prices from the Federal Supply Schedule (FSS) for pharmaceuticals were included in the calculations of Medicaid's best prices (used to calculate Medicaid rebates), FSS prices rose."

VA style drug government price-controls under Medicare Part D "negotiations" would come with the same lack of quality and the same lack of choice faced by our veterans under the VA system. To hold costs down, the limited VA formulary offers between 1,300 and 1,400 drugs, while almost all of the Part D Medicare plans now offer some 4,300 drugs. The VA formulary offers drugs that are significantly "older" than those covered by Medicare Part D or by private insurance plans. What does older mean? The VA excludes newer and more expensive drugs (that are often are more effective) from their formulary.

According to the November 2006 Manhattan Institute study by Senior Fellow Benjamin Zycher, The Human Cost of Drug Price Negotiation:

"The VA formulary includes only 38 percent of the drugs approved by the FDA during the 1990s, only 19 percent of the drugs approved since 2000, and only 22 percent of the drugs given priority review approval since 1997. VA prescriptions systematically are for drugs older than those specified in non-VA prescriptions, and new drugs as a matter of VA policy are not considered for the VA formulary for three years, regardless of improved effectiveness or reduced side effects. A third of VA seniors prefers to switch to Part D, but cannot because they would lose other VA benefits."

More recent enrollment data indicates that almost half of the veterans enrolled in the VA health system are accessing medicines through Medicare Part D. Some 1 million veterans enrolled in the VA health system have chosen to also enroll in a Part D drug plan. Again, it's easy to see why. The VA system offers only a one-size-fits-all formulary. Another recent study (December 2006 Study by Covance Market Access Services Inc.) found that out of 226 active ingredients, the VA covers only 73 percent. In contrast, a sample of three high-enrollment Part D plans covered 94 percent of those same ingredients. Again, there is only one VA plan and only one VA formulary. If the medicine you need isn't there, you are just out of luck.

What drugs aren't on the VA formulary? It's a long list, but the first and foremost drug on the list is Lipitor, the Pfizer cholesterol-lowering agent. Lipitor has been and is the world's top selling drug. In addition, the U.S. Food and Drug Administration recently approved Lipitor to reduce the risk of several serious problems in patients with heart disease including hospitalizations for heart failure. Again, Lipitor is not on the VA formulary. Nor are Allegra, Clarinex, Flomax, Pravachol, or Pulmicort, just to name a few. Nine of ten key biotech anticancer drugs are missing from the VA National Formulary, as are five of five biotech autoimmune disease agents. If you're covered by a VA type plan and you need or want what could be a better drug for you, you will have to go elsewhere, as many now Part D-enrolled veterans have clearly done.

Fatal Consequences

If some in Congress succeed in turning Medicare Part D into the price-controlled, one-size-fits-all limited formulary that is the VA system, seniors will suffer and die as a result. When you can't get the medication that your doctor wants you to have, it's not just inconvenient, it could be fatal. And like it or not, that is where every cost-controlled government run system ends up. We have only to look at some headlines from Europe for a preview of Medicare's future under government "negotiation" of drug prices. Here are just a few from recent years:

• "Alzheimer's Drug Denied to Thousands" - Daily Mail, January 23, 2006
• "Rationing of Osteoporosis Drugs Could Hit 200,000 Women in Wales" - Western Mail, January 17, 2004
• "Women Told to Wait for Cancer Drug" - The Press Association, September 22, 2005
• "Concerns Raised on Herceptin Use" - BBC News, July 26, 2006
• "NHS Official Refuse to Pay for Breakthrough Cancer Drug" - Daily Telegraph, July 31, 2005
• "Patients Angered as Watchdog Refuses to Allow Bowel Cancer Drugs on NHS" - The Times, August 21, 2006
• "Cost Cut Threat to MS Patients" - The Glouchester Citizen, April 22, 1999

Limited Part D formularies, drug coverage and reimbursement policy decided by cost, not by consideration of drug effectiveness and individual need, is the future we can expect under a "negotiated" Medicare Part D. This is clearly not the future that 78 million Baby Boomers are looking forward to in retirement.

Current and future retirees are also counting on the utmost possible research and development to provide new cures and therapies for devastating illnesses like cancer, heart disease, diabetes, Alzheimer's disease, strokes, Osteoporosis, and many others. Negotiated drug price controls will, as they have everywhere else in the world, strangle research and development by artificially capping prices and denying the manufacturers a fair, market-based return.

The cost to bring one new drug to market is staggering. It takes up to 15 years and, on average, $1.2 billion to successfully research and develop a new biologic. For the one new drug that gets approved for the market, 10,000 other compounds will have failed. With these long odds and enormous costs, the future development of breakthrough drugs will only happen if the extraordinary private-sector investments in lifesaving research can be recovered. It is the reward of market-based returns that drives innovation forward. Without fair returns, the discovery of new, desperately-needed medicines will slow to a crawl, perhaps ceasing altogether. Sadly, the promise of innovation will be suffocated by the "negotiated" weight of "price-controls."

How bad will it be? Once again, Benjamin Zycher of the Manhattan Institute provides an estimate of the impact that "negotiated" price controls would have on the research and development of future medicine (through 2025). By using a limited drug formulary (that excludes some drugs) to set prices, versus a more inclusive formulary like that now in place, Zycher projects that there would be "negotiated" Part D savings. Those price-controlled savings will naturally cause a reduction in the incentives for the capital market to invest in drug research and development (R&D). That decline in the necessary R&D investment funding will have a devastating impact which can be measured in the loss of new drugs.

Using three separate scenarios, all spanning a period from the establishment of government "negotiated" prices in 2007 through the year 2025, Zycher projects a baseline case, developed from National Science Foundation (NSF) data on historical investment trends, in which the cumulative decline in research and development investment would yield a loss of 196 new medicines, or about ten a year.

Then, using the same NSF data with a more conservative assumption about the growth rate of research and development investment, he estimates the loss of 107 new medicines, or about six per year. Finally, Zycher uses historical data gathered by the Pharmaceutical Research and Manufacturers of America to project a loss of 220 new medicines, or twelve per year.

As Zycher notes: "In the short run, federal price negotiations would allow some consumers to receive medicines at lower prices, or, alternatively would yield savings for federal taxpayers. The longer-term costs of government price-negotiation however, are likely to be large and adverse." His paper estimates that investment in new drug research and development will decline by approximately $10 billion per year. He then estimates the effect of reduced R&D on American life expectancies, or expected "life-years." Specifically, Zycher's work projects that federal price negotiations would yield a loss of 5 million expected "life-years" annually, an adverse effect that can be valued conservatively at about $500 billion per year, an amount he notes is "far in excess of total annual U.S. spending on pharmaceuticals."

This study concludes that while federal price negotiations might yield short-term savings, the resulting long-term costs are large. Those savings could only be achieved only at the cost of reduced pharmaceutical innovation. The reduced flow of new medicines will be especially disastrous to the millions of Americans who are or will be suffering from diseases like cancer, diabetes, or Alzheimer's. In Zycher's words, "Cheap drugs in the here and now would prove expensive indeed tomorrow."

Choices Control Costs

For older Americans covered by Medicare, new drug development, and the access to those new drugs, will mean everything. The Lichtenberg study, Benefits and Costs of Newer Drugs: An Update (June 2002 National Bureau of Economic Research Working Paper), placed the non-drug medical cost savings of spending $18 on new drugs at $129, a net savings of $111 in overall health care costs. Those new drugs could save seniors from the Alzheimer's disease and diabetes epidemics soon to ravage the U.S. and much of the world, as well as create the overall health care savings to actually keep Medicare in business.

While "negotiated" drug prices may or may not produce savings, they would certainly limit drug choices for seniors and limit or preclude their access to the newest and best medicines. Any savings achieved would result in the loss of new drug research and development, the loss of hundreds of new drugs, and the loss of millions of lives.

Medicare Part D is working well, saving older Americans big money, and giving them the medical keys to longer, healthier lives. If the Congress meddles now, in the program's second year, to mandate a limited formulary and "negotiated" drug prices, it will indeed be a deadly "interference" that will harm seniors for years to come.

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