The Realities and Challenges of Medicare Negotiating Drug Prices

The idea to let Medicare negotiate drug prices has been around for years, but has recently gained new traction under President Donald Trump. Panelists at the ISPOR 22nd Annual International Meeting, held May 20-24 in Boston, Massachusetts, discussed the complexities of allowing Medicare to negotiate prices and whether or not it would produce meaningful savings.

Medicare isn’t allowed to negotiate drug prices because of the law, but the Congressional Budget Office (CBO) weighs in every once in a while on what savings might be realized if Medicare could negotiate drug pricing, Juliette Cubanski, PhD, MPP, MPH, of Kaiser Family Foundation, said.

Lifting the prohibition would only have a negligible effect on drug pricing, according to CBO estimates. Cubanski explained that this conclusion was reached because private plans already do a good job of negotiating prices and there’s no reason to believe the HHS secretary would do a better job. In addition, the HHS secretary doesn’t have the ability to create a formulary, and without that authority, he or she wouldn’t have a lot of negotiating power.

Where savings might be seen is in areas with unique drugs that have no competitive products; but even still, Cubanski said that savings might not be as large as people are expecting.

So why does the idea of allowing Medicare to negotiate drug prices remain popular? Public concern for rising drug prices is one reason.

“This is a real pocketbook issue for people, a real concern for voters and policy makers to pay attention to what constituents are upset about,” Cubanski said.

Trump’s repeated mentions of allowing Medicare to negotiate is another reason. However, the unusual thing is that this has historically been an idea with the Democrat Party. There is legislation currently that would allow Medicare to negotiate drug prices. The bill also directs the HHS secretary to prioritize specialty and high-priced drugs in negotiations with a fallback that if negotiations fail—no agreement is reached after 1 year—then the price would be what the Department of Veterans Affairs (VA) pays. The HHS secretary would also be able to establish formularies. However, there is no CBO score yet on this legislation, so it’s unclear what the effect of these provisions might actually be.

“I think whatever you might think of the policy idea, the political headwinds are still blowing against this idea generally, although maybe not as strongly as they were before Trump came along and expressed support for the idea,” Cubanski said.

Dana P. Goldman, PhD, of the University of Southern California, continued outlining why the savings might not be worth allowing Medicare to negotiate drug prices because of the tradeoffs.

“Of course lower prices in the near term are viewed as valuable; in the long run, however, I think it’s pretty clear that policy change can have an effect on innovation,” he said.

There is a range of elasticity for innovation. A study has found that when expenditures are increased in the US by 10%, the rate of new treatments increases anywhere from 29% to 40%, depending on the study, Goldman said.

He then speculated what would happen if pharmaceutical companies were forced to sell at the VA’s prices if the legislation Cubanski mentioned was passed. He cited work by Avalere that suggests that 48% of claims in Medicare Part D would not be eligible under the VA’s formulary. Research has suggested that savings to Medicare could be up to $30 billion a year, which is reductions of up to just 8% in terms of total drug spending, so it wouldn’t be a solution to the overall cost issue.

Goldman compared Medicare negotiating drug prices to climate change. While there is a lot of uncertainty about the effect of climate change, but scientists agree if we don’t act now, we may lose control as temperatures continue to rise. As a result, aggressive policies should be put in place now, he said. In comparison, Part D is the opposite because while there may be modest savings from acting now, the potential cost in terms of health could be large.

“I would say, in some sense, the converse is true,” Goldman said, adding that there needs to be a better understand about the potential consequences that may result from allowing Medicare to negotiate drug prices.

“But that isn’t to say that we can’t do anything,” he said. “I think probably the most promising aspect is to support value-based pricing.”

The last panelist, Patricia M. Danzon, PhD, of the University of Pennsylvania, outlined how Medicare might use value-based pricing to negotiate drug prices. In her proposal, Medicare, but preferably an independent agency, would assess the value of new drugs and Medicare would establish a threshold—the highest it would be willing to pay—and it would reimburse up to that threshold. Part D plans could then negotiate below that threshold, but manufacturers could also choose to set prices above it and the plans could choose their own higher thresholds. However, Medicare would not reimburse above that threshold and the plan and the patient would be responsible for paying the excess cost.

“In this way, Medicare’s value-based price is constraining the actual reimbursed price; it’s not trying to negotiate rebates off of an unlimited price, but rather it’s constraining the reimbursed price,” she explained.

The value of the drug would depend on outcomes, such as efficacy, safety, and quality of life, and the greater the cost savings and quality-adjusted life-years gained, the higher the threshold. Therefore, Medicare would be rewarding innovations as long as the treatments actually improve outcomes or reduce costs.

Goldman responded to Danzon’s pitch that in large part he agreed with the idea, but that the idea of setting a ceiling for what Medicare would reimbursement works in a system where health plans don’t have a lot of power, but plans do have power because they have the ability to implement formulary restrictions.

What Goldman thinks might actually work better is if Medicare allowed plans to only cover generics and some rare specialty drugs. This could be cheap for people to buy and if people want to have more generous coverage, they pay extra for it.

“I think what you’re going to find, though, is that people don’t want these plans,” he said.