Vantage point – Price restraint talks hit reality bump

US President Donald Trump has said he wants to control drug prices by having the government negotiate directly with big pharma – and in that he is joined by many politicians across the political spectrum. The trouble with this proposal is that federal health programmes already have mechanisms in place that achieve discounts, and budget watchers are not sure how to squeeze out any more savings.

The question will take on greater significance in the coming months as Mr Trump’s administration says it is still working on a drug pricing bill, and members of Congress roll out their own proposals. The threat of new limits on big pharma’s drug pricing power has spooked investors through the winter, although with each passing week without an administration proposal volatility has subsided (Fickle Trump showers disappointment on biopharma's golden day, January 12, 2017).

As a sign that work is still under way in spite of the failure to pass major health legislation, Health and Human Services Secretary Tom Price said last month the administration was working on a drug price bill. A group of Senate Democrats led by Senator Al Franken has also drafted legislation.

Medicare negotiation

The leading proposal for some time has been to have the government negotiate prices for the Medicare programme for the elderly and disabled – essentially using the buying power of 55 million people to seek steep discounts. In the law adding prescription drugs to the Medicare benefit package enacted in 2003 the government was forbidden from doing so.

The trouble with the proposal is that other aspects of the prescription benefit have ensured that the programme does not pay full price – namely, the requirement that beneficiaries receive their coverage through private means, either a standalone prescription drug plan (PDP) or a health maintenance organisation that covers other health services.

These private plans already negotiate lower prices so efficiently that the nonpartisan Congressional Budget Office (CBO) believes that extending that power to the Medicare programme broadly would have a “negligible” effect on drug spending.

“Not only are you having negotiations by private organisations but you are having multiple organisations negotiating, which also helps lower prices,” says Mary Jo Carden, vice-president of government and pharmacy affairs with the Academy of Managed Care Pharmacy, which represents pharmacists at private health insurance plans.

The CBO’s estimate, however, might be understating the government’s power, says Chuck Shih, a senior officer with the Pew Charitable Trusts who heads that organisation’s drug spending research initiative. For example, the budget forecasters do not assume that the government has the power to make formulary exclusions as private payers do – if Medicare is allowed to do so it could achieve greater savings, he says.

Single national negotiation or one among equals?

How Medicare negotiation is structured could also have an influence. For example, if CMS were to negotiate benchmark prices on behalf of all 55 million enrolees, and had the power to establish a tiered formulary with the threat of exclusions, then the savings could be significant, Mr Shih said.

On the other hand, if Medicare were to be just another PDP competing with the private plans, “I tend to think the potential effect of Medicare negotiation would be minimal,” he says.

Senator Franken’s plan has an additional stick to bring drugmakers to agreement: if, after a year, there is no settlement, the CMS would have the power to compensate based on the lower prices paid by the Department of Veterans Affairs (VA) healthcare system or the Medicaid programme for low-income people – the VA system has 9 million enrolees and Medicaid 74 million. 

Should the same price be extended to another 55 million people enrolled in Medicare, the pharma sector would no doubt try to press for increases to the government-set VA or Medicaid prices to make up for lost revenue.


Mr Trump’s pivot to “competitive bidding” rather than direct negotiation raises comparisons to Medicare’s abortive attempt to engage in this practice for injectable drugs administered in physicians’ offices, covered by part B of the programme. This scheme, in which speciality pharmacies bid for a national contract to deliver drugs to physicians, was ultimately halted after attracting fewer than 1,100 practices.

The programme had the effect of raising costs instead of lowering them, in part because its price calculations did not reflect usage patterns and in part because the speciality pharma selected, Bioscrip, did not have the power to set a formulary – a flaw carried over from the existing programme.

Renewal of this programme for part B and even expanding its use to the broad patient population receiving self-administered drugs under part D – or at least the expensive drugs that have drawn the ire of lawmakers – is one solution. Mr Shih notes, however, that the speciality pharma selected would need formulary power and utilisation management techniques like prior authorisation and step therapy to have an effect on prices.

Conversely, another idea for reining in drug prices is moving some of those physician-administered drugs covered by part B into part D, where they would be subject to price negotiation under the private plans, writes Rick Weissenstein, an analyst with Cowen & Co. “More management in Medicare part B is something that would benefit the programme as well as beneficiaries,” AMCP’s Ms Carden says. 

How to advance drug pricing legislation, once it has been written, will be the next obstacle to be overcome, especially given the fractures among Mr Trump’s Republican congressional allies over health-insurance legislation (UPDATE: Obamacare repeal stalls leaving drug tax and coverage in place, March 27, 2017). The president this week reiterated that he continues to negotiate with congressional leaders on a health-insurance bill in the hopes that savings can be achieved to pay for tax reform.

If momentum builds for a pricing bill, the legislative strategy will be essential. Mr Weissenstein writes that it could be attached to “must pass” legislation such as bills to raise the limit on how much debt the federal government can accumulate, or reauthorisation bills for PDUFA or the State Children’s Health Insurance Programme.

He believes that passage of pricing legislation is unlikely. And, in any case, the sector seems to have taken steps recently to avoid high-profile, big-ticket launches hitting the headlines – Lilly’s Dupixent and Roche’s Ocrevus came in at unexpectedly low prices, for example – which could have the effect of appeasing politicians who want prices to moderate.

Yet Mr Shih sees an appetite for action on prescription drug pricing, increasing the chances that Congress and the White House can act successfully. “There’s a lot of support on both sides of the aisle to deal with increasing drug prices and get a handle on drug spending in public programmes,” he says.

To contact the writer of this story email Jonathan Gardner in Virginia at [email protected] or follow @ByJonGardner on Twitter

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