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Issue Brief - Medicare Drug Negotiation and Rebates

Rising health care costs have led policymakers to look for ways to reduce overall spending without affecting the quality of care.  Two proposals, aimed at saving the Medicare program money, that are receiving attention are: 1) allowing the federal government to negotiate with drug companies for lower prescription prices and 2) restoring drug manufacturer rebates (discounts) for coverage provided to low-income beneficiaries.

The first refers to authorizing the U.S. Secretary of Health and Human Services (HHS) to negotiate lower prices for high cost prescription drugs for Medicare beneficiaries, which is prohibited under current law.  The second, a specific type of drug negotiation, would require drug companies to restore paying a minimum rebate to the federal government on drugs covered under Medicare Part D for low-income beneficiaries, such as those who are dually eligible for both Medicare and Medicaid (referred to as dual eligibles) or the Part D Low-Income Subsidy (LIS).  The LIS provides assistance with Part D premiums and cost sharing for those with low-income and modest means.

During the 113th Congress (2013-2014), legislation has been introduced that would allow the Secretary of HHS to negotiate for lower Medicare drug prices or require discounts for low-income Medicare beneficiaries.  These bills include: The Medicare Prescription Drug Price Negotiation Act of 2013 (S. 117, H.R. 1102); The Medicare Prescription Drug Savings and Choice Act of 2013 (S. 408, H.R. 928); and The Medicare Drug Savings Act (S. 740, H.R. 1588).  The National Committee supports this legislation because we believe that Medicare should receive the best price for prescription drugs for all beneficiaries, especially those with low-incomes.  

Background

Medicare Part D is a voluntary prescription drug benefit for Medicare beneficiaries, established in 2003 under the Medicare Modernization Act (MMA).  Prior to this law, Medicare did not offer a prescription drug benefit.  In 2012, almost 65 percent (over 30 million) of Medicare beneficiaries were enrolled in a Part D plan (MedPAC, 2013).

Medicare Part D went into effect in 2006, providing prescription drugs through private stand-alone prescription drug plans (PDPs) and Medicare Advantage (MA) plans.  Part D drug prices are determined through a negotiation between the private drug plan that administers the benefit and the drug manufacturer.  By law, the federal government cannot negotiate for Medicare drug prices.  The Medicaid program and the U.S. Department of Veterans Affairs (VA) are able to negotiate with drug companies for lower prices.

Prior to the implementation of Part D, Medicaid paid the drug costs for individuals who were dually eligible for Medicare and Medicaid.  Dually eligible individuals are generally low-income, sicker and expensive to treat.  The costliest 20 percent of dual eligible individuals account for 66 percent of Medicare spending (MedPAC, 2012).  When Part D went into effect, dually eligible beneficiaries’ drug coverage switched from Medicaid to Medicare and the manufacturer discounts were discontinued.

Support/Opposition to Drug Negotiation/Rebates for Low-Income Beneficiaries

Various views exist on extending drug negotiation to Medicare and restoring discounts for the drugs used by low-income beneficiaries.  Supporters argue that these proposals produce significant savings and receive broad public support from both Democrats and Republicans.  They also make sense because Medicaid and the VA are able to negotiate lower drug prices for their beneficiaries.  Opponents argue this would lead to reduced research and development, interference with Part D plans’ success and higher costs.

Support

Savings.  One argument is that billions of dollars of savings would be produced if the federal government negotiated for Medicare drug prices.  While there are no current Congressional Budget Office (CBO) cost estimates for federal drug negotiation, a report from the Center for Economic and Policy Research (CEPR) estimates that savings to the U.S. government would range from $230 billion to $541 billion over 10 years (Baker, 2013).  CEPR noted that the U.S. pays twice as much as other wealthy countries for prescription drugs because their governments are able to negotiate for lower prices.   

In addition, CBO estimates that the federal government would save $141 billion over 10 years if drug manufacturers provided discounts to individuals dually eligible for both Medicare and Medicaid or the Part D Low-Income Subsidy.  These savings could be used to strengthen the Medicare program or to pay for repealing the sustainable growth rate (SGR) formula that threatens large reductions in payment to physicians each year.  The cost to repeal the SGR is about $138 billion (CBO, 2013).

Public Support.  A second argument is that the majority of the public supports federal drug negotiation for Medicare beneficiaries.  National polls indicate that the majority of the Americans, across party lines, support allowing Medicare to negotiate with drug companies to bring down the cost of prescription drugs.  A nationwide poll of 1,200 adults, conducted in November 2012 by Lake Research for the National Committee, found that 81 percent of Democrats, 86 percent of Independents and 70 percent of Republicans favor federal drug negotiation (Voss, 2013). 

Another survey of 1,347 adults conducted in January 2013 by the Kaiser Family Foundation, the Robert Wood Johnson Foundation and the Harvard School of Public Health, found that most Americans (about six in 10) oppose cutting Medicare spending as a way to reduce the federal deficit.  Specifically, they supported “requiring drug makers to give the government a better deal on medications for low-income seniors (85 percent)” (Cary, 2013).   

Best Price. A third argument is that it makes sense for Medicare to receive the best price available for prescription drugs, just like Medicaid and the VA.  In Medicaid, the drug manufacturer provides the federal government discounts for drugs, which are shared with the states.  The discount is either the minimum drug amount or an amount based on the best price paid by private drug purchasers, whichever is less.  Current law requires drug companies to charge Medicaid 23 percent less than the average price they receive for the sale of a drug to retail pharmacies.  Drug companies also must provide another discount if a drug’s price rises faster than the rate of inflation (Thomas and Pear, 2013).

Supporters note that Medicaid rebates, if applied to Part D, would save the federal government money.  According to a 2011 study conducted by the Office of the Inspector General (OIG) for the U.S. Department of Health and Human Services, Medicaid rebates were three times greater than the discounts negotiated by Part D for 100 brand name drugs.  In 68 of these drugs, Medicaid rebates were twice as high as rebates granted by the drug companies for Medicare drugs (OIG HHS, 2011; Hulsey, 2013).  Similarly, a 2008 study of drug pricing information by the U.S. House Committee on Oversight and Government Reform found that Part D paid, on average, 30 percent more for drugs than Medicaid (Hulsey, 2013).

The Department of Veterans Affairs and the Department of Defense, which operates the military health plan known as TRICARE, also are permitted to negotiate for prescription drugs prices.  In TRICARE, drug companies compete to be in the top tier of drugs with the lowest co-pays, resulting in significant savings for the government.  Since 2009, TRICARE, which serves 9.6 million active duty military personnel, families and retirees, received $5.3 billion in negotiated discounts from pharmaceutical companies (Hulsey, 2013). 

Opposition

Research and Development.  Opponents argue that if the drug industry loses profits due to Medicare drug negotiation and restoration of rebates for low-income beneficiaries, there will be less money for research and development of new drugs.  One analysis estimates the profit loss would be about two to seven percent (Berkrot and Morgan, 2013).  However, others contend that the drug industry can afford a reduction in profits of this magnitude.  Drug companies revenues were more than $200 billion between 2005 and 2010, and they spent 19 times more on promotion and marketing of new drugs than on research (Eichler, 2012).  The Congressional Budget Office also suggests that loss in research and development would be relatively small (CBO, 2011).

Market Competition.  Another argument is that allowing the federal government to negotiate for lower Medicare drug costs is a form of price control, which would interfere with market competition and the Part D program’s success.  Specifically, opponents point to the fact that Part D program costs are less than originally estimated.  The Medicare Trustees projected in 2004 that Part D would cost $131.4 billion in 2011, but the cost was $67.4 billion, 51.3 percent less than originally predicted (Baker, 2013).

However, some research disputes the idea that market competition is the cause of lower Part D prices.  A 2012 Kaiser Family Foundation study found that other factors, besides market competition, such as greater use of generic drugs and fewer new drugs coming to the market, were the reasons for lower than expected Part D costs (Frank, 2012).

Higher Drug Costs.  A third argument is that Medicare drug negotiation and restoring drug rebates paid by pharmaceutical companies for low-income beneficiaries would negatively affect employers, leading to job loss.  Specifically, they argue that profits lost through Medicaid rebates would have to be recouped by requiring employers to pay more for the drug coverage they provide to their employees.  According to Holtz-Eakin (2013), they could “create incentives for drug companies to offer fewer rebates to private payers, such as employers, and possibly to launch new drugs at higher prices.”  For example, a RAND study from 1997, that examined the best price formula for Medicaid drug rebates, found that private drug purchasers, such as employers, did see small cost increases that could affect employers.  Frank and Hoadley (2012) dismissed these findings, noting that, in today’s market, there is greater access to and use of lower cost generic drugs, so employers would be less likely to be affected negatively by the rebate.

National Committee Position

The National Committee supports legislation and proposals that allow the federal government to negotiate Medicare drug prices and require drug companies to restore discounts for low-income individuals for several reasons, including:

  • There would be significant savings created for the Medicare program, without shifting costs to beneficiaries.
  • Medicare should get the best price for the drugs it purchases for all beneficiaries, especially for those who are low-income.
  • Drug manufacturers were prosperous when they paid rebates for drugs used by Medicare-Medicaid dual eligibles before passage of the Medicare Modernization Act of 2003, so restoring the discounts would have a negligible effect on overall drug pricing.    
     
  • National polls show that most Americans, across party lines, support allowing the federal government to negotiate with drug companies as a way to bring down the cost of prescription drugs.

At a time when policymakers are seeking ways to lower the federal deficit and overall health care spending, proposals that reduce Medicare prescription drug costs cannot be overlooked.  Allowing the federal government to negotiate for lower Medicare drug prices and restoring discounts for low-income beneficiaries make sense because they save money without shifting costs to beneficiaries and have broad public support.

References

Baker, D.  Center for Economic and Policy Research.  (January 2013).  Reducing Waste with an    Efficient Medicare Prescription Drug Benefit.      http://www.cepr.net/documents/publications/medicare-drug-2012-12.pdf

Berkrot, B. and Morgan, D. (2013).  Obama Medicare rebate plan could hurt drug companies.     Posted by Reuters, February 13, 2013.  http://www.reuters.com/article/2013/02/13/us-           usa-healthcare-medicare-idUSBRE91C1OB20130213

Carey, M. (2013).  Americans Want Deficit Addressed Without Medicare Cuts, Poll Finds.  /          Kaiser Health News. http://capsules.kaiserhealthnews.org/index.php/2013/01/americans-       want-deficit-addressed-without-medicare-cuts-poll-finds

Congressional Budget Office.  (2013).  The Budget and Economic Outlook: Fiscal Years 2013 to 2023.  Washington, DC: Congressional Budget Office.  http://www.cbo.gov/sites/default/files/cbofiles/attachments/43907-BudgetOutlook.pdf

Congressional Budget Office.  (2011).  Reducing the Deficit: Spending and Revenue Options.       Washington, DC: Congressional Budget Office.  http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12085/03-10-       reducingthedeficit.pdf

Eichler, A.  Pharmaceutical Companies Spent 19 Times More on Self-Promotion Than Basic         Research: Report.  The Huffington Post.  Posted August 9, 2012.   http://www.huffingtonpost.com/2012/08/09/pharmaceutical-companies-     marketing_n_1760380.html

Frank, R. (2012).  Prescription Drug Procurement and the Federal Budget.  Washington, DC:      Kaiser Family Foundation.  http://www.kff.org/medicare/upload/8307.pdf

Frank, R. and Hoadley, J.  (2012).  The Medicare Part D Drug Rebate Proposal:  Rebutting An    Unpersuasive Critique.  Posted on the Health Affairs Blog on December 28, 2012.   http://healthaffairs.org/blog/2012/12/28/

Holtz-Eakin, D.  (2013).  Critiquing the Medicare Part D Low-Income Drug Rebate Proposal: A Response to Richard Frank and Jack Hoadley.  Posted on the Health Affairs Blog on    January 18, 2013.  http://healthaffairs.org/blog/2013/01/18/

Hulsey, L. (2012).  Billions at stake over Medicare drug prices.  Dayton Daily News.  Posted        February 23, 2013:  http://www.dailynews.com/news/news/national-govt-        politics/billions-at-stake-over-medicare-drug-prices/nwwq7/

MEDPAC.  Report to the Congress: Medicare Payment Policy.  (March 2013).

 http://www.medpac.gov/chapters/Mar13_ExecutiveSummary.pdf

MEDPAC.  (2012).   Dual Eligible Beneficiaries, Chapter 3.

http://www.medpac.gov/chapters/Jun12DataBookSec3.pdf

Scott Morton, M.  (1997).  The Strategic Response by Pharmaceutical Firms to the Medicaid         Most-Favored-Customer Rules.  RAND Journal of Economics.   http://www.jstor.org/discover/10.2307/2555805?uid=2&uid=4&sid=21102117506387

Thomas, K. and Pear, R.  (2013).  Uphill Road for Plan to Cut Government’s Drug Costs.  New    York Times. Posted February 14, 2013.      http://www.nytimes.com/2013/02/15/business/uphill-road-for-plan-to-cut-            governments- drug-costs.html?tntemail0=y&_r=0

U.S. Department of Health and Human Services Inspector General.  (2011).  Higher Rebates for Brand-Name Drugs Results in Lower Costs for Medicaid Compared to Medicare Part D.

            https://oig.hhs.gov/oei/reports/oei-03-10-00320.pdf

Voss, J.  (2013).  Medicare and Social Security in the 2012 Elections: Findings from survey of       1200 registered likely 2012 voters.  Lake Research Partners.


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