This week during his speech at George Washington University, President Obama said one of the ways he plans on cutting Medicare costs is to cut government spending on prescription drugs by $200 billion over ten years. He said, “We will cut spending on prescription drugs by using Medicare's purchasing power to drive greater efficiency and speed generic brands of medicine onto the market.”
With this statement, Obama seems to suggest that he wants Medicare to use its clout and to start negotiating prices directly with pharmaceutical companies, something the Veterans Administration, for one, has been doing for years. The only problem is that back in 2006 when Congress expanded Medicare to cover prescription drugs, the law included a gift to drug companies that specifically prohibits the government from directly negotiating on drug prices.
While campaigning for the presidency, Obama often spoke about taking on drug companies and allowing Medicare to have bargaining power over prices. He also supported the re-importation of cheaper prescription drugs from Canada as a way to lower health care costs. But in order to get Pharma support for the Affordable Care Act, these two measures were taken off the table and left out of the legislation.
The Pharmaceutical Research and Manufacturers of America (PhRMA) is already on the offensive, with chief executive of the industry group John Castellani releasing a response to the President’s speech; "A strategy of reducing the deficit by simply cutting existing Medicare funding will adversely impact American jobs and medical innovation."
Castellani points to one report that found costs for Part D (the Medicare prescription benefit) already “coming in about 40% below projected costs.” He also adds that implementing price controls in Part D in the form of an overall spending cap, for example, would force drug companies to reduce their investment in R&D, stifling innovation and development of cures and bring higher premiums to Medicare beneficiaries.
Of course, this idea that negotiating prices will stifle innovation is an old argument. Innovation is already slowing at drug companies as fewer new “game-changing” drugs are approved each year. Big Pharma spends more money on the marketing and development of “me-too” drugs in the same few profitable classes (like atypical anti-psychotics) at the expense of true breakthrough drugs. According to a study in Nature Reviews: Drug Discovery, an analysis of 252 drugs that were approved by the FDA between 1997 and 2008 finds that drugmakers were responsible for less than half of the innovative medications discovered during that period. (Small biotech firms and academic labs were the source of the balance) And about two-thirds of drugs produced by Big Pharma were classified as “follow-ons.”
The truth is that the drug industry is finding itself in a bind even without any pressure on pricing from Medicare. The pipeline for blockbuster new drugs is drying up at the same time that companies like Pfizer, Eli Lilly and Merck are facing the loss of patent protection for key money-makers like Lipitor.
The response is to increase drug prices even further, according to a new report on the website Pharmalot. In March there were price increases on 14 drugs, up an average of 6.7%, compared to 10 price increases and an average of 6.5% in March 2010. Meanwhile, monthly statistics for the first quarter of this year (including 59 prescription drug price increases, averaging 8.2 percent just in January) seem to point to another record year for price jumps. This follows last year's largest increase in price activity in the past decade, according to Barclays.
The Pharmalot post asks; “Which drugmakers led the pack?” “Merck raised prices on four meds – the Januvia and Janumet diabetes pills each rose 7.5 percent price, while the Vytorin and Zetia cholesterol pills each jumped 5.3 percent. Eli Lilly raised the cost of its Zyprexa antipsychotic by 9.5 percent…and the cost of its Evista osteoporosis drug was up 9 percent.” No surprise, these are all drugs in classes with high utilization rates in Medicare patients.
Obama also seemed to suggest that he wanted to speed up the process of introducing generic drugs (including generic versions of increasingly expensive biologicals) onto the market—a move also strongly opposed by the drug and biotech industries. In a nod to the industry, the Affordable Care Act gives “pioneer biologics” 12 years of exclusivity on the market, even though the bipartisan fiscal commission now recommends shortening that to seven years—after which so-called “biosimilar” generic versions can be introduced for sale.
The real worry for the Obama administration is that if they insist on changing the law—allowing Medicare direct negotiation on drug prices, putting a cap on spending for Part D, or shortening the drug exclusivity period—they will not only lose the support of the powerful drug lobby, but also gain a formidable foe as health reform continues to be controversial in Congress.
So the question becomes, can the administration wring $200 billion in savings from Medicare Part D without using any of these obvious cost-cutting measures?
For starters, Obama can require drug companies to give rebates to 9 million low-income elderly or disabled people who qualify for both Medicare and Medicaid. According to the Fiscal Commission, that move would save $7 billion in 2015 and $49 billion through 2020.
Another idea is to have Medicare buy drugs like the Veterans Administration health care program does. According to a new analysis by Austin Frakt titled “Should Medicare Adopt the Veterans Health Administration Formulary?” (to be published soon in the journal Health Economics but accessible now as a working paper through his blog, The Incidental Economist) the federal government would stand to save $14 billion each year if it followed the VA’s lead.
But there would be trade-offs, according to Frakt.
For one, he says, the VA’s national formulary—or list of drugs it will pay for—includes only 59% of the top 200 drugs while Medicare’s various prescription drug programs cover between 68% and 93% of those drugs, averaging about 85% covered. Frakt writes, “if Medicare plans looked more like the VA, a lot fewer drugs would be covered.” As it stands now, Medicare is quite generous in its coverage; a minimum of two drugs must be included in each class (for example, anticoagulants) and in six classes—anti-psychotics, anti-depressants, anti-convulsants, immunosuppressants, cancer, and
HIV/AIDS drugs—plans are required to cover almost all drugs available on the market. In the case of cancer drugs, these are some of the most expensive of all—costing up to $100,000 per year.
By restricting the formulary to just one or two drugs in each class, Frakt says, the VA is better able to drive a hard bargain with drug makers. “This is one, but not the only, reason the VA can purchase drugs at prices 40% below those paid by Medicare Part D plans,” he writes. “If Medicare drug plans restricted their formularies to the level of generosity offered by the VA and obtained VA-like drug prices by doing so, we estimate that the program would save… a total of $14 billion per year (2009 prices)."
The VA’s drug formulary does not arbitrarily restrict drug choices. Medications are included on the list when they have strong evidence of efficacy, have been determined safe, and have a good cost-to-benefit profile. We already know that overmedication of seniors is a serious problem, by cutting back on the overuse of certain costly but unnecessary or ineffective drugs, patients receive better evidence-based, quality care.
In the end, the Obama administration might have to wait until the health reform bill is fully implemented before it can follow through on its intent to “use the bargaining power of Medicare” to directly negotiate prices with drug companies. Right now, with Congress so divided over how to wring savings from Medicare, it will be nearly impossible to pass a new law that is required to give Medicare this additional power—even though it makes infinite sense. And at least for a while, the government needs the support of drug companies who vehemently oppose direct price negotiations in order to pull off other aspects of reform over the next two years.
As Matt Herper points out in his blog at Forbes, negotiating with drug companies is tougher than it sounds. “What is Medicare going to do, tell Dendreon that it won’t pay for its Provenge treatment, which has been shown in clinical trials to extend the lives of cancer patients by a median 4 months (that means half the patients get more than four months) because Provenge costs $93,000 per patient? Or tell Bristol-Myers it won’t pay for Yervoy, for melanoma, because of its $120,000 per patient cost?” Right now, he adds, “I count nine drugs that cost $200,000 a year or more.”
But eventually, the federal government will have to take the upper hand when it comes to controlling Medicare’s rising prescription drug costs. Perhaps the new Independent Payment Advisory Board will get involved in providing the bulk of these recommendations. Direct negotiation, shorter exclusivity for biological drugs, more restrictive formularies and even, perhaps, a cap on prescription drug spending—they will all have to occur if we want to achieve Obama’s desired savings.
“The Obama administration has shown more than enough deference to drug companies,” says Judy Feder, a senior fellow at the Center for American Progress. “They got off easy in the original law passed last year”, she said. “There are more savings to be had.” It might just require a little patience.