News Flash– In Debt Ceiling Negotiations, Pharma Is Now on “the Chopping Block”

It was only a matter of time. Eventually, Medicare would refuse to continue paying drug-makers whatever they choose to charge.  Now, it appears that this is happening.  (Kudos to Igor Volksky over at Think Progress Health.)

In 2006 when the Bush administration expanded Medicare to cover prescription drugs, it included a gift to drug companies that specifically prohibited the government from directly negotiating on drug prices.

Four years later, when health care reformers were trying to push a politically prickly piece of health reform legislation through a deeply divided  Congress, they didn’t try to reverse that provision. It just wasn’t the time to try to take on Pharma. Too many legislators are beholden to the industry for campaign contributions. As it was, the Affordable Care Act barely made it through Congress.

Nevertheless, some liberals groused that the administration had made a “deal” with Pharma.  As I wrote at the time, I very much doubted that the president had pledged that Medicare would never, ever ask for lower drug prices. I also assumed that sometime between the spring of 2010, and the beginning of 2014, reformers would revisit the issue. The Affordable Care Act was, and is, a work-in progress.

Then, in April, as Naomi reported here on HealthBeat, President Obama put the idea of letting Medicare using its clout to secure lower drug prices “back on the table.” 

“During a speech at George Washington University, President Obama revealed that one of the ways he plans on cutting Medicare costs will be to cut government spending on prescription drugs by $200 billion over the next ten years.”  With this statement, Naomi observed, “Obama seems to suggest that he wants Medicare to . . . start negotiating prices directly with pharmaceutical companies, something the Veterans Administration, for one, has been doing for years.”  (And, I would add, with great success.)

                 Pharma Becomes Part of the Mix in Debt Negotiations

Late this afternoon, Igor Volsky reported that the president has now opened the door to slicing Medicare’s drug bill. 

“In response to my question about pharmaceutical cuts being included in the debt ceiling negotiations” Volsky writes, “The Hill’s Julian Pecquet reports that Republicans and Democrats may both agree on a provision to  extend Medicaid drug rebates” to patients eligible both for Medicaid and for Medicare.

The deal could be attractive, Pecquet argues, to conservatives:  “By demanding that the rebates count as revenue raisers rather than spending cuts, Republicans would be able to say they’re meeting Democrats halfway — without actually having to raise taxes, which is anathema to conservatives. The proposal would extend Medicaid drug rebates to the nation’s 9 million ‘dual eligibles' who are on both Medicaid and Medicare but aren’t currently covered by the rebates.

Back in 2003, Volsky explains: “the Medicare part D legislation moved the 6 million Americans who were eligible for both Medicare and Medicaid into the Medicare part D program, thus creating a windfall for the industry. Whereas Medicaid obtained an average discount of about 34 percent from pharmaceutical companies that participated in the Medicaid program, the average discount obtained by the [Medicare] Part D plans was 14 percent,’ according to a report issued by Rep. Henry Waxman (D-CA). As he put it, ‘The drug companies are making the same drugs. They are being used by the same beneficiaries. Yet because the drugs are being bought through Medicare Part D instead of Medicaid, the prices paid by the taxpayers have ballooned by billions of dollars.

“CBO estimates that if drug manufacturers provided the Medicare Part D program with the same prices that Medicaid receives, the government could save $112 billion over 10 years. One Washington investment analyst told Pecquet, ‘PhRMA is scared, and I think they have reason to be.’”

I agree.


13 thoughts on “News Flash– In Debt Ceiling Negotiations, Pharma Is Now on “the Chopping Block”

  1. This one is such low-hanging fruit that it’s hard to believe any senator or representative would publicly defend not doing it. Privately, of course, is another matter.

  2. In order to focus the budget debate more on the issue on entitlements and whether there should be tax increases, I really wish that the Dem leadership would push for the idea of either eliminating or significantly increasing the FICA tax cap, which goes to the Medicare and Social Security trust and is currently capped at the first $106,800 of annual earned income. Because of this tax cap, many higher income wage earners actually pay an overall lower tax rate than what the middle class pays.
    Republicans would most certainly balk at the idea, however, the public can then be reminded that during a recession in 1983, President Reagan & Tip O’Neil did this very thing.
    I really wish this idea would enter the public debate, but I have not heard anyone pushing for this in mainstream media. If R’s are worried about inflating budgets becaue of entitlements and do not want to raise the Federal Income tax rate on top earners, a FICA increased tax cap is a more forcued solution on entitlements & allows the Republicans their still get their wish to have a separate debate on the Federal Income Tax rate.
    D’s can’t give up on not increasing any sort of tax, and I think a more focused approach toward entitlements is a good way to ensure the public’s trust about the viability of Medicare and Social Security. Some people may think it would be unfair to only raise taxes on the rich, but many would be appalled at the idea that the rich actually pays a lower fair share for Medicare than the rest of us.

  3. Gary–
    Actually there is no cap on the Medicare tax. EVeryone pays 1.45% of their total wages– whether they earn $100,000 or $1 million. So the rich pay the same percentage of their income toward medicare as everyone else.
    See the chart labeled FICA Yearly Limits
    By contrast, there is a cap on how much of your wages are subject to the Social Secruity portion of FICA. Today, people pay a percentage of income up to $106,800.
    Anything you earn over $106,800 is not taxed for Social Secruity.
    Why not raise the cap for SS taxes? Two reaons: a) Social Security (unlike Medicare) is not in that much trouble financially. With just a few fixes, we can make it solvent far into the future.
    One of those fixes might be raising the cap slightly. But we need to be careful. Social Security enjoys such widespread support because it isn’t seen as a “welfare program” for the middle-class, financed by the rich.
    We want to make sure that SS remains popular — which is why we don’t want to tax every last dollar a millionaire earns.
    There is no cap on the Medicare tax because Medicare is so very expensive, that we need 1.45% of every last dollar.
    The reason Medicare is so expensive is not that the tax is too low, but that Medicare is paying too much for everything: drugs, devices, equipment, many specialists’ services, and unnecessary hospital services (unnecessary tests, surgeries, etc.)
    The way to make Medicare solvent is to cut the waste from Medicare spending, and reduce the medical errors –which cost a fortune. (The Joint Commission recently pointed out that U.S. surgeons perform “rong site” surgery 40 times a week— operating on the wrong person, or the wrong body part !
    Finally, we do need to raise taxes to fund other programs where we are not spending enough: the environment, public education, public health, alternative sources of energy etc. . .
    Panacea– Indeed.
    Chris– I agree. But many Republicans and some Democrats in Congress won’t.
    One should keep in mind that Pharma has much
    power in Congress because Pharma stocks are so important on Wall Street.
    Both the wealthy and instutional money managers (pension fund managers) have a huge amount of money tied up in them.
    On the other hand, many folks on Wall Street have seen this coming for a long time, and have even tried to warn drug companies (on the pages of the WSJ) that if they continue to over-price drugs, the govt. will move in and begin to regulate prices.
    Neverthless, conservatives will still make the same old arguments about “crushing innovation.” If we don’t pay drug-makers what they demand, they won’t have the money they need to invest in R&D.
    Of course the fact is that large drug companies no longer are making major discoveries. . .
    I’m hopeful that this proposal will go through, but it won’t be as easy as common sense would suggest.

  4. The whole Medicare Part D program should follow the Medicaid formula, which starts wih the base price during the first full quarter when the drug is marketed. The pharma companis get penalized if they increase the price of drug in a given year more then the CPI-U. In essence, they pay the difference between the price increase and the CPI-U to Medicaid (states). Since the drug companies take much higher price increases than the CPI-U, the Medicaid rebates go up.
    With Medicare Part D you have insurance companies involved in the process which is a waste in itself. Then they negotiate with pharma for discounts. In some instances (e.g., antidepressants) pharma doesn’t have to give higher discounts because this is a “protected” class. So the governmet’s buying power is diminissed.
    On other thing, even some of the regular Medicaid programs (not associated with Medicare) hire insurance companies to manage the benefit plans. It used to be, before the healthcare act, that Medicaid did not use their formula in this instance and used to go by the rebates negotiated by the insurance companies.

  5. To Maggie
    You probably already know this, but nobody is “crushing innovation” more than the pharma companies themselves. I used to work in the industry and have seen so much waste, it’s was quite incredible. They hire employees, then pay millions and millions to hire “consultants” to tell their employees how to do their jobs. The consultants would tell them what they want to hear, so they kept their business. When a drug was launched and things did not materialized, as they were based on flawed analogs and models, then they would blame the sales force…..and so on.
    They run companies that are top heavy – Wyeth for example used to have over 118 VPs (many with no direct reports). Started to count once, but after that number I gave up. A few years ago I did a pipeline analysis for top 20 pharma and it wasn’t much there besides the same drugs – rehased. You know the extended releases – XL, XXL…Especially in today’s environment when people are trying to keep their jobs, some folks in charge of clinical studies are pushing through projects with no future, so they can secure their jobs for the duration of the next study. And in the meantime we’re paying for all this. It’s crazy!

  6. AC-
    Yes, Medicare Part D is extremely–and needlessly–expensive Everything that you say about Part D is true. Thank you.
    And Pharma is, as you say, top-heavy. Drug companies have down-sized by firing some of their salespeople, but the most expenisve people at the top remian. What you say about their use of consultants is typical of corporations in the past 10 years. They appear to be streamlining, but . . .

  7. One other thing, a bit off topic….I’m sure we’ll never get to see this in our lifetime, if ever, but it would be nice to have US drug prices in line with European prices. But, that would also “stifle” innovation….LOL.
    I was researching the price for Enbrel a month ago and noticed that in France (lowest price I found in Europe) the price was about 67% lower than what I found in the US by calling around. French price was pretty much in line with what the Federal Schedule Supply (Big4) pays for it.
    Do you guys write about other health industry issues, e.g., price transparency? One can find healthcare prices everywhere else, except in the US.

  8. Related to my latest comment, I read an article on kevinmd and asked the question as to why doctors are not displaying their rates. The author (also a doctor) mentioned that they are prohibited of doing so because disclosing the fees it would mean they are “conspiring” against insurance companies. That doesn’t sound right. I only asked for the rack rates not the insurance negotiated fees. Do you know anything about this? To me it sounds like hospitals’ claim that they could not offer discounts to uninsured because Medicare did not allow them to, which of course was not true….

  9. AC
    On why doctors –and hospitals– don’t display prices.
    Different insurers may pay them different amounts for the same service.
    Insurer A might pay a hospital $3500 for a hip
    Insurer B might pay $4.000
    The hospital doesn’t want insurer B to know that it will accept as little as $3500.
    Also, even if doctors displayed prices, most patients would not comparison shop and pick a doctor or a hospital based on price.
    If one doctor charged 20% less than another doctor, woudn’t you wonder why? Are you sure you would want to go to him?
    Of course, most of the time someone else (an insurer) is paying the bill (or most of it) making patients less price-senstive.
    But even if you were paying out of pocket, you probably would want “the best” care rather than the cheapest care. Keep in mind that 75% of our health care dollars are spent when we are very sick.

  10. AC–
    Let me add that some states have tried to promote greater price transparency.
    I believe that in California hospitals are required to advertise average prices for the 25 most common procedures.
    And under the Affordable Care Act all hospitals will be displaying “average prices”
    But this is of limited value. The “average” price includes what Medicaid and Medicare pay, averaged in with what various private insurers pay. (How much they pay depends on how much leverage they have in the marketplace.) The “average” doesn’t tell you what you will pay.
    Secondly, these prices don’t reflect doctors’ fees– just hospital fees.
    Ken Terry has a good recent article about all of this on BNET.

  11. Maggie,
    Regarding the doctor fees, I was referring more to the regular doctor visits. I’m not asking them to disclose their negotiated rates with the different insurance companies, but rather their regular prices and the discount they offer to the uninsured, if any.
    It’s a simple schedule really and it surely would not take much effort to do it. They could just follow the existing regular CPT codes which are no more than 10 for new and existing patient visits. In fact, all offices have this list developed but they just don’t want to post it which makes no sense whatsoever.
    The health industry is the only one allowed to function in complete secrecy. How many times do we go to a restaurant, order a meal without knowing how much it would cost, and get a hugely inflated bill at the end, listing a fee for each ingredient (priced at several times its market value), then a fee for each step in cooking the food, then fees for electricity, accounting, personnel wages, building, etc. This is how hospitals currently charge the uninsured. Then they offer a “discount” of usually 35%. Never mind the fact that insurance companies pay between 14% (for an ER visit) to 21% (for DRG 246 – PTCA procedure with 2 drug stents). I’ve seen fees at an outpatient facility for a lipid panel, hepatic panel plus A1c for $888 (rack fee) and the insurance company paid $29.25 (3.3%). It’s completely insane.
    I know the system is set up like this for a reason. Of course everybody knows that someone who can’t afford health insurance and makes even $50k per year could not afford to pay tens of thousands of dollars. But hospitals do this because they get reimbursed for their “uncompensated” care, which by the way has nothing to do with cost (the called cost-to-charge ratio).
    I agree that the “average” has no value. This is another industry diversion to say they are “transparent” when they’re actually not. They need to advertise the rack fees for most common procedures, packaged just like they do it for any other payer (Medicare, Medicaid and insurance companies) by episode or case. There are a few states that now advertise the charge masters but everything is done piece meal, so unless you work in medical coding or you are a provider, you couldn’t put together the price for a specific procedure (see Arizona state). These prices should also reflect the actual cost plus an x% margin. Currently the price has nothing to do with the actual cost for any of these services. For example, a CMP at the hospital could be $467.05, another hospital charged $228, or a third $274. An insurance company would pay no more then $20, while Medicare and Medicaid would pay $14.87 and $13.88 respectively. Some doctor offices charge $20 for a self-paying patient for this test. Then you have another constant offender, the chest x-ray. For this I’ve seen fees like $477 or $504 for ER facilities. We are not talking about the latest breakthrough in medicine as chest x-rays have been performed for over 100 years.
    Insurance companies don’t even pay for these tests; they negotiate a discount from the ER “room” fee and that’s it. That is how they keep the cost down to only 14%.
    So unless they use some special, super-expensive reagents or devices, which of course is not the case, how can they justify these prices?
    Further, hospitals (and other providers) should have clear and reasonable policies for uninsured patients. Why should the self-paying patients have to pay 65% of the rack fees when everyone else pays up to 28% top? I’ve seen some “charity” policies where they offer to wave the fees for those with an income of up to 200% of the federal poverty level ($21,780 for 1 person). So if I have an annual gross income of $30k, I should then be able to pay $62,154 for a 2-day hospitalization? This would be the fee with a 35% discount for a PTCA procedure with 2 stents at a rack fee of $95,621. The insurance paid $20,699 or 21.6%. Medicare pays on average $15,699 (national number) for a similar procedure of up to 4 stents.
    Another myth from the industry is that they can’t tell a patient the prices in advance because they can’t foresee the exact treatment, but they do have care/episode packages for everyone else.
    More and more people are becoming uninsured or underinsured. I know the official number of uninsured was 50.7 million, but this is most likely on the low end because more people are loosing their jobs and more and more employers are hiring contractors with no benefits. Then the underinsured were estimated at 25 million but we’re hearing the number of “consumer-driven” plans are increasing. These people represent a significant percentage of the US population. They shop or they would like to shop if they could.
    More expensive does not necessarily mean better and more tests doesn’t mean better care. Dr X charges $422 rack fee for a 10-min visit. Dr Y’s fee is $210 for the same 10-min visit and diagnostic. The quality of the service was the same. “The best” is such a relative term when the pool itself is mostly mediocre. Top notch doctors are rare. There are some doctors that are very good but also have reasonable fees and do offer discounts for the uninsured. This doesn’t mean that they are less knowledgeable. It simply means they’re not greedy. Sometimes less is more….
    To give you another example. Let’s say you need to get a mammogram and you have dense breasts. In the US you first go to our PCP who gives you a prescription to get a mammogram. Here you have to get a “diagnostic and digital” mammogram plus an ultrasound. Then you go back to your PCP to get the results because the radiologist doesn’t meet with patients. Then the PCP sends you to a specialist. If you are uninsured, you would spend $100-$125 for the PCP visit, $230 for the mammogram, $189 for the ultrasound, another PCP visit at $100, and then the specialist visit at a minimum $200.
    On the other hand, in Europe you could just go to a radiology place, you take a regular mammogram, meet the radiologist who goes over the results and you’re done. All for $100 tops. The diagnosis is the same in the end. I rather do option 2 not only because of the cost, but also because to me the European doctor is more prepared than the PCP and the radiologist in the US. Is it a matter of making more money, lack of knowledge or both? This is one reason why our system is so expensive compared to everyone else’s. I know that some have used the “defensive medicine” argument, but I believe it has to do more with competence, or lack of, and to be quite blunt, it has a lot to do with money.
    Then there is also the affordability factor. If I am uninsured and I have limited resources, even if a doctor would be that good to justify a premium, if I can’t afford that additional fee I would not be able to go there.
    You mentioned that “75% of our health care dollars are spent when we are very sick.” Sure one’s health should be his/her responsibility. But shouldn’t physicians also guide their patients in the process? If I as a patient have to do the research on medical conditions to include symptoms, tests, therapy, etc, then what do I need a doctor for?
    The US healthcare system is a money-making machine, deluxe healthcare with several tiers:
    The ones with good insurance plans – get care
    The underinsured – may get some care
    Medicaid and Medicare – get care sometimes since they’re at the doctor’s mercy for taking their insurance
    The uninsured – mostly no care
    Anything that has been done so far it’s like putting a band-aid on a patient who needs major surgery. No real change will occur because it’s too much money at stake….

  12. I agree completely with AC: hospital charges are beyond ludicrous. Regulation or legislation is necessary to address this glaring problem.