The wrong prescription for Medicare drug plan

January 05, 2007|By Yong Suh

Since taking effect in January 2006, Medicare Part D has enrolled 22.5 million seniors in 3,873 Part D plans. Despite aggressive price competition among private drug plans yielding premiums 40 percent lower than projected and federal expenditures $76 billion less than expected for 2006 through 2016, Part D has drawn more criticism than praise because of a gap in coverage, dubbed a "doughnut hole," of $2,250 to $5,100 in drug costs.

In response, congressional Democrats have made government negotiation of drug prices under Medicare a key item on their agenda for the first 100 hours. Although this was an easy promise on the campaign trail, government negotiation of drug prices not only could fail to deliver the Democrats' promise to close the "doughnut hole" but also might stifle new drug discovery and harm multiple sectors of the economy.

According to an October report for Rep. Henry A. Waxman, a California Democrat, the average current Medicare beneficiary will use $2,500 worth of drugs, thus falling into the doughnut hole, and incur $1,081 in out-of-pocket costs. The report argues that government negotiation of drug prices would lower out-of-pocket drug costs to $660 per beneficiary, saving them $421 annually. The estimated savings narrow but do not close the doughnut hole and are based on the assumption that the government could negotiate a 25 percent reduction in prices. Proponents cite the Department of Veterans Affairs, which enjoys drug price discounts of 24 percent or more, and Medicaid's best-price rebates as working examples of how the government has successfully negotiated drug prices.

What is omitted from these discussions is that the government "negotiated" VA discounts by threatening to deny market access to Medicaid and Medicare if the drug companies did not accept the VA's terms, and that "best-price" requirements for Medicaid caused a reduction in discounts that private insurers had received, thus raising prices for many drugs on the market.

The government would make a poor negotiator compared with private-sector pharmacy benefit managers that have negotiated drug prices for two decades. Medicare lacks the infrastructure, a working formulary of drugs, the experience and the management capabilities necessary to compete against PBMs in negotiating drug prices. Furthermore, with 41 million enrollees, Medicare has less market clout than certain large PBMs. The only way that Medicare could even hope to achieve the goal that the Democrats have set would be for the government to resort to noncompetitive practices and dictate rather than negotiate prices.

Such a move would not be unprecedented for Medicare, despite a noninterference clause prohibiting the government from regulating activities of the medical establishment. Medicare Part A reimbursement rates for hospital services became regulated in 1983, followed 10 years later by Part B reimbursement rates for physicians. What sets Part D apart, however, is that drug companies are in the business of innovation and incur considerable research-and-development expenditures. Government regulation of drug prices would severely strain the R&D capabilities of the pharmaceutical industry.

Unlike manufacturing costs, which are easily covered by sales, R&D expenditures can exceed $800 million for a new drug and often cannot even begin to be recovered until 12 or more years after initial discovery, when the drug is on the market. And with only one out of 5,000 to 10,000 screened compounds eventually gaining approval, drug companies are often left to play the odds. A Manhattan Institute analysis of real drug prices from 1960 to 2001 indicates that government influence on drug prices has eliminated approximately 140 million life years and $188 billion in potential R&D investments. The cost to the U.S. economy in deaths, lost productivity, job losses, devaluation of investments, and revenues forgone in associated industries could be in the tens of trillions of dollars.

With U.S. health care expenditures exceeding 16 percent of gross domestic product, health care should be a priority on the domestic agenda. But Congress must devise a more thoughtful and effective solution than the Democrats' proposal. Ideas might include: eliminating tax breaks for activities counterproductive to drug discovery; limiting litigation losses to a reasonable and fair level; increasing the efficiency of regulatory and post-approval processes; facilitating the genericization of drugs and increasing generic drug usage; defending the intellectual property of U.S. drug companies abroad; and weighing the benefits of standard-deductible vs. doughnut-hole-deductible plans.

Savings resulting from these reforms could be used to close the premium gap for full coverage to eliminate the doughnut hole, currently estimated to be $458 per person. Closing the premium gap to full coverage would be more effective than the government dictating lower prices to reduce out-of-pocket costs. Government "negotiated" cuts in drug prices might produce some relief in the short term but would hurt future seniors and the economy in the long term as we bleed from the cuts in R&D investments and feel the thirst of the drying pipeline.

Yong Suh, a former Marshall Scholar in biomedical research at Oxford University, works in the finance industry. His e-mail is yongsuh@yahoo.com.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.