Editorial Board

For Medicare Savings, Send a Negotiator to the Pharmacy: View

President Barack Obama has his eye on Medicare’s prescription-drug program as one place to find significant savings in the federal budget.

It’s a big target, given that the price tag is expected to reach $68 billion this year, rising to $175 billion by 2021. A new federal report comparing Medicare with Medicaid demonstrates there’s ample room for savings.

Medicaid gets much larger rebates from drugmakers than Medicare does, according to the report. Looking at 100 brand-name medicines that cost Medicare the most in 2009, the inspector general for the Department of Health and Human Services found that the median rebate to states for Medicaid payments for these medicines was three times the size of rebates to Medicare. For 68 of these drugs, Medicaid’s rebate was at least twice as large as Medicare’s.

Why can’t Medicare mandate rebates as Medicaid does? Because in creating Medicare’s Part D prescription-drug program in 2003, Congress expressly forbade it. Medicare gets back only as much as can be negotiated by the private insurers that contract with the program. And their negotiating power is limited, because they lack the authority to restrict the list of medicines they cover. It’s difficult to bring drugmakers to the bargaining table unless they are presented with the choice of lowering their prices or seeing their medicines dropped from the formulary.

Rebates Required

For Medicaid, in contrast, federal regulations require that pharmaceutical companies pay rebates on drugs amounting to at least 23 percent of the average wholesale price (on drugs distributed to retail pharmacies) -- plus an additional amount if the drug’s cost has risen faster than consumer prices have.

Because Medicare cannot demand such rebates, it should at least be able negotiate drug prices. This would be the ideal way for Medicare to keep prices low. After all, with 35 million beneficiaries in the Part D program, Medicare is essentially one of the world’s largest retail drug buyers. Like any big purchaser in the private sector, it should be able to negotiate healthy discounts.

Such bargaining works for the Department of Veterans Affairs. The VA buys drugs at prices 40 percent lower than those paid by Part D plans, according to Austin Frakt, a health economist at Boston University, who has compared the two agencies’ drug-buying strategies.

But an important reason the VA negotiates so effectively is that it restricts the list of drugs it recommends to patients. The VA’s formulary includes only 59 percent of the top 200 drugs, while Medicare’s prescription-drug plans cover, on average, 85 percent of them.

Little Bargaining Power

Without a more restricted formulary, Medicare doesn’t have the bargaining power to get its prices as low as the VA’s. And even though the VA has demonstrated that its limited formulary works well -- its patients do not go without the drug treatment they need -- both the powerful drug-industry lobby and Medicare recipients are opposed to restricting the drugs available through Medicare Part D.

There is another way to save Medicare money on drugs -- one whose political prospects, while not rosy, are at least in the realm of the possible. That is to require drugmaker rebates for medicines prescribed to people known as dual-eligibles.

These are the 9 million elderly or disabled people on Medicare who also qualify for Medicaid. Dual-eligibles are extraordinarily poor. In 2007, 57 percent of them had annual incomes of less than $10,000, and only 6 percent had incomes higher than $20,000. They are also among the sickest people covered by either program: Although they represent only 15 percent of people on Medicaid and 21 percent of those on Medicare, the dual-eligibles account for more than 35 percent of expenditures in both programs.

Until 2006, Medicaid covered the prescription drugs for dual-eligibles, and its big rebates came into play. But starting in 2006, these beneficiaries were switched to Medicare Part D. That change could essentially be undone.

Senator Jay Rockefeller of West Virginia is proposing that drugmakers provide Medicaid-level rebates for drugs dispensed through Medicare Part D to all beneficiaries who are dual-eligibles or qualify for a low-income subsidy. The Congressional Budget Office has said such a change could save Medicare $112 billion over the next 10 years.

That, at least, would be a significant start toward reducing the budget deficit and closing the unnecessary gap between Medicare and Medicaid on drug payments.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.

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