The US Senate is debating a bill which proposes to allow the government to negotiate directly with drug developers over prices for Medicare Part D drugs. Although designed to reduce patients’ costs, a recent study indicated that government negotiation would bring only negligible savings in the absence of additional cost containment tool implementation, as Datamonitor’s Dr Mark Belsey discovers…

Following the introduction of Part D in January 2006, Medicare patients were provided with extensive access to out-patient drugs for the first time. However, the cost of the program to both the government and patients has been controversial from the outset, primarily because of the government's decision to contract out the plan to private healthcare insurance providers. As a result, there has been significant debate over possible ways to reduce costs, including one suggestion to allow the government to directly negotiate with drug developers over the drug price.

Last week, the Senate Finance Committee approved a bill (S3) introduced by the Committee chairman, Senator Baucus, which abolishes the Medicare Modernization Act (MMA)'s outright ban preventing the Department of Health and Human Services (HHS) Secretary from directly negotiating with drug developers on drug prices. The bill proposes that the secretary be allowed to negotiate, and as such, it is less strongly worded than a bill passed in January by the US House of Representatives (HR4), which specifically requires negotiation. These bills were introduced on the basis that direct negotiation between the government and pharmaceutical companies would drive down the cost of drug prices, given the significant potential bargaining power exerted by Part D.

Allowing government negotiation is a high-profile issue: since gaining majorities in the House of Representatives and the Senate, the Democrats have made it a key issue, and they are supported by significant lobbying from bodies such as the powerful seniors' advocacy group, the AARP. Furthermore, a Kaiser Family Foundation survey addressing seniors' experiences of Part D published in December 2006 indicated that the leading change to the program proposed by the seniors interviewed would be to allow government drug price negotiation. Supporters of the measure point to the significant discounts leveraged by the Department for Veterans Affairs (VA) and other governmental departments.

Conversely, those who are against direct government negotiation believe that the considerable experience in both patient management and in brokering favorable deals yielded by private insurance companies is helping to drive costs down, and that consolidation within the Part D plan providers has supplied the dominant companies with considerable leverage. Supporting this argument is a recent Congressional Budget Office (CBO) study commissioned by the Senate Finance Committee, which indicated that cost savings would be negligible unless accompanied by cost containment tools designed to reduce drug prices. Furthermore, the current HHS Secretary Mike Leavitt has indicated that he would be unwilling to negotiate, even if he was allowed to.

Nevertheless, without concrete evidence proving that negotiation is not effective in cost containment, it is likely that it will continue to be pushed. It is therefore interesting that S3 includes proposals to allow Congressional support agencies such as the CBO to access data on the rebates, discounts and other price concessions that are negotiated. Analysis of this data would then be fed back to Congress and the HHS, providing information on issues such as the impact on drug prices following negotiation.

The government's primary objective with Part D so far has been high levels of enrollment. However, over the longer term, rising costs of the program will mean that cost containment is increasingly prioritized. As such, there is likely to be increasing pressure to allow measures such as government negotiation. Dialogue on S3 is contributing to the significant debate over whether such measures are likely to be effective, and the issue is unlikely to be settled without evidence of the success of such measures. As such, S3 provisions to allow greater transparency on negotiated prices will help to establish a feedback loop to monitor this effectiveness.

However, Datamonitor believes that without the use of additional cost containment tools, the introduction of government negotiation is unlikely to have a significant impact on overall drug prices, and may actually lead to reductions in other government-negotiated drug discount programs, such as the VA discounts.


Related research:

 Pricing & Reimbursement Series: Medicare Part D's progress so far
 Medicare Part D - Its impact on US drug pricing issues and role as a driver towards European style pricing mechanisms
 Pricing and Reimbursement in the US: Innovation and robust pharmacoeconomic analysis are key