Since before his election, President Trump has been floating the idea of using the bargaining power of the federal government to negotiate better deals for the Medicare prescription drug program. Every few weeks this theme reappears, as the Business Insider recently highlighted. But to date, Trump has been all talk.
Things may be changing soon, though, as evidenced by three tidbits recently reported. First, in mid-March, Trump met with Representatives Elijah Cummings and Peter Welch to discuss lowering prescription drug prices. At the meeting, the Congressmen reportedly shared with Trump a draft of the Medicare Prescription Price Negotiation Act of 2017, which, among other things, allows the government to negotiate drug prices on behalf of Medicare.
A second tell came two weeks later when Trump spoke with the Congressional Black Caucus and discussed his meeting with Rep. Cummings, stating: “But we’re going to bid on drug prices, and we’re going to try and have the lowest prices anywhere in the world, from really the highest.”
Then last week, in the middle Secretary of Health and Human Services Tom Price’s testimony before a House subcommittee, a third snippet showed that Trump is now moving forward on his campaign promise. Amid the beltway posturing, one revealing scrap leaked out: when Wisconsin Congressman Mark Pocan (D) raised the issue of prescription drug prices and asked what HHS was doing from the standpoint of negotiating drug prices, Secretary Tom Price explained that they were in the process of formulating a strategy with the White House to address that issue. (Clip starts at 1:14-1:15:20)
If Trump Follows Through, He May Fail
Together, these signs all point to the Trump administration announcing, in the near term, a specific legislative proposal to combat the escalating price of pharmaceuticals. However, if Trump follows through on his earlier bravado and pushes for government-led negotiation of Medicare drug prices, he is setting himself up for a second health care-related legislative failure. And he won’t have the Freedom Caucus or pharmaceutical lobby to blame. Such legislation will be D.O.A. thanks to the Senior Lobby.
But before we go there, let’s do a brief recap. When Congress added prescription drug coverage to Medicare in 2003, it included a statutory provision—called the non-interference provision—barring the government from negotiating with pharmaceutical companies over the price of drugs covered by Medicare Part D. In decrying the high price of prescription drugs, Trump and other politicians regularly sell a reversal of this law as a panacea to the problem. But it isn’t.
As the Congressional Budget Office concluded in its analysis of the proposed Medicare Prescription Drug Price Negotiation Act of 2007, allowing negotiation over Medicare drug prices “would have a negligible effect on direct spending.” According to the CBO, the cost benefit in 2008 would have been $2 million, and then less than $500,000 annually in subsequent years.
Government Can’t Negotiate Better Than Private Insurers
There are two main reasons why any savings would be “negligible.” First, contrary to the impression created by Trump (and other politicians) that drug companies “are getting away with murder,” much negotiation already takes place in the Medicare Part D pricing—it is just done by the insurance companies which manage the plans, and not the government.
Just as insurance companies do when managing private health care policies, insurers offering Medicare Part D plans maintain “formularies” of covered drugs and bargain annually with pharmaceutical companies on prices. If the pharmaceutical company does not provide an attractive enough price, its drug won’t be listed on the formulary or covered by the insurance policy. This threat provides a strong incentive for drug companies to negotiate fair prices. And, as the CBO recognized, it is unlikely the government could negotiate prices more favorable than those obtained by the private insurers.
To Offer Better Prices, Medicare Needs To Exclude Drugs
In response, proponents of federalizing the negotiation process claim that the government can leverage its purchasing power for Medicare, just as it has for the Veterans Administration, and thereby save substantial sums of money. After all, they argue, the Veterans Administration pays 40 percent less for prescription drugs than Medicare plans do.
But here’s the rub—and the second reason the promised savings will not materialize: the VA pays less for prescription drugs because it tightly restricts the medications available to veterans. According to a paper published in the journal Health Economics and discussed in detail in the L.A. Times, “The VA’s national formulary covers 59% of the top 200 drugs while Medicare [Prescription Drug Plans] cover between 68% and 93% of those drugs, averaging about 85% covered.”
Further, as it now stands, the federal government cannot—even if it wanted to—tighten its formulary of available drugs for Medicare recipients because under federal law:
“[A] minimum of two drugs in each class must be included on formularies and six classes must include ‘all or substantially all’ drugs on the market. Because of this, providing Medicare the authority to negotiate directly with manufacturers would not lead to price reductions on its own. To achieve savings, Medicare or its participating plans would also need the ability to exclude drugs from its formulary. This ability to tighten formularies would provide the leverage to bargain for lower prices.”
Influential Seniors Deeply Dislike This Idea
So to achieve the promised cost savings, Congress cannot merely authorize the Secretary of Health and Humans Services to negotiate drug prices—it would also need to grant the Secretary greater authority to exclude drugs from coverage. But such a change would come at a high cost to seniors: To make the kind of deals we’re seeing at the VA, the government would need to reduce the number of covered drugs by as much as 34 percent.
While over 80 percent of respondents favor allowing the federal government to negotiate with drug companies, the Senior Lobby will not tolerate any reduction in benefits. And according to the CBO, without a tighter drug formulary, the federal government lacks the bargaining power necessary to leverage lower prices:
CBO estimates that modifying the noninterference provision would have a negligible effect on federal spending because we anticipate that under the bill the Secretary would lack the leverage to negotiate prices across the broad range of covered Part D drugs that are more favorable than those obtained by PDPs under current law. Without the authority to establish a formulary or other tools to reduce drug prices, we believe that the Secretary would not obtain significant discounts from drug manufacturers across a broad range of drugs.
Thus, it will be our senior citizens who thwart a plan to install government-based negotiation in the Medicare Part D drug benefits program—not the Freedom Caucus or pharmaceutical lobby. But because the press and liberal (and moderate) politicians have found such an easy target in conservatives and the drug companies, they have ignored the true resistance to such legislation.
Seniors’ most recognizable face, AARP, is playing this misdirection symphonically. In its recently issued Medicare Special Report, CEO Jo Ann Jenkins assures its members: “AARP will flatly oppose any attempts to cut, scale back or diminish Medicare’s benefits. This includes any efforts to eliminate the guaranteed level of coverage that has been part of Medicare from the start.”
But then the AARP CEO disingenuously adds that it “will work to find sensible solutions” that reduce costs by, for instance, “allowing Medicare to negotiate lower drug prices.” But that cannot be done—at least no more than negligibly—absent a reduction in the benefits seniors currently receive in the form of wide-range access to the entire class of drugs for certain conditions.
How to Ditch Talking Points and Actually Bring Costs Down
If the president and politicians were truly concerned with solving the program, they would ditch the talking points, which misrepresent the pricing practices under Medicare, and instead focus on what is needed to bring costs down.
What is needed is not government negotiation, but more freedom for the private Plan D insurance providers to create drug formularies. While such a change will necessarily come at a cost to seniors—in the form of fewer choices—further reductions in the formularies seem appropriate. One reason to think so? Medicare plans cover approximately 3 percent more drugs than covered by the very generous health care plans provided to federal employees.
Whether (and how much of) a tightening of the Plan D drug formulary makes sense is the discussion we should be having. Instead, we’re talking about the government leveraging its buying power to reduce the price of pharmaceuticals. When it comes to Medicare Part D, negotiating better deals just isn’t going to cut it.