Because of considerable uncertainty that cost cutting will achieve substantial savings, the new administration will be looking
hard for strategies that reduce outlays for prescription drugs. A prime candidate for elimination is the Medicare "noninterference
clause," a controversial policy that prevents the secretary of the US Department of Health and Human Services (HHS) from directly
negotiating payments for drugs covered by Medicare Prescription Drug Plans (PDPs).
The Part D program relies on private insurers to hold down program costs by seeking low drug prices from pharmaceutical companies.
The Centers for Medicare and Medicaid Services (CMS) announced that Medicare spending on drugs totaled $44 billion for fiscal
year 2008, much less than the $74 billion originally predicted. However, PDPs pay more for drugs than federal healthcare programs
provided by the Veterans Administration and the US Department of Defense, among others, which can use federal supply-schedule
rates. And state-administered Medicaid programs reduce outlays for drugs by collecting additional rebates from manufacturers.
A first order of business for many Democrats is to simplify and centralize the Part D program. Pharmaceutical manufacturers
strongly supported a decentralized structure for Part D to avoid creating a central Medicare formulary that would provide
a coverage and cost model for the broader healthcare market. PDPs have crafted drug-coverage programs to fit federal standards
as well as corporate business goals, and differences between PDP formulary preferences, copayments, and premiums have generated
competition and cost variation. The program has kept down overall costs, but it also is confusing to seniors.
Eliminating the curb on direct HHS price negotiations could reduce manufacturer revenues by roughly $10 to $30 billion, according
to the Boston Consulting Group, depending on the extent to which private insurers and pharmacy benefit managers demand the
same low price set by Medicare. The actual effect of allowing government "interference" in price negotiations is unclear,
though. It is difficult to negotiate lower prices for drugs if no therapeutic alternatives exist. It's also hard to negotiate
discounts for products in classes for which Medicare requires coverage of all medicines. Manufacturers may be reluctant to
accept a low price that they know will become the norm for the broader market. At the same time, it will be difficult for
a pharmaceutical company to refuse to sell a product to the vast Medicare population.
Another strategy for curbing Medicare drug spending is to require manufacturers to pay rebates to CMS. Such a mandate could
start with rebates on outlays for drugs provided to dual-eligible seniors (i.e., low-income individuals who previously obtained
drug coverage from state Medicaid plans). Switching these patients to Medicare Part D reduced manufacturer Medicaid rebates
considerably and boosted industry revenues. Some Congressional leaders are determined to reverse that trend.
Another way to reduce drug prices that wins support from both Democrats and Republicans is to make it easier to reimport medicines
from other countries. Obama makes the usual proviso that the products coming in must be safe and effective. But taking steps
to ensure drug quality inevitably eats into potential savings. Several state and local drug-import programs have been dropped
because of high costs and low consumer interest, and establishing drug coverage for seniors has removed a major pool of customers
for reimport programs.
Moreover, recent scandals about contaminated heparin from China and manufacturing-quality problems with generic drugs from
India are making lawmakers more hesitant to open the gates too wide to less-regulated imports. Obama advisers have acknowledged
that enthusiasm for reimporting has declined since the heparin incident.
Making generic drugs more readily available to patients and payers might be a more palatable measure for reformers. At the
annual meeting of the Generic Pharmaceutical Association in September 2008, Obama's health-policy adviser Dora Hughes said
that eliminating barriers to generic drug use should be central to health reform efforts. Hughes voiced support for curbing
reverse-payment agreements and backed legislation that would allow the US Food and Drug Administration to approve generic
versions of biosimilar products. A market-exclusivity period for brand-name biotechnology therapies, she noted, should be
much shorter than the 14 years advocated by the biotechnology industry.
Although savings from many of these cost-cutting policies may be elusive, the reforms are likely to be championed by Congress
and the new administration. Political leaders believe that tightening the rules will allow HHS to ratchet down outlays to
Big Pharma and to curb waste and abuse. The prospect of gaining $60 billion in savings is much too attractive for anyone to
pass up in these cash-strapped times.