Negotiating prices

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.

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.

More imports?

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.