HHS price negotiations for the Medicare drug benefit would not yield greater savings than health plans will be able to secure because the government would be unlikely to use its negotiating power forcefully enough, Centers for Medicare & Medicaid Services Chief Actuary Richard Foster says.

"We do not believe that the current Administration or future ones would be willing and able to impose price concessions that significantly exceed those that can be achieved in a competitive market," Foster said in a Feb. 11 ¹ memo to CMS Administrator Mark McClellan.

"The Secretary's ability to achieve price reductions would depend on the federal government's willingness to use its large-purchaser power in a forceful way."

The Medicare Modernization Act's "non-interference" clause bars HHS from negotiating prices for the drug benefit with pharmaceutical manufacturers.

Foster's memo compares the effectiveness of drug price negotiations by the government to that of private drug plans. The document is one response to "a broad range of inquiries...to make sure we're implementing the drug benefit as effectively as possible," McClellan said during a briefing Feb. 16.

HHS price negotiations would threaten beneficiary access to a broad range of drugs, Foster's memo states.

McClellan cited the Department of Veterans Affairs' health care system as an example of the trade-off between prices and access. The VA "is a closed system where the government not only provides the drug benefit, but also provides the hospital care [and] employs the physicians," he said.

"In addition to having this very different structure," the VA "also has some significant limitations on which drugs it covers," McClellan said. "Medicare works with a private system of health care providers where people have a very broad range of choices of doctors and hospitals....They expect broad access to the prescription drugs that they need as well."

The Bush Administration's recent disclosure that it expects to pay more than $1 trillion for the Medicare drug benefit through 2015 has revived criticism on Capitol Hill about the program's costs and prompted calls to reform the law (² Also see "Medicare Drug Spending Expected To Surpass Total Current Rx Sales By 2014" - Pink Sheet, 14 February, 2005., p. 25).

Sen. Edward Kennedy (D-Mass.) and Rep. Henry Waxman (D-Calif.) renewed the call for giving HHS drug price negotiating authority in a Feb. 15 letter to President Bush.

"One simple change will both reduce the costs of the new law and benefit Medicare beneficiaries - and that is to give the Secretary of Health & Human Services the authority to negotiate," the letter states.

Kennedy and Waxman predict that HHS negotiating authority would save $190 bil. over 10 years, an amount they maintain would be sufficient to eliminate the "donut hole" coverage gap. That figure assumes VA-level savings of 45% on drugs, as opposed to the 20% cost management factor used by the Congressional Budget Office for the current benefit.

McClellan refuted the notion that HHS negotiation would save $190 bil. "This is serious business, and we need serious numbers guiding our action," the CMS administrator said. "We need to rely on careful, thoughtful independent actuarial analyses to guide our policies."

CMS projects that Medicare prescription drug plans will initially achieve average savings of 15% off of retail, unmanaged drug costs. The agency expects that figure to increase to 25% over five years.

"The ultimate savings level of 25% has frequently been achieved...by pharmacy benefit managers on behalf of large drug insurance plans," Foster's memo states. One of the "big three" PBMs, Medco, says it expects to achieve savings under Part D that are "comparable" to what it can secure in the private insurance market.

The memo cites the Medicare Part B program as an example of unsuccessful government price negotiations. "The past experience of Congress and the Medicare program in regulating drug prices has not been reassuring," the memo states. Prior to the MMA, Part B drugs "were reimbursed at rates that, in many instances, were substantially greater than prevailing price levels."

In addition, government-set prices would eliminate a major source of competition between PDPs, Foster said.

HHS Price Negotiation Under Medicare Rx Would Not Beat PBM Prices – CMS

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