It is perhaps a self-fulfilling prophecy that American problems require uniquely American solutions. As a solution to the lack of outpatient prescription drug coverage for the over 65s and disabled, Medicare Part D is unarguably unique. It’s also expensive, complex and awash with perverse incentives. But it is well established, and efforts to introduce greater efficiency, simplicity, fairness and rationality have to be pragmatic.

The idea of a Medicare-run plan is an option founded in pragmatism. It adheres to the original competitive framework and maintains choice for beneficiaries. At the same time it has the potential to simplify the choices and significantly reduce costs. Of course it’s not a new idea; the Medicare Modernization Act provided for plans run by the Centers for Medicare and Medicaid Services (CMS) in the event private plans failed to show up for business in any given Part D region. But – combined with redoubled efforts towards removing the prohibition on Government involvement in drug price negotiations – it’s now getting renewed traction.

A recent Medicare Rights Center paper proposing the establishment of a CMS run plan coincided with the release of draft Senate and House bills providing for the establishment of one or more national, Medicare-operated standalone prescription drug plans to compete with the private plans operating under Part D, offering standard national monthly premiums. In a perfect storm, these also coincided with the release of a Report from the Committee on Oversight and Government Reform showing just how poorly Part D plans are doing by their beneficiaries. In the recently released Nov/Dec issue of Health Affairs, we discuss the issues surrounding setting up a CMS-run plan, and how such a mechanism might provide a transition to a more rational and sustainable drug benefit in the longer term.

Critical to the potential success of a Medicare-run plan’s price negotiations is the concept of a standard national formulary. This represents a significant evolution since the earlier S3 and HR4 bills, which specifically precluded the establishment of a formulary. As drafted the current bills require the Secretary to establish a formulary to “increase patient safety; increase appropriate use and reduce inappropriate use of drugs; and reward value.” Not surprisingly perhaps, value is not defined; nor for that matter, is reward. Moreover when considering which drugs to include in the formulary the Secretary is required to consider clinical benefit and price, but the consideration of price is limited to considerations of drugs with the same or lower cost and offering the same or greater clinical benefit than other drugs. The bills are very loudly silent on the consideration of drugs that offer increased benefit but at increased cost, thus precluding any application of incremental cost effectiveness analysis.

In determining which drugs are included in the formulary the Secretary of Health and Human Services (HHS) will seek recommendations from the Agency for Healthcare Research and Quality (AHRQ), which in turn will be required to take into account, among other things, available evidence of clinical effectiveness, comparative effectiveness, safety, and enhanced compliance, and which may include evaluations conducted by the Drug Effectiveness Review Project (DERP) and the Department of Veterans Affairs (VA). But strangely, the Secretary may only consider within-class (and not between-class) comparisons (with the classes as defined by the US Pharmacopeia).

What is perhaps most interesting about the bills is what’s not in them. The text not only falls short of mandating comparative data but specifies that the comparative data of interest are only within-class comparisons. The HHS Secretary is given no guidance for considering first-in-class drugs, which simply by offering a different mechanism of action may not only be no more effective than existing drugs for a condition, but may indeed be less effective, and will always be more expensive. There is also no guidance about adding to the formulary drugs that offer additional benefit at additional cost. Does every drug representing a modest additional benefit automatically meet the test of medical necessity?

The bills also require the Secretary to appoint an advisory committee to review “petitions from drug manufacturers” and other interested parties, including patient groups, for additions or alterations to the formulary, and to recommend any changes to the formulary, including recommendations based on within class comparisons. Laudably the advisory committee may not consider an application unless accompanied by “raw data from clinical trials on the safety and effectiveness of the drug”, but this would seem to rule out successful petitions from any entity other than a drug company. Also required are “any data from clinical trials conducted using active controls on the drug or drugs that are the current standard of care” and “any available data on comparative effectiveness of the drug.” Of course these data may not exist.

It’s worth noting that not only is the Secretary not obliged to accept the recommendations of the advisory committee, he is not precluded from adding to the formulary a drug that neither the Director of AHRQ nor the advisory committee has recommended. At the same time the bill doesn’t frame any criteria for the Secretary to apply such broad discretion.

With that in mind it’s interesting to consider a wild card that is unlikely to have floated into the consciousness of the legislators. If Medicare establishes its own plan and formulary, then the formulary processes will be subject to the transparency provisions of the Pharmaceuticals Annex of Chapter 2 of the Australia US Free Trade Agreement. While these provisions were crafted to exclude most US programs (by specifying that they apply only to federal pharmaceutical reimbursement programs – thereby excluding Medicaid and procurement programs like the VA), a Medicare-run Part D plan would be well within scope.

The trade agreement provisions include requirements to disclose procedural rules and guidelines for formulary additions and to provide detailed written information to applicants regarding the basis for formulary listing decisions. This would conceivably apply to the recommendations of the AHRQ and the advisory committee as well as the decisions of the HHS Secretary. The text also requires written information to be provided the public regarding the reasons for the addition of a drug to (or exclusion of a drug from) the formulary, as well as the establishment of an independent review process for applicants whose formulary listing applications have been rejected (as distinct from an appeals process for beneficiaries).

So the broad discretion of the Secretary would be accompanied by a requirement for transparent decision-making. Rather than perceiving transparency as a constraint, Congress would do well to extend these obligations to the private plans and use this as an opportunity to bring some much needed transparency to the entire program.