October 20 Update

In our post below, we discussed the political and empirical obstacles to a congressional repeal of the ban on Medicare’s negotiating on prescription drugs. As an example of a pilot project that could generate data and be initiated without congressional action, we referenced CMS’s proposed pilot on value-based drug purchasing in Medicare Part B. (While most prescription drugs covered by Medicare are managed in Part D, certain drugs, such as those administered via infusion by physicians, are managed in Part B.)

Recent events prove our point about the extremely complex and obstructive politics of drug-pricing reform. The Part B pilot has continued to receive significant backlash funded by the pharmaceutical industry and has resulted in increased Congressional scrutiny of CMMI’s activities. House Republicans have even introduced a bill (H.R. 5122) to prohibit further action on the proposed Part B pilot, even though CBO estimates that blocking the project would cost $395 million in direct spending over the next 10 years.

However, H.R. 5122 is unlikely to pass, in which case CMS will likely move forward with a narrower but potentially transformative proposal on Part B drug prices. Action on Part D will probably follow a similar pattern and will require pilots that over time build the kind of strong evidence for value-based drug pricing or other reforms that will finally bust the gridlock.

Original Post

Despite this election season’s divisiveness, both major parties’ presidential candidates have embraced the idea of authorizing Medicare Part D to negotiate directly with drug companies to set prescription drug prices. The Medicare Modernization Act of 2003 (MMA), which established Medicare Part D, included a ban on such negotiation. In theory, if the Centers for Medicare and Medicaid Services (CMS) could negotiate with pharmaceutical companies, the agency could leverage its purchasing power to pay less for drugs. The idea has received considerable media attention over the past few months and has broad public support, reflected in a recent poll showing 87 percent of Americans have a favorable view of the idea.

Nevertheless, if history is any guide, politics may prevent a full repeal of the ban. It took almost 40 years to add a prescription-drug benefit to Medicare — a fact that may be surprising given how much seniors spend on pharmaceuticals. A coalition of stakeholders, including the pharmaceutical industry, helped defeat President Bill Clinton’s failed effort at health reform, and President Obama is said to have learned from that experience. President Obama secured the support of the drug industry early in the process of enacting the Affordable Care Act (ACA), so it may not be a surprise that the ACA does not do much to address drug pricing. The political process has continued to stymie more recent efforts to make even modest changes in this direction. The candidates’ promises to repeal the ban may therefore be difficult to keep.

Moreover, even if a repeal were possible, it is uncertain whether repealing the ban would be effective in lowering spending on Part D drugs. Despite the idea’s widespread support and the debate it has spurred among health policy analysts, because the proposal is untested, evidence of its efficacy is limited. This post sets out some of the political and legal history of the ban in order to explain why, once the high-minded talk of election season concludes, repeal may be unrealistic, or even unwise. We conclude with some ideas for proceeding in a more incremental and evidence-based fashion — a tried and true process of achieving health reform in the face of entrenched interests.

The Political and Legal History Behind the Ban on Negotiating Drug Prices

Allowing Part D to negotiate drug prices is not a new idea: President Obama supported the repeal during his 2008 campaign and has included versions of the proposal in multiple budgets. Meanwhile, other government programs that purchase drugs have been able to lower drug costs through a variety of tactics. Medicaid prices are set by law at the lower end of a discounted price or the lowest price anyone is able to negotiate. The VA negotiates prices, receives mandatory rebates, and maintains a National Drug Formulary.

So why doesn’t Medicare have the ability to control its drug costs? The short answer is politics.

As noted above, from its creation and through Bill Clinton’s presidency, Medicare lacked a prescription-drug benefit. It was not until 2003, under President George W. Bush, that Congress added the Part D benefit, through which Medicare pays for seniors’ prescription drugs. The enactment followed a controversial House roll call vote, which Republicans held open for several hours as party leadership maneuvered to secure enough votes for passage. One bargaining chip to attract market-oriented Republican votes was the so-called “noninterference clause”—a provision drug manufacturers had a major role in writing and getting through Congress—which banned negotiations between Medicare and pharmaceutical companies on drug prices and prevented the government from developing its own formulary or pricing structure. Instead of CMS negotiating on Part D plans’ behalf, prescription drug plans compete for enrollees and negotiate directly with manufacturers.

Part D was progress, but by most accounts it was not enough. Conspicuously absent from President Obama’s signature health reform efforts were any provisions directed at reducing the prices Medicare pays for drugs. The only salient feature of the ACA as it pertains to Part D was the statute’s closing of the “donut hole,” the out-of-pocket amount seniors pay for drugs when their spending exceeds the coverage level but falls short of the catastrophic level at which benefits resume. Closing the donut hole provides more seamless coverage, thereby preventing seniors from having to choose between medication and other needs, but it does not address pricing. Closing the donut hole may actually exacerbate the problem since some patients switched from expensive specialty drugs to generics or stopped taking drugs that may be overused upon reaching the coverage gap.

Congress has taken no action to repeal the ban, and that seems unlikely to change. The pharmaceutical industry’s lobbying efforts topped $231 million last year; indeed, the industry has spent more on lobbying than any other industry since 1998. It seems unlikely that a newly elected President would start his or her administration by reigniting the fight with the pharmaceutical industry that previous presidents, of both parties, have lost.

The existence of other, lesser-known laws on the books further complicates the issue. Any future president will have to deal with these laws for Medicare’s drug price control efforts to be successful. The most significant of these lesser-known legal provisions originated as CMS guidance implementing the MMA and was subsequently made law in the ACA. This provision requires Part D drug plans to give access to all or nearly all drugs on the market in six protected classes—ranging from anti-retroviral drugs to antidepressants—until CMS promulgates a regulation to change the designated classes. Although originally intended to discourage drug plans from discriminating against patients with certain conditions, such as patients with HIV, this restriction has limited drug plans’ negotiating power by reducing their ability not to cover drugs that are priced above their value. These two legal provisions—the ban to help the pharmaceutical industry and the protected classes to help patients—restrict what CMS can do to control drug prices.

Recent attempts to make modest changes reflect the fierceness of the politics around this issue. In 2014, the Department of Health and Human Services (HHS) tried to make progress with the protected-classes provision by proposing to create a process to remove some drugs from the protected list. That effort, a much less radical change than repealing the negotiations ban, floundered due to industry and consumer backlash.

The Contested Merits of Repealing the Ban on Price Negotiation

Rarely have we seen a health policy issue on which there is so much apparent consensus that is backed by so little research. Although it seems intuitive that allowing Medicare to negotiate will produce savings, under both Presidents Obama and George W. Bush, the nonpartisan Congressional Budget Office predicted repealing the ban would result in only minimal savings. One important reason is that Part D actually already has a negotiating mechanism: Medicare piggybacks on private plans’ incentives to reduce prices. Prescription drug plans participating in Part D bid to contract with Medicare and compete for enrollees. In order to offer competitive prices, the plans negotiate directly with drug companies — even though Medicare itself cannot.

The plans are frequently successful when there are competing drugs because the plans can use exclusion of drugs from the formulary or placement of drugs on preferred or non-preferred tiers as leverage to obtain higher rebates and lower net prices. Medicare benefits from those lower drug prices. Thus, it is not clear how much repealing the ban would change things, although it is possible that Medicare could use its scale to negotiate a volume discount for unique drugs that face a less competitive market. To address the high prices of unique drugs, Richard Frank and Joseph Newhouse have suggested the strategy of negotiations followed by binding arbitration if the government and manufacturers cannot agree to a price after a fixed time period.

A different concern, often raised by pharmaceutical companies, is that proposals to give Medicare Part D negotiating power could stifle innovation. Some studies suggest the pharmaceutical and biotech industry increased investments in research and development of drugs for seniors after the passage of Medicare Part D. Since drug development is expensive and an uncertain business, reductions in the potential pay-off of drugs aimed at the senior population could affect companies’ willingness to invest in those drugs.

A complete repeal of the non-interference clause may not be in the immediate future, but there are other ways to implement effective negotiation. One idea in this vein that has shown promise is value-based pricing, sometimes called “pay for performance.” Under this model—which leading industry executives such as former PhRMA President and Merck CEO Kenneth Frazier support—payers and pharmaceutical companies negotiate to link prices for medicines to the actual value achieved. This approach could mitigate concerns about innovation since under this model breakthrough innovations that improve health would receive higher reimbursement than less effective medications.

Practical Politics: Incremental Steps and Pilots in Value-Based Pricing

Some of the most important major policy changes in health care began with pilot programs or experiments in the states. The ACA was inspired by Massachusetts’ health reform law, passed in 2006. The ACA embraces this philosophy of incremental, tested reform. The ACA has created an extraordinary number of pilot programs, and launched the Center for Medicare and Medicaid Innovation (CMMI), whose mission is to test new models. A major benefit to initiating reform through pilot programs is that it can be done administratively — through CMS, acting without Congress and federal legislation. In other words, the evidence base can be constructed without worrying about the politics of congressional gridlock.

It seems likely that embracing the ACA’s philosophy of testing new policies on a smaller scale will result in the most progress on the question of Part D’s negotiating power. A pilot of a partial repeal of the ban, perhaps with a value-based component, could provide the evidence base to make broader political moves possible. The ACA gives HHS powers to waive Medicare requirements for the purpose of testing models that address potentially avoidable expenditures. These tests, conducted by CMMI, include a proposed value-based project for the drug benefit in Medicare Part B, which covers drugs administered by doctors and hospitals. The Part B pilot, which has been hotly contested by stakeholders, institutes innovative payment models, such as risk-sharing agreements that link payments to patient outcomes, building on the mandate of the ACA to move from blind pricing to value-based pricing. We would encourage a similar pilot for Part D that would allow the government to negotiate value-based arrangements and use a limited waiver of the ban on government formulary power as leverage in these negotiations. Other models—such as allowing Medicare to negotiate the purchase of unique drugs that lack competitors—ideally also would be tested as parallel pilots. President Obama’s recent budgets call for CMS to negotiate on prices for high-cost drugs and biologics.

Of course, a pilot would have its own set of challenges. For instance, the demonstration project would need to choose specific classes of drugs to focus on and determine how value-based contracts would interact with existing prescription drug plan arrangements. One pivotal decision is whether CMS would lead central negotiations with drug manufacturers and mandate the resulting value-based arrangements for participating drug plans, or if drug plans would negotiate directly. Central negotiations have the advantage of allowing the government to track the value achieved over time, since enrollees may switch between plans during the course of the pilot, making measurement more difficult.

Specific value-based arrangements might include: reference pricing, payment for results, and bundling. Reference pricing sets a benchmark price for therapeutically similar drugs and would require determining which drugs are interchangeable. Under a payment for results model, CMS would enter risk-sharing agreements with drug manufacturers to link patient outcomes to payments. Specific outcome targets would have to be identified and negotiated with drug manufacturers, and outcome data would have to be tracked and collected for each patient. Bundling pays for clinically associated products and services at a set price. Implementing this model for a specific group of patients would require integration with other parts of Medicare. Under any model, CMS would need to rigorously analyze the data and communicate its results.

These challenges are not insurmountable, and policy analysis should now focus on resolving these questions. The payoff is potentially large: a demonstration project for Part D negotiation with a value-based pricing model is an achievable first step to building the evidence that will guide future action.