I work for one of the "big three" pharmacy benefit managers, so it's always fun for me when I hear some right-wing policy wonk try to paint the idea of negotiating with the drug companies as a bad one. While it is entirely possible that a poorly run Health and Human Services department under President Bush might screw up price negotiations, my experience in the industry indicates that it's far more likely that a well run government program could actually save the government - and the American taxpayer - a signficant amount of money verus the current Medicare Part D system.
This article from the Heritage Foundation is a pretty good summary of the right-wing talking points on why allowing the government to negotiate drug prices would be bad:
There are three major points to the right's argument, and I'd like to pick them apart one at a time:
Medicare’s market clout is, in fact, inferior to that of the largest existing pharmacy benefit managers (PBMs). As of 2004, Advance PCS covered 75 million individuals, Medco Health Solutions covered 65 million, and Express Scripts covered 57 million. Medicare covers 38 million individuals. By allowing Medicare beneficiaries to buy into these and other existing PBMs, Congress enables these beneficiaries to take advantage of the even larger "market clout" of the private sector, where PBMs are already successfully providing drug benefits for millions of Americans.
The problem with this argument is that PBMs don't set a universal price for all of their clients. Price is negotiated based on a number of factors, but one significant factor is the size of each individual client. In other words, General Motors is paying far less than Joe's Tire Shop for their healthcare benefit because GM has much greater clout in the marketplace. It makes sense if you think about it even in the most general of economic terms...GM has the ability to move an enormous amount of market share toward the PBM it signs a deal with. Even if the margin is lower per prescription, no PBM is going to turn away the chance to exclusively have 300,000 employees join their rolls. This is true for any business. If you had a guaranteed way to get 300,000 potential customers to use your business and your business alone, you'd do it.
Why doesn't this same principle apply for Medicare Part D? There is no clear answer. Whoever wrote these talking points doesn't seem to understand how the industry works at all.
Medicare’s experience in managing drug benefits is inferior to that of private sector alternatives.
<snip>
Unlike traditional government management of drug programs, which relies on such negative strategies as market access restrictions, one positive feature of the Medicare drug entitlement is that it allows Medicare beneficiaries to choose between competing private prescription drug plans. Accordingly, competing health plans have to respond to consumer pressure both to keep costs down and to maintain access to a broad range of drug therapies.
This argument is also a fallacy. The implication here is that government negotiation of cheaper drug prices is mutually exclusive from member choice. There are a few ways the United States could go about this. The two most feasible ways would be either to 1) negotiate directly with drug manufacturers for a low price and then work with one or more of the existing PBMs to manage the benefit, or 2) put the entire bloc of Medicare business out for bid for a three-year contract, allowing the winning PBM to have the entire bloc of business for a three-year period. Either of these ideas would result in lower drug prices than are available through the current program, since the United States would be consolidating the power of 38 million Americans into one negotiation.
Government intervention will undermine quality and patient choice. If the government were to override the existing private sector negotiations among PBMs, pharmacies, and drugs (sic) companies, it would override their decisions, effectively making the PBMs irrelevant. In order to be more effective than PBMs, the government would have to tell drug makers to accept what it offers to pay or risk not having their drug available in Medicare.
This argument is the weakest one of all, and displays either a complete lack of understanding about the industry or an utter lack of respect for the reader of the article.
Let's go back to the General Motors model above. When GM puts their pharmacy benefit management business out to bid, all PBMs compete to attempt to win the business. As part of this bid process, each PBM offers a rate on the three elements listed above:
a) the negotiated rate with pharmacies
b) incentives offered by drug manufacturers, known as rebates
c) programs offered by the PBM itself.
All three elements above will be offered at a lower rate due to General Motors's negotiating power. While price is not the sole criterion to any negotiation, GM will have the opportunity to take the lowest price offered by any PBM on what's paid to the pharmacy, what share of manufacturer rebates GM will get from the PBM, and what it will have to pay for any additional programs it might want from the PBM directly. The PBM can also take it or leave it, deciding that there isn't enough profit in working with GM if GM says that a rival PBM is offering rates that are too low to be believed.
Perhaps even more importantly, each PBM can do one of two things when a large client like GM comes a' calling. They can either:
- take a loss on one part of the balance sheet (rebates, drug price) and try to recoup on the other side, or
- negotiate separate rebates and pharmacy contracts especially for the large client.
In either case, no PBM is going to throw away the opportunity to serve 38 million lives, whether the government is negotiating the pricing or not.
As far as a drug specifically being covered or not covered, that is up to the plan, in this case Medicare Part D. PBMs design formularies, or lists of preferred medications. Typically, the non-formulary medication is offered at a higher cost to the member. PBMs do not deny coverage of medically necessary medications unless the plan dictates it.
Incidentally, the government does currently negotiate drug prices for the Department of Defense through a PBM. 9.1 million lives are covered, and the plan offers members robust coverage of all major therapy classes of medications at competitive co-payments for the members and deep discounts for the federal government. And the bottom line was great: the DOD saved over $100 million dollars over a 12 month period on drug costs through a full service prescription program.
In fact, it is the current system that doesn't represent the free market. Drug manufacturers are assigning a price to medications and the government is paying this price automatically, without any room for negotiation.
Government entities are constantly negotiating better pricing - whether it's for medical coverage, a car, or a construction job - is part of the free market, not some arcane process that is socialism. A socialized approach would force an artificially low price on a product or service. A negotiation would use the power of the federal government to move 38 million lives of market share. This is the free market.
There is absolutely no reason that the United States should be any different than any other government entity, any business, or any union trust fund that currently negotiates with PBMs to get the best drug pricing possible. This is how the free market works. Upon review, the ultra-right wing argument is not an argument for letting the free market work, but an argument for a de facto monopoly on drug pricing. The possibilities for savings are great with government negotiation of drug pricing. Don't be fooled by the spin...not only can drug prices be negotiated, but they already are.