Medicare to Congress: Cost of Part D Drugs a Secret

On March 1, The Centers for Medicare and Medicaid Services (CMS) told Congress that the prices paid by Part D prescription drug plans would not be revealed to Congress.  This decision makes oversight of the Part D program extremely difficult because in the absence of this information, Congress cannot possibly have any idea if the discounts part D plans negotiate are passed along to beneficiaries, as required by the Medicare Modernization Act (MMA)

The MMA prohibits the press, non-governmental researchers, the Congressional Budget Office (CBO) and most entities outside the Center for Medicare and Medicaid Services (CMS) from obtaining information necessary to evaluate Medicare Part D.  As we all know by now, Part D is financed by the federal government (about 75%) and beneficiary premiums, deductibles and co-pays (about 25%).  It is administered entirely by private Prescription Drug Plans (PDP) (which provide only drugs) or Medicare Advantage Plans (MA, which provide all medical services in the place of traditional Medicare).

The MMA requires drug plans to give their beneficiaries the benefit of any discounts they negotiate with drug manufacturers through premium reductions and/or reductions in co-pays.  They are prohibited from keeping such benefits to fatten their profits.      

PDPs and MAs must report to CMS the prices they pay for drugs as well as the prices their beneficiaries and the government pay to buy them.  CMS is, however, prohibited from reporting purchase price information to Congressional agencies or the public (including qualified health researchers and the press).  So as it now stands, Congress cannot possibly know if prescription drug discounts are being used to fatten the profits of private insurance companies and how much is being passed to their beneficiaries.

A very busy Henry Waxman is trying to rectify this situation.  On February 9, Waxman sent letters to 10 insurance companies sponsoring PDPs and the two dominant pharmaceutical benefit managers (PBM) requests for comprehensive information about their use of these public funds.  (For information about the role of PBMs in the pharmaceutical supply chain, see here.)

He asked for the following:

Specifically, we request that you provide the Committee with a copy of the information
that your company, or its subsidiaries, was required to report as a Medicare prescription drug plan provider to the Department of Health and Human Services, including the Center for Medicare and Medicaid Services (CMS), for contract years 2006 and 2007 on the following topics: Medicare drug plan profits; Medicare drug plan administrative costs; negotiated price discounts, rebates, and other price concessions obtained from drug manufacturers and pharmacies by Medicare drug plans; and the extent to which, and the methods by which, these discounts, rebates, and other price concessions obtained by Medicare drug plans are passed on to beneficiaries. Your submission should include any information on these subjects that you were required to report under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the regulations implementing the Act, and CMS’s Medicare Part D Reporting Requirements for Contract Years 2006 and 2007.

At an Oversight Committee hearing the same day (investigating waste, fraud and abuse in pharmaceutical pricing and its effect on  in federal health programs), the Ranking Member, Tom Davis, told Waxman that he need not write the insurance companies; he could get all he needed from CMS.  Davis wrote CMS, requesting the information, and on March 1, the Acting CMS Administrator refused to provide it.  She cited studies by the CBO and the Federal Trade Commission (FTC) concluding that such disclosure would substantially increase the program’s cost, according to the CBO,  by as much as $40 billion over 10 years.

The rationale for these predictions is based on the very strange pharmaceutical price setting mechanisms in this country.  Generic drugs lack patent protection, are manufactured by various companies, compete on price, and therefore offer little scope for negotiated price concessions.  There are some patented drugs which are unique in their effects on disease processes.  There is little possibility of receiving discounts on these products either.  There are also situations in which several patented drugs treat the same condition.  These drugs are the subjects of price negotiation between PDPs (or the PBMs representing them) and the drug manufacturers.  

By creating formularies that limit beneficiaries to one or a very limited number of such drugs, plans can increase sales of those drugs and decrease those of competing patented drugs ("move market share").  If they are successful in doing so, they receive price discounts paid in the form of after purchase rebates that allow the pharma manufacturers to evaluate the PDP’s success in increasing their market share before paying them.

The opposition to revealing publicly the prices paid by specific PDPs is based on the assumption that such revelations would allow drug manufacturers to collude to limit the discounts they negotiate.  Specifically, it has been argued (PDF) that PDPs will differ in their skill in negotiation:  some will receive large discounts; others will receive smaller ones.  If manufacturers knew the amounts of the discounts, they would probably equalize their discount offers, and those offers in aggregate would probably be smaller than the aggregate discounts offered under current arrangements.

But the CBO has recently reduced the cost estimates cited by CMS.  (PDF)  On March 12, responding to requests from two Republican representatives, the CBO revised its estimate of the financial impact of publicizing the prices paid by PDPs.  According to that report, CBOs estimate of a $40 billion cost over 10 years was made before Part D became operational.  After one year of its operation, CBO concluded that the cost of publicity would be $10 billion over 10 years, and possibly substantially less.

At this time, I can find no indication as to the fate of Waxman’s request for data from the PDP sponsors and the PBMs.  I have little doubt, however, that the Chairman will continue to pursue the matter with the tenacity he has exhibited in other matters.

This situation raises even more questions about the wisdom of entrusting public funds to private enterprises to administer.  Private businesses are notoriously hesitant to release information about their internal financial operations beyond that required by government regulation.  As in this case, a sympathetic Congress, regulatory agency or executive agency can find seemingly persuasive reasons to deny the public any means of knowing how public money is spent.  Whether it be PDPs, PBMs or pharmaceutical manufacturers, the Part D program thus far has merely perpetuated the mystery surrounding pharmaceutical pricing in the US.  Perhaps Henry Waxman can unravel at least a bit of this mystery.