Jump to content [accesskey 's']

 Home 

  News & Information  

  Online Store  

News & Information

CCH® BENEFITS — 1/26/07

House Passes Medicare Drug Price Negotiation Bill; Measure Would Not Attain Savings: Actuaries

from Spencer’s Benefits Reports: On January 12, by a vote of 255-170, the House passed the Medicare Prescription Drug Price Negotiation Act of 2007 (H.R. 4), which was introduced one week earlier by Sen. John D. Dingell (Mich.), along with 189 cosponsors. The bill would amend the Medicare Part D prescription drug benefit law to require the Department of Health and Human Services (HHS) to negotiate lower covered Medicare Part D drug prices with drugmakers for Part D prescription drug plans (PDPs) on behalf of Medicare beneficiaries. However, PDPs would be able to negotiate even lower prices. Unlike PDPs, the HHS would not be permitted to set up a formulary (a list of preferred drugs) to drive market share.

However, according to analyses of H.R. 4 prepared by actuaries in the Centers for Medicare and Medicaid Services (CMS) and the Congressional Budget Office (CBO), the bill would not produce any savings. “Although the bill would require the [HHS] Secretary to negotiate with drug manufacturers regarding drug prices, the inability to drive market share via the establishment of a formulary or development of a preferred tier significantly undermines the effectiveness of this negotiation,” explained Paul Spitalnic, director of the Parts C and D Actuarial Group in the CMS’s Office of the Actuary. “Manufacturers would have little to gain by offering rebates that aren’t linked to a preferred position of their products, and we assume that they will be unwilling to do so.

“The actuaries expect that the Part D plans will continue to be the source of meaningful negotiations with manufacturers as they will continue to have the authority to establish formularies and define a preferred tier,” Mr. Spitalnic continued. “We would not expect H.R. 4 to have any effect on these negotiations or the prices that are ultimately paid by Part D.”

In a January 10 letter on H.R. 4 to Mr. Dingell, chairman of the Energy and Commerce Committee, the CBO noted that it “estimates that H.R. 4 would have a negligible effect on federal spending because we anticipate that the Secretary would be unable to negotiate prices across the broad range of covered Part D drugs that are more favorable than those obtained by PDPs under current law. Since the legislation specifically directs the Secretary to negotiate only about the prices that could be charged to PDPs, and explicitly indicates that the Secretary would not have authority to negotiate about some other factors that may influence the prescription drug market, we assume that the negotiations would be limited solely to a discussion about the prices to be charged to PDPs. In that context, the Secretary’s ability to influence the outcome of those negotiations would be limited. For example, without the authority to establish a formulary, we believe that the Secretary would not be able to encourage the use of particular drugs by Part D beneficiaries, and as a result would lack the leverage to obtain significant discounts in his negotiations with drug manufacturers.

“Instead, prices for covered Part D drugs would continue to be determined through negotiations between drug manufacturers and PDPs. Under current law, PDPs are allowed to establish formularies—subject to certain limits—and thus have some ability to direct demand to drugs produced by one manufacturer rather than another. The PDPs also bear substantial financial risk and therefore have strong incentives to negotiate price discounts in order to control their costs and offer coverage that attracts enrollees through features such as low premiums and cost-sharing requirements. Therefore, the PDPs have both the incentives and the tools to negotiate drug prices that the government, under the legislation, would not have. H.R. 4 would not alter that essential dynamic.”

According to the CMS’s Office of the Actuary, the estimates of costs for the Medicare Part D prescription drug benefit for the fiscal year 2008 budget cycle show that net Medicare costs are now expected to be 30% less—$189 billion lower—than originally predicted when the benefit was created in 2003. In addition, based on strong, competitive bids by health care plans for 2007, average monthly premiums for the basic benefit will be approximately $22 for beneficiaries, down from $23 in 2006. The original estimate for 2007 premiums was $38. There currently are more than 23 million Medicare beneficiaries receiving drug coverage through Part D prescription drug and Medicare Advantage plans.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.