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Controlling Drug Prices

Human Resource Executive magazine online

January 22, 2007

Congress is offering several variations on ways for Medicare to lower drug prices -- a process that may reverberate in the corporate sector.

By Stephen Barlas

An attempt by House Democrats aimed at forcing drug manufacturers to lower prices charged to Medicare could well have an impact on corporate health-insurance spending as well.

Though the bill, which passed the House on Jan. 12, requires the federal government to negotiate directly with drug companies, odds are it will not pass Congress. Nevertheless, it may pave the way for a federal role that perhaps could include a new requirement for drug price "transparency."

Any downward pressure on Medicare drug prices would reverberate in the corporate sector, says Cara Jareb, director of retiree medical consulting for Watson Wyatt Worldwide, which is headquartered in Bethesda, Md.

She cites statistics from the Center for Medicare and Medicaid Services, the agency which administers Medicare, showing that of the 38 million Medicare participants in Part D, 6.9 million are corporate retirees in corporate plans for whom each company gets a subsidy from Medicare.

Another 16.4 million Part D participants actually get their drug benefits from one of the Medicare plans, but those individuals also get payments from their former employers to underwrite their Part D participation.

If drug companies are forced to cut their prices to Medicare, they are likely to raise them to private payers, a phenomenon called "cost shifting."

Steve Wojcik, vice president of public policy at the Washington-based National Business Group on Health, which represents Fortune 500 companies, says, "There is a legitimate concern that cost shifting could occur."

Senate leaders from both parties have all but declared the House bill dead on arrival, and even if it somehow passed the Senate, President Bush has threatened to veto it. J.D. Piro, a principal at Lincolnshire, Ill.-based Hewitt Associates, says the House does not have the votes to override a veto.

That bill aside, however, lowering Medicare drug costs remains a potent political issue.

Jareb points to a recent Kaiser Permanente survey which showed 85 percent of people questioned said Medicare can get lower prices from drug companies than it currently obtains.

Given that political pressure, the Senate may opt to pass a more limited approach, such as the one taken by Sens. Ron Wyden, D.-Ore., and Olympia Snowe, R.-Maine. Their bill requires the secretary of Health and Human Services to negotiate prices when there is one brand-name drug in a therapeutic category or when a drug was created with substantial taxpayer funding for its research and development.

Another approach was suggested by Gerard Anderson, professor of health policy and management at Johns Hopkins University, who testified at hearings in the Senate Finance Committee on Jan. 11.

He wants drug-price transparency. "Unfortunately we do not know the prices that the Part D plans are paying for individual drugs," said Anderson, noting that the Center for Medicare and Medicaid Services "collects the data on prices, price concessions, rebates, and discounts but is prohibited from sharing this data or even analyzing it internally."

The Bush administration has pushed price transparency in tandem with its advocacy for health savings accounts, which give an individual tax advantages in conjunction with high-deductible health plans.

So the White House might find it politically difficult to oppose transparency in Medicare drug pricing.

"That is certainly a possibility if the Bush administration felt it had to compromise," says Piro.

But Mark Merritt, president of the industry trade group, Pharmaceutical Care Management Association, says if the prices PBMs pay drug companies for individual drugs become public, "it would be like playing poker with our cards face up."