Should drug prices be negotiated under part D of medicare? And if so, how?

Health Affairs

Volumn 27, Issue 1, 2008, Pages 33-43

  Frank, Richard G ^a,c   Newhouse, Joseph P ^b,c  

^a HARVARD MEDICAL SCHOOL   (United States)

^b Department of Health Policy and Management ^*  (United States)

^c NATIONAL BUREAU OF ECONOMIC RESEARCH   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

AGED; COST BENEFIT ANALYSIS; COST EFFECTIVENESS ANALYSIS; DRUG COST; DRUG INDUSTRY; ECONOMICS; ELDERLY CARE; GOVERNMENT; HEALTH CARE COST; HUMAN; INTERPERSONAL COMMUNICATION; MEDICARE; PRESCRIPTION; PROSPECTIVE PRICING; REVIEW; UNITED STATES;

AGED; CENTERS FOR MEDICARE AND MEDICAID SERVICES (U.S.); COST-BENEFIT ANALYSIS; DRUG COSTS; DRUG INDUSTRY; HUMANS; MEDICARE PART D; NEGOTIATING; PRESCRIPTIONS, DRUG; UNITED STATES;

EID: 38849203212     PISSN: 02782715     EISSN: 02782715     Source Type: Journal    
DOI: 10.1377/hlthaff.27.1.33     Document Type: Review

References (41)

1. Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2007, http://www.cbo.gov/ftpdocs/85xx/doc8565/08-23-Update07. pdf (accessed 19 September 2007). Additional data supplied by Peter Orszag, director, CBO.
2. CBO, Research and Development in the Pharmaceutical Industry (Washington: CBO, October 2006).
3. CBO, Issues in Designing a Prescription Drug Benefit (Washington: CBO, October 2002);
4. R.G. Frank, "Prescription Drug Prices: Why Do Some Pay More than Others Do?" Health Affairs 20, no. 2 (2001): 115-128;
5. and J.P. Newhouse, "How Much Should Medicare Pay for Drugs?" Health Affairs 23, no. 1 (2004): 89-102.
6. The 20 percent coinsurance in Part B creates modest differences among prices charged by physicians for the minority of beneficiaries who pay the coinsurance, and there is also some difference created by the small number of physicians who do not accept assignment.
7. CBO, Issues in Designing a Prescription Drug Benefit.
8. Frank, "Prescription Drug Prices."
9. For this group the shift in purchasing arrangements makes the demand curve for individual products in most drug classes more price-elastic, with resulting lower prices.
10. CBO, Issues in Designing a Prescription Drug Benefit, chap. 3. In this chapter the CBOprojects only modest price increases over prices absent Part D. Since dual eligibles represent about 29 percent of the Part D recipients and a larger share of purchases, it stands to reason that the expectation was that prices for dual eligibles would also be expected to increase modestly.
11. F. Scott-Morton, "The Strategic Response by Pharmaceutical Firms to the Medicaid Most Favored Customer Rules," RAND Journal of Economics 28, no. 2 (1997): 269-290.
12. AMP is the price at which manufacturers sell to wholesalers net of prompt-pay discounts.
13. Newhouse, "How Much Should Medicare Pay for Drugs?"
14. J.P. Newhouse, E. Seiguer, and R.G. Frank, "Was Part D a Giveaway to the Pharmaceutical Industry?" Inquiry 44, no. 1 (2007): 15-25.
15. Also see CBO, Issues in Designing a Prescription Drug Benefit.
16. CBO, Issues in Designing a Prescription Drug Benefit.
17. CBO August 2007 baseline.
18. Ibid.
19. Neither the population covered nor cost sharing changed materially for dual eligibles. See Securities and Exchange Commission (SEC) filing documents for the following pharmaceutical manufacturers: AstraZeneca, Form 6-K, July 2006, http://www.sec.gov/Archives/edgar/data/901832/000095010306001898/ dp03246_6k.htm;
20. Bristol-Myers Squibb, Form 10-Q, 30 June 2006, http://www.sec.gov/ Archives/edgar/data/14272/000119312506164507/d10q.htm;
21. Eli Lilly and Company, Form 10-Q, 30 June 2006, http://www.sec.gov/ Archives/edgar/data/59478/000095013706008651/c07379e10vq.htm;
22. GlaxoSmithKline, Form 6-K, July 2006, http://www.sec.gov/Archives/edgar/ data/1131399/000102123106000439/b834273-6k.htm;
23. Merck and Company, Form 10-Q, 30 June 2006, http://www.sec.gov/Archives/ edgar/data/64978/000095012306010023/y23763qe10vq.htm;
24. Novartis, Form6-K, 18 July 2006, http://www.sec.gov/Archives/edgar/data/ 1114448/000110465906047401/a06-16261_16k.htm;
25. Pfizer, Form 10-Q, 2 July 2006, http://www.sec.gov/Archives/edgar/data/ 78003/000007800306000203/q2-06pfe1.htm;
26. and Wyeth, Form 10-Q, 30 June 2006, http://www.sec.gov/Archives/edgar/ data/5187/000119312506163572/d10q.htm (all accessed 19 September 2007).
27. For a description of some formulary structures for protected classes versus drugs that are heavily used by Medicare beneficiaries, see California Health Care Foundation, "The Medicare Drug Benefit: How Good Are the Options?" Issue Brief (Oakland: CHCF, March 2006).
28. There are good reasons for this regulation given the strong incentives for PDPs to enroll the healthiest people (who use the fewest drugs). The protected classeswere created to blunt incentives to compete for enrollees who spend little on drugs by offering very narrow formularies for drugs used to treat complex and costly conditions. For amore complete discussion of this issue, see R.G. Frank and J.P. Newhouse, "Mending the Medicare Prescription Drug Benefit: Improving Consumer Choices and Restructuring Purchasing" (Presentation at Hamilton Project meeting, Brookings Institution, Washington, D.C., April 2007).
29. E.R. Berndt et al., "Is Drug Price Inflation Different for the Elderly? An Empirical Analysis of Prescription Drugs," in Frontiers in Health Policy Research, vol. 1, ed. A.M. Garber (Cambridge, Mass.: MIT Press, 1998), 33-75, found that during the early 1990s there were no significant differences in price indexes for drugs used by the elderly versus those used by others.
30. For example, AARP shows larger increases for the average cost of treating chronic conditions of the elderly during 2005-06 than in any of the prior five years. See AARP Rx Watchdog Report, September 2006.
31. Newhouse et al., "Was Part D a Giveaway?"
32. For example, AstraZeneca reports 20 percent growth in sales of Toprol in the first six months of 2006. Toprol contributed 26 cents to earnings per share in the first half of 2006.
33. That is, the regulations on allowable formularies, which are set on clinical grounds, may well require coverage of the drug.
34. K.M. Murphy and R. Topel, "The Economic Value of Medical Research," in Measuring the Gains from Medical Research: An Economic Approach, ed. K. Murphy and R. Topel (Chicago: University of Chicago Press, 2003), 41-73.
35. CBO, Research and Development, chap. 6.
36. It should be noted that we are explicitly not recommending a return to the Medicaid "best price" approach because of the private-sector pricing distortion it causes.
37. IMS, "IMS Reports U.S. Prescription Drug Sales Jump 8.3 Percent in 2006, to $274.9 Billion," Press Release, 8March 2007, http://www.imshealth.com/ims/portal/front/articleC/0,2777,6599_3665_80415465,00. html (accessed 6 November 2007).
38. See letter from Peter Orszag to Sen. Ron Wyden dated 10 April 2007, http://www.cbo.gov/ftpdocs/79xx/doc7992/DrugPriceNegotiation.pdf (accessed 1 October 2007).
39. For reviews of the empirical literature on final-offer arbitration, see O. Ashenfelter and J. Currie, "Negotiator Behavior and the Occurrence of Disputes," American Economic Review 80, no. 2 (1990): 416-420;
40. O. Ashenfelter, "Evidence on U.S. Experiences with Dispute Resolution Systems," in Organized Labor at the Crossroads, ed. W.C. Huany (Kalamazoo, Mich.: Upjohn Institute, 1989);
41. and R.A. Lester, Labor Arbitration in State and Local Government (Princeton, N.J.: Princeton University Press, 1984).