“Controlling Prescription Drug Costs,” Frakt, Pizer, Hendricks (2008)

This post summarizes a 2008 article I coauthored with Steve Pizer and Ann Hendricks titled “Controlling Prescription Drug Costs: Regulation and the Role of Interest Groups in Medicare and the Veterans Health Administration” (Journal of Health Policy, Politics and Law 33(6), December).

Federal statute authorizes private plans offering a drug benefit under Medicare to negotiate with drug manufacturers for volume discounts, and it prohibits Medicare as a whole from doing so. While the prohibition on direct negotiation by Medicare has received considerable attention there is another important limitation imposed by law on the administration of the Medicare drug benefit: a minimum number of drugs in each class must be included on formularies (some classes must be open to “all or substantially all” drugs on the market).

Some have pointed out, correctly in my view, that providing Medicare the authority to negotiate directly with manufacturers would not lead to price reductions on its own. To achieve savings Medicare would also need the ability to exclude drugs from its formulary. This ability to tighten the formulary would provide the leverage to negotiate bargains.

Medicare’s inability to negotiate prices and to freely restrict drugs from its formulary is in stark contrast to another large public provider of prescription drug benefits, the Veterans Health Administration (VA), which negotiates directly with drug manufacturers and obtains very low prices.

This raises two interesting questions. First, why is Congress comfortable with the VA prescription drug benefit but not willing to authorize something similar under Medicare? Second, given the limitations on Medicare, is there a lower-resistance path to getting VA-like drug prices for more Medicare beneficiaries? Both questions are addressed in our “Controlling Prescription Drug Costs” paper, and the answer to the first question suggests one to the second.

The paper explains the differences between the two drug benefit designs by observing that Congress acts as an agent for multiple interest groups. We conclude that important limitations on the Medicare drug benefit probably arose from the advocacy of drug manufacturers and retail pharmacies, among others. Relative to Medicare policy, these interest groups are less involved in VA policy.

This suggests a practical approach to reducing the cost of providing a prescription drug benefit. A drug program that is more directly under the VA’s purview but that builds on the financing structure of the new drug-only Medicare plans may not immediately arouse the kind of effective interest group opposition that typically restricts the options of Congress with respect to Medicare. Moreover, a drug program of this kind is likely to receive the combined support of Medicare and VA beneficiary advocacy groups, which increases the political cost to opposition relative to policy proposals that receive the support of only one or the other of these groups. We develop this idea in more detail and show that a combination of VA and Medicare could achieve improved access and lower costs for some Medicare-enrolled veterans.

In particular, a VA-Medicare prescription drug plan (PDP) could be made available to certain Medicare-enrolled veterans. Such a plan has the potential to provide a rich drug benefit to a large number of beneficiaries. Of the 43 million Medicare beneficiaries, about 10 million are also veterans. While about 3 million Medicare-eligible veterans already receive drug and nondrug benefits from the VA, the rest do not. A VA-Medicare PDP would be another prescription drug coverage option for these beneficiaries, one that likely would be more comprehensive and less costly than any other available to them.

The VA-Medicare PDP discussed in the article would offer advantages to both programs and beneficiaries. Much as Medicare currently subsidizes private drug plans (whether employer offered or individually purchased), Medicare could subsidize the VA-Medicare PDP on a per-beneficiary basis. These funds would permit the VA to broaden the numbers and types of veterans it serves. Since the VA receives steeper discounts for prescription drugs than Medicare drug plans do, the per-beneficiary subsidy could be set lower than for private plans, producing savings to Medicare.

A VA-Medicare PDP would not be implemented without challenges, which are acknowledged and explored in the article. Of course, above all, it is political considerations that make prospects for this kind of integration uncertain.

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