Medicare drug plan formulary design

In a 2009 Health Affairs article, Kevin Outterson and Aaron Kesselheim describe a variety of options for reducing drug costs to the Medicare program. One of the approaches they describe is similar to one I’ve studied myself, letting Part D plans implement tighter formularies.

Medicare limited the freedom of Part D plans to control their formularies through rules such as the safe harbor guidelines established by the U.S. Pharmacopeia and MMA’s requirement that Part D plans cover at least two drugs per class.

The CMS went beyond the statute, requiring at least one drug in each subclass as well. In addition, the CMS has given special protections to six classes of drugs, requiring that “all or substantially all drugs” in the classes be included in the formularies. This rule effectively eliminates Part D drug price negotiations over anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosuppressants. In other classes, Part D plans routinely exclude some drugs as part of the normal commercial formulary process. The 110th Congress solidified and expanded the protected classes. The July 2008 physician payment update legislation gave the CMS clear statutory authority to expand the protected drug classes and created a cumbersome process that delays competition within the classes.

These rules limit the negotiating power of Part D plans andmake drugs in those classes more expensive. A Milliman study found that these six protected classes accounted for 16.8–33.2 percent of Part D drug costs by Part D plan administrators. Reversing this one rule would decrease prices in these classes by 9–11 percent, for a projected Part D savings of $511 million per year.

Now $511 million is a tiny fraction of the over $500 billion spent on Medicare annually. It’s even a small part of the approximately $68 billion spent on the program’s drug benefit. So, this is not even in the ballpark of making a noticeable dent in Medicare spending. Nevertheless, it’s just another example of how program design can cost taxpayers money. These things do add up!

Commercial insurance products aren’t subject to such formulary requirements, as far as I know. Is there anyone outside the drug industry who thinks it is a good idea to impose them in one of the “free-market” arms of Medicare? How ’bout we let the market get us the best prices and we let beneficiaries decide with their feet which type of formularies they like? There are about 50 stand-alone Part D plans available everywhere. Seems like enough competition to let up on the reins, no?

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