Forecasting Medicare: Price Controls in the Years Ahead

Part D in 2010 will be under price and access pressure. Pharma should develop plans for the future by imagining best- and worst-case scenarios.
Dec 01, 2006



Medicare Part D as a windfall for pharma? Don't believe the hype. While it has generated a nominal increase in prescription volume, the great windfall that was expected for pharma may not occur. But forget for a moment about Part D as a driver of sales. Instead, companies should conceptualize the benefit as serving a much more strategic and longer-term role—to alleviate the pressure for price concessions and controls by creating market-based systems for Medicare.

The introduction of Medicare Advantage Prescription Drug plans (MA-PDs) and Prescription Drug Plans (PDPs) is a significant departure from the traditional government-defined reimbursement model for Medicare. Some point to the high enrollment, consumer satisfaction, and low premiums in 2007 as proof that this experiment is well on its way to success. But, the risk of failure for the current Medicare system remains very real. And although initial data show good uptake, the Medicare Modernization Act of 2003 (MMA) set the stage for two serious complications: rapid and easy conversion to government-controlled pricing and the adoption of government pricing by private payers.

Private Lessons for Government Pricing

The demand for price controls is cyclical. In the early 1990s, the government tried to control drug costs through rebates to state Medicaid plans. Today, members of Congress talk of other tactics to keep costs down: legalizing re-importation, creating European- and Canadian-style pricing bodies, and even the "boogie man" of price control—instituting nominal federal pricing. But so far, it's just that—talk.

So, executives may wonder, what makes today's environment particularly vulnerable to price controls? Part of the answer can be found when one examines who is footing the nation's pharmaceutical bill.

Part D creates two equally powerful groups of purchasers: the government and employers. By January 2010, the US government will pay for 37 percent of all drug expenditures under Medicare and Medicaid, and employer-provided private insurance will pay for another 39 percent, according to various sources. Cash and out-of-pocket expenses will represent the remaining 24 percent of drug purchases.

As the single-largest payer, the federal government has the size and purchasing power to demand the greatest discounts from the industry—think of the Centers for Medicare and Medicaid Services (CMS) as the Wal-Mart of healthcare. Currently, the government is prohibited from negotiating directly with pharma companies for discounts. Although there is pressure to reverse this, for now it seems the debate for CMS price negotiations will be kept at bay for the next two or three years.

However, it's important for the industry to understand that—if price controls come—it would be hard to limit their impact on government programs. Certainly, it has happened before. In the mid-1970s, in an effort to control costs, the government changed from paying hospital list prices to prices based upon Diagnosis Related Groups (DRGs). Following the success of DRGs in reducing costs, the federal government developed price lists for durable medical equipment and complex reimbursement models for physician services, long-term care facilities, and even drugs provided in the physician office that private payers have adopted as standards for their own business. Now negotiations between insurers and physicians begin at the Medicare rate rather than the physician's own price list. Indeed, it is reasonable to believe that the price controls implemented under Medicare could easily be adopted by private health insurance, and expanded to this 39 percent of the market.

Imagine the Future

Picture what Part D will look like in 2010. Costs will have risen, and Congress will be pressured to find a solution. For certain, Congress will demand that CMS provide more pricing information about the drugs covered under Medicare, and compare those prices to a variety of sources, including foreign markets and even other government programs like those offered through the Veteran's Affairs/Department of Defense (VA/DoD). Congress and policy makers will publicly debate this information to decide how to reduce pharmaceutical costs, while employers and consumers will begin asking why they are required to pay so much more than the government for the same drugs. The result will be unpredictable, and it is easy to imagine the worst possible outcome.