Price Concessions Follow
As happened with WIC, the spiraling costs of enrollment will lead managed care, fallback plans, and state governments to push
back on pharma pricing. It is certain that managed care will use the traditional "managed lives" (which often is greater than
the actual number of enrollees) argument to negotiate the most aggressive discounts from manufacturers by tightening formularies.
The current legislation has left a lot of wiggle room to reduce the number of medications needed to meet the formulary requirement
for the new drug plans. It says a formulary must include "drugs" within each therapeutic category and class, but it does not
say whether that means one, two, or more brand-name drugs. Whether managed care companies use this clause to limit their formularies,
or merely threaten to use it, pharmaceutical companies will have to give price concessions or rebates.
Percent of Medicare Population Who Will Be Dual-Eligibles
The structure of the Medicare drug benefit will give MCOs powerful leverage in extracting such concessions. Today, the co-pay
difference between a third-tier and second-tier product (typically $180 per drug per year) can shift as much as 25 points
of market share in a therapeutic class. Medicare Part D patients will be exposed to substantial out of pocket costs: monthly
premiums, the $250 deductible, 25 percent co-pays. In all, beneficiaries will pay as much as $1,170 for the first $2,250 (and
$4,520 of the first $5,600) of drugs they purchase in a year.
A somewhat hidden dimension of the current legislation provides that the federal government will serve as the insurer of last
resort. This fallback coverage—and a stabilization fund—is available when only one prescription drug plan (PDP) is available,
or in the very likely case that a PDP goes out of business. This arrangement will also become a catchall for any group or
individuals that cannot or will not enroll in the Medicare Part D through a PDP. These could include current Medigap customers
who are terminated by the indemnity insurers, rural customers, and large groups of retirees whose employers are unable to
find a PDP to cover their obligations. In almost every consumer insurance business, the "uninsurable risk pool" becomes a
dumping ground for the unprofitable customer. That's likely to happen here as well.
Finally, the state governments, which would appear to be losing bargaining power, may, as they did in the WIC program, exert
their influence to squeeze prices. The Medicare drug program gives the federal government responsibility for the "dual-eligible"
patients who qualify for both Medicare and Medicaid. But the transfer of responsibility will cost the states bargaining power,
and the financial savings it provides are likely to be small or wholly illusory. The states will still pay 90 percent of the
cost of serving dual-eligible patients. And costs are certain to rise, if only because the states already receive deeper discounts
from drug companies (around 15 percent) compared with the 8 percent the private providers who will administer the program
are expected to receive. It is possible that states will end up paying more out of pocket for dual-eligibles than they currently
do. It is therefore easy to project a scenario in which the states respond with some form of supplemental rebate requirement
State success in extracting price concessions with either the fallback group or the dual-eligibles could lead to an even more
frightening scenario in which the subsidized low-income senior segment would be bundled with other non-Medicare enrollees
to squeeze higher rebates and discounts from manufacturers. It is an easy step for states to go down the "Maine RxPlus" path
in which low-income "under-65" eligibles could be bundled with the uninsured who would fall below 150 percent of the poverty
When contracting with state governments and managed care organizations, pharma executives must think about the potentially
irreversible effects of their actions. A small supplemental rebate for low-income Medicare enrollees may be the first step
down the slippery slope.