Under this scenario, the federal government requires companies that want their branded products covered under Part D to provide
a specified discount—in effect, creating single-payer price controls. This model has long-term risks to pharma because the
only option that would be available to CMS to address cost increases is to demand greater discounts. Moreover, it would permanently
place pharmacy into a separate budget because it isolates pharmacy as a single cost category, without any linkage to hospital
or physician services. Pharmacy would compete with physicians and hospitals for funding.
For this scenario to occur, the following needs to happen:
- A lift on the prohibition against direct price negotiation by CMS
- The current Part D program exceeds 10 percent of cost increases per year
- Employers begin dropping their retirees into Medicare Part D to cut costs.
To sell this benefit to Medicare enrollees, Congress could sweeten the deal by decreasing co-pays and filling the doughnut
hole. It also could streamline the program by eliminating PDPs and choosing one to two administrators to manage claims and
reimbursements (similar to how Part A and B are administered).
This scenario is more likely than the first two, only because it is an easy political solution to cost increases in Part D.
To understand this, think about the year 2009: In this scenario, the political pressure to address the cost of Medicare and
other social programs, combined with high federal deficits and dissatisfaction from consumers about the problems with the
donut hole and confusing benefits, prompts Congress to act quickly. The political answer to all of these pressures is to attack
private insurers and pharmaceutical companies, and propose a new benefit that is funded with deeper discounts from pharmaceutical
Scenarios #4 and #5
Reference Pricing and/or Therapeutic Maximum Pricing
Because their overall threats to the pharmaceutical industry are the same, it's useful to think about Reference Pricing and
Therapeutic Maximum Pricing together. Here, the primary risk to the pharmaceutical industry is that the government quickly
reduces reimbursements to the generic level, and only the most cutting-edge, innovative treatments have pricing leverage.
Reference pricing, which is already used by several countries—Germany and New Zealand, for example—would operate largely like
a Maximum Allowable Cost list. CMS would fix the maximum level of reimbursement for classes of drugs. Retail and mail-service
pharmacies would receive only the specified per-unit reimbursement—no matter what they dispensed—and pharmacy margins would
be driven by the ability to purchase drug products below the class price.
Therapeutic pricing is the equivalent of DRG reimbursement for hospitals. The goal under this model is to identify the optimal
treatment regimen and price for a specific disease. For example, treatment for a "simple patient" with high cholesterol may
be $1.00 per day, but more complex cases would have higher reimbursements based upon the drug and other therapies required.
These models attempt to address the issues of quality of care, value of outcomes, and variances in patient need. They are,
in theory, better than straight price controls for the industry because they offer a place at the table for addressing issues
of optimizing outcomes and total cost of care—price controls do not.
For these scenarios to occur, the following needs to happen:
- Cost increases for Medicare, and Part D in particular, must remain between five and eight percent per year for the next three
to five years, taking some pressure off the need to act quickly
- The MA-PD model demonstrates success at measuring population-based health outcomes, but fails to attract more than 10 million
- Strong alliances of private and public groups must form to demonstrate how to implement and measure these designs before the
cost debate begins.
The probability of these scenarios occurring is very low unless action is taken now to lay a foundation for these complex
programs. The greatest barrier to these two scenarios is the complexity of developing and maintaining the evaluation and pricing
mechanisms. Either of these models would require a significant amount of time to develop and test. What's more, reference-based
pricing and therapeutic maximum models would be far more difficult to describe and explain to consumers than the current choice
of MA-PDs and PDPs.