Scenario #6

VA/DoD Model

Members of Congress and special interest groups have suggested that the VA system is the solution to maintaining cost controls because it leverages the government's size to obtain the lowest possible price. In this scenario, the government uses a competitive bidding mechanism to choose the single-lowest-cost product in a category for coverage by Medicare. Non-selected products would be available at significantly higher cost to members (50 percent of retail). This would, in essence, limit consumers and physicians to one or two therapeutic choices in most categories.

For this scenario to occur, the following needs to happen:

• Costs of Part D exceed $100 billion per year by 2009 and inflation trends suggest that it will continue to grow by more than 10 percent per year
• The financial condition of Medicare and the general health of the US economy are so poor that there is no alternative, short of eliminating Medicare completely
• Medicare beneficiaries and physicians in private practice agree to significantly fewer treatment options in exchange for a low-cost program.

The strength of the VA/DoD scenario for the government creates the Achilles heel for the Medicare market. Under the VA/DoD Model, many classes of drugs would be limited to one or two treatment options. Physicians and patients in the VA/DoD system accept these tight restrictions largely because they have military traditions that permit highly restrictive controls. However, Medicare recipients and physicians in private practice who are accustomed to multiple options would not be satisfied. In reality, this is probably the least likely scenario to actually take place—political realities would make it very difficult to implement.

Move Beyond the Pill

The least-risky scenarios for the pharmaceutical industry are MMA as Planned and FEHBP Lite. Unfortunately, those two scenarios could not be maintained unless the industry kept cost increases below five to eight percent per pharmaceutical product.

The Reference Pricing or Therapeutic Maximum models are not the most favorable scenarios, but they do provide the opportunity to explore other options that reduce the risks of more price controls, such as the Standard Discounts and VA/DoD Model scenarios. Moreover, it is in the best interest of pharma, patients, and physicians to avoid these draconian price-control models because quality and treatment options will fall at the altar of cost. The reality is that the price-control models represent the easiest and quickest political solutions to the complex problem of providing important pharmacy services to the nation's senior population.

Here are some other ways companies can better manage the risk for price controls.

Recognize and support the importance of data integration Identify and support organizations that are developing the tools and resources that integrate data from pharmacy and medical claims records. Employers, private plans, and the federal government are all struggling to use the data they have to measure health outcomes and assess medical interventions.

CMS will soon have the largest single database of claims information. The agency will be able to use the knowledge derived from this database to determine how programs like the ones described under the Reference Pricing and Therapeutic Maximum Pricing scenarios are implemented and measured.

Provide incremental discounts to the right plans Over the next two or three years, MA-PDs and PDPs will approach the negotiating table seeking greater discounts from the pharmaceutical industry. But, in determining a health plan's value—and in turn, these discounts—pharma companies must consider factors other than a health plan's size, such as its ability to add value by integrating medical care with prescription drugs. Companies should grant the best discounts to health plans that provide these additional measures, even if they aren't the largest.

Linking discounts to outcomes or patient care and satisfaction may seem like a radical concept, but it's an important and wise strategy. If the pharmaceutical industry finds itself in 2010 with CMS demanding the best price as a starting point for more discounts under the Standard Discount scenario, companies can reframe the discussion from being about size and control to being about outcomes. This will at least broaden the discussion of best price to include other components of value—even if they do not have an immediately demonstrable return.