Securing Savings - Pharmaceutical Executive


Securing Savings

Pharmaceutical Executive

Rebates Required

Another cost-cutting strategy is to require manufacturers to pay rebates on medicines purchased by Medicare Part D plans. House Energy and Commerce Committee chairman Henry Waxman (D-CA) has been pushing an initiative to reduce "windfall profits" to manufacturers due to reduced rebates to state Medicaid programs. CBO calculates that a mandatory 15 percent rebate of the average manufacturer price, beginning in 2011, would save the government $33 billion over five years and $110 billion over ten years. Manufacturers would pay rebates to retain coverage for their products by Medicaid, the Veterans Health Administration, and other government health programs, as well as Medicare Parts B and D. The policy builds on the Medicaid drug rebate program, but drops the "best price" provision to reduce the impact on price negotiations by private purchasers.

The downside is that over time manufacturers will likely try to offset rebates by raising prices for new medicines, and by introducing new strengths and dosages for existing drugs, thus commanding higher rates. But Sanford Bernstein financial analyst Timothy Anderson calculates that a 20 percent rebate on all Part D drugs "would be tolerated surprisingly well" by leading pharma companies, reducing earnings only 3 to 10 percent.

Savings Elusive

With many popular reform proposals, however, CBO sees little potential for reducing government outlays. Prevention and disease management programs may lessen some patients' need for expensive care, but such initiatives can be expensive, especially if provided for large populations. Anti-obesity and anti-smoking campaigns may extend lives, but over time will increase demand for elderly care. And modifying medical malpractice laws would have only a modest impact on healthcare expenses.

Many policymakers support wider adoption of health information technology to help lower healthcare costs and improve quality of care. But implementation will be costly up front—more than $50 billion a year to establish a national health IT system. CBO also continues to challenge the idea that comparative effectiveness research will generate savings. Budget analysts estimate that studies weighing the clinical effectiveness of medical products and procedures could lower total healthcare spending by about $8 billion over 10 years, but upfront costs would eat into most of those savings and yield limited financial gains.

CBO agrees with pharmacy benefit managers and manufacturers that permitting the federal government to negotiate lower Medicare drug prices with pharmaceutical companies is likely to produce "small if any savings." The Secretary of Health and Human Services (HHS) might persuade some companies to reduce prices for select single-source products, but would not have sufficient leverage to secure significant discounts.

These issues will be revisited in coming months under a number of initiatives. Congress has moved quickly to reauthorize the State Children's Health Insurance Program (SCHIP), and is working with the White House to craft a 2010 budget, tax changes, and additional economic stimulus proposals. Most significantly, the Medicare physician-pay solution looms ahead.

Many legislative experts believe there's not enough time to address broad health issues this year, but reform advocates insist that American industry cannot compete globally unless the nation develops a more efficient and cost-effective healthcare system.

Jill Wechsler is Pharmaceutical Executive's Washington correspondent. She can be reached at


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