A reader asked why I’m in favor of allowing the Feds to negotiate prices with pharmaceutical manufacturers. The reader’s colleagues had the idea that since the PBMs and health plans in Part D are already negotiating, why have the Feds involved?
Here’s my response.
First, the whole Part D mess is a great example of how overcomplicated programs generate huge problems. Medicaid claimants were getting their drugs just fine before Part D went into effect, and are now having all kinds of problems. While those problems will likely go away in the near future, the problems did occur when the claimants were switched from a governmental to a private program. A little ammunition for the single payer advocates, if nothing else…
1. “price” is an elusive concept in pharma. The AWP and most other pricing mechanisms are based on the price but do not factor in rebates or any other funds transfer mechanisms that effectively reduce the actual, real “price”. So, while PBMs are in fact negotiating for “price”, we do not know in most cases what the actual real price is.
2. PBMs by definition have much less purchasing power than governments. As an example, the Veterans Administration is the only federal entity that is allowed under the law to negotiate drug prices. The VA is entitled under the law to receive either the minimum 24% discount off the non-federal average manufacturer price or the “best price” the manufacturer gives anyone, whichever is lower. These rates are much more favorable than any PBM gets.
3. The PBMs make money on the delta between what they buy the drugs for and what they charge CMS. So, while the PBM is incented to get the lowest possible price, they are more concerned w maximizing the price to CMS.

More on the adverse selection problems with Part D from a research study by DSS Research. The study indicates more than half of eligible seniors have no plans to enroll in a Part D program. And, their characteristics should set alarm bells ringing at every Part D sponsor:
“Disinterested, non-buyers are lowest users of medical services. Those who said they had not chosen a plan and had no plans to do so take fewer prescriptions; spend less on prescriptions; go to the doctor less often; and make fewer ER, inpatient hospital and outpatient clinic / surgery center visits.”
In other words, they are healthy, aren’t likely to need the coverage any time soon, and aren’t interested in subsidizing the costs of their less-healthy fellow seniors. This is exactly why Part D is a really bad idea, poorly executed too.

No, it is not going well. Despite what the spokespeople at HHS claim, enrollment in Medicare Part D has been a failure to date. Perhaps not a dismal failure, but certainly a lot further towards the “failure” end of the spectrum than the “exceeding our expectations” end. Here’s why, with thanks to Bob Laszewski for boiling down a complex topic to an understandable conclusion.
Enrollment goals
Only 21.3 million Medicare enrollees have the ability to make a decision on enrollment in Part D. Sure, there are a lot more Medicare eligibles, but many are covered under their employer’s plan (11 million), Medicaid (6.2 million of the so-called “dual eligibles”), and 4.5 million under MedicareAdvantage programs.
Of the 21.3 million, 17% have signed up so far. That’s right, 17%. As I have been noting for months, the stage is now set for big problems with Part D. You can read about the issues inherent in adverse selection here; briefly it is what happens when only sick people sign up for insurance.
In general insurers need at least 70% of eligibles to sign up to get a good spread of risk. If there is not a good spread of risk, it is highly likely that the only people who signed up are the ones who will gain more in benefits than they will pay in premiums. Result – insurers will lose money hand over fist on this deal (although their losses will be covered by the government, i.e. the taxpayer, for a period of about two years).
There continue to be problems with dual eligibles enrolled in the wrong plans, missing information, coverage issues, etc. But, as Bob points out, that is not the real problem (although it certainly is to those folks who can’t get their meds.) The real problem is taxpayers are going to foot the bill for a program that is a poster child for adverse selection.
What does this mean for you?
If you are a drug company, lots of profits. Eligibles, a great benefit. Taxpayers, bad news.

The news about the debacle that is the Medicare Part D roll-out has been well-publicized, along with the details that the individuals most heavily impacted are the 6 million dual-eligibles; those folks covered under both Medicaid and Medicare. They should have been automatically enrolled as of 1/1/06, but many states are experiencing big problems.
The key issue appears to be pharmacies are not able to access eligibility information in government databases through the normal EDI links, requiring the pharmacists to call Medicare where they spend hours on hold. Meanwhile, patients aren’t getting their drugs.
If this was just a case of a few scripts for Propecia or Viagra going astray, no big deal. But we’re talking beta blockers, insulin, cancer drugs, pain meds, scripts for Parkinson’s and the like. Life and death stuff.
Many states have provided emergency funding to enable these people to get their scripts. And this will get ironed out at some point.
The larger issue is the canary-in-the-mine nature of the problem. Many health care experts, politicians, and even some politicians who claim to be experts are putting a lot of faith in technology to root out fraud and abuse, enable better delivery of medical care, enhance evidence-based medicine and streamline the delivery of electronic health records. The Bush Administration in particular is highlighting technology as a big part of the “solution” to the health care crisis.
While there is no doubt technology can help address some of the problems in health care, history is also replete with examples of how solutions made problems worse.
Here’s hoping Sec. Leavitt and his colleagues at Health and Human Services get their act together before this gets really ugly.
What does this mean for you?
If you are a pharmacist, you don’t have time to read blogs unless you do so while on hold.