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Why should Medicare negotiate drug prices?

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.

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Joe Paduda is the principal of Health Strategy Associates




A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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