The other day a reporter asked me to explain why the government cannot negotiate the price of Medicare drugs lower than private drug plans run by pharmacy benefit managers (PBMs). A related question is why state Medicaid agencies pay higher fees and prices for drugs than PBMs.
The Medicare Modernization Act of 2003, the law that created Medicare Part D drug plans for seniors, contains a non-interference clause. Federal law prevents the Centers for Medicare and Medicaid Services (CMS) from interfering in negotiations between drug makers and Medicare drug plans. Democrats routinely blast the non-interference clause as a Republican give-away to drug makers. That’s not the case; CMS could never negotiate lower prices than private drug plans in a competitive market. Having buying power (as in a large purchaser like the government) is not the same as bargaining power. Bargaining power derives from the willingness to say “no,” and deny a firm your business. Only when a negotiator is willing to walk away from a deal does it have any bargaining power with which to negotiate lower prices.
Medicare and Medicaid often lack the political will (and sometimes the legal right) to preclude drugs when the price is egregious. By contrast, private drug plans run by PBMs at least have the ability to pit one drug in a given class against similar drugs. This forces the drugs’ manufacturers to compete by bidding lower prices if they want to be included in the formulary of preferred drugs to which plans steer most members.
I do not believe the reporter understood or perhaps even believed my explanation. It’s hard to explain the issue in a soundbite. Basically, politicians routinely advocate on behalf of locally-based drug companies and pharmacy constituents in their state or in their districts. When this happens, federal and state bureaucrats are no match against lobbyists and politicians, who seek to influence policies. Interference by industry lobbyists is greater when state and federal bureaucrats manage medical and drug benefits. The reason is because agency employees often do not want to risk a political backlash when politicians and lobbyists push back against efforts to contain costs.
A recent example of this is the Kentucky legislature, which passed a Senate Bill 5 in early March seeking to return management of Medicaid drug benefits to the state. The purpose was to increase the fees paid to independent, rural pharmacies. Similar proposals are being debated in Ohio and Arkansas
Currently, half of states integrate drug benefits with Medicaid managed care plans to improve care coordination and lower drug costs. Managed care plans contract with PBMs, private firms hired to administer drug benefits. PBMs possess far more bargaining power and expertise than any one state agency.
Why would politicians in Kentucky, Ohio and Arkansas want to increase Medicaid spending by paying pharmacies hundreds of millions of dollars more? Politicians protect outdated, state-run fee-for-service (FFS) programs to benefit constituent pharmacies, who lobby for higher fees than paid by Medicaid managed care. When pharmacy constituents descend on state capitols they often get a sympathetic ear from state legislators.
One goal the pharmacy lobby hopes to achieve is to persuade lawmakers to increase dispensing fees. State-run Medicaid drug programs normally pay dispensing fees far higher than managed care plans. Every $1 increase in the cost of dispensing a Medicaid prescription in Kentucky is estimated to cost federal and state taxpayers $27 million. The Kentucky Cabinet for Health and Family Services warned if the state Medicaid agency took over control of managing drug benefits from managed care plans, taxpayers’ costs would increase costs by $161 million.
All too often public programs like Medicare and Medicaid are allowed to become state and local economic development programs. Because the cost of running Medicare and Medicaid is funded by both federal and state taxpayers, supporters justify higher spending claiming the higher costs will benefit local firms but are partly shifted to taxpayers in other states.
There are numerous other examples where the medical industrial complex is able to run circles around bureaucrats, who have little incentive to control costs or act quickly in the face of fraud. One example is drug testing. In the aftermath of the opioid crisis, pain doctors began testing their Medicare patients for drugs to ensure they were not consuming multiple prescriptions or taking other illegal drugs. There is a $10 urine strip test that will test for the 10 most commonly abused drugs. Yet, some pain doctors were charging outrageous prices for the test. When CMS balked at the prices, doctors circumvented the new policies and took advantage of the bureaucratic rules to install costly diagnostic laboratory machines in their offices that allowed them to run multiple tests on a single urine sample and charge Medicare for each test performed as though it were a separate test. Instead of $100, doctors billed Medicare hundreds (sometimes thousands of dollars) for multiple tests that were essentially the same test on the same urine sample. Medicare now pays more than $8 billion per year on urine tests for patients on opioids. Many pain doctors are now billing Medicaid more for urine tests than for pain management.
In other words, it’s an elaborate scam. But that’s only one of hundreds of Medicare and Medicaid scams, perhaps thousands of different scams. Doctors and hospitals don’t even think these are scams anymore; they consider them revenue enhancement strategies. Consultants help them set up the scams. Yet, try explaining that type of gaming the system to a reporter who does not understand why Medicare is not able to outmaneuver drug makers or doctors with bureaucratic orders.
Another example is how Medicare has never been able to conduct a competitive bidding process that locks out losing bidders. Why can’t Medicare only reimburse doctors, hospitals and medical equipment suppliers whose bid was accepted as the lowest? The answer is politics. Imagine the screaming and lamentation if Medicare or Medicaid said it would only reimburse two of the three hospitals in a given town. Or perhaps Medicare would only reimburse hip replacements at a few select hospitals that won a competitive bidding process within a region.
In conclusion, if CMS tried cost-saving strategies that actually worked, every congressman from the district of the losing hospitals or drug maker would call CMS complaining that their constituents are being abused. They would introduce bills in Congress or the state legislatures to repeal cost-control. Yet, Democrats still maintain that Medicare (an agency unable to lock out losing bidders) and Medicaid (an agency that pays higher fees than private drug plans) has the potential to negotiate a better deal than private firms motivated by profit.
Devon M. Herrick, PhD is a health economist and policy advisor to the Heartland Institute.
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