On drug prices, are Democrats in a fix?

Times Staff Writer

With millions of seniors facing premium hikes for their Medicare prescription plans, Democrats say they have a solution: Use the government’s massive buying power to bargain for rock-bottom drug prices. The Department of Veterans Affairs does it for 5 million patients, they point out, so why not Medicare with its 43 million?

Medicare already sets rates for hospitals, doctors and medical equipment such as power wheelchairs -- as well as drugs administered in doctors’ offices. It was only the Republicans’ ideological commitment to the private sector that led them to bar the government from negotiating discounts with drug companies, Democrats contend.

But the VA model may not be readily adaptable to Medicare, some independent experts say. And policy differences among Democrats, along with the Bush administration’s opposition to government price-setting, may further complicate the task of reaching a goal that Democrats have set for themselves when they take over Congress in January.

In addition, newly announced discounts by drug companies could have an impact on the Democrats’ effort before it gets started. At least one major manufacturer is offering help to seniors who have trouble paying for their drugs.

“From a rhetorical perspective, Democrats may feel like they gain a lot with this issue, but there are many substantive hurdles that the government faces in trying to negotiate prices,” said Dan Mendelson, president of Avalere Health, a consulting firm that tracks the Medicare prescription program.


“If you look historically at the government’s experience in trying to regulate prices, it’s poor.”

VA’s lower prices

Although costs for the Medicare drug program are lower than the government originally projected, there is evidence that prices could be lower still. A recent Consumers Union study of the prices charged in South Florida for six widely used drugs found that the Veterans Administration’s average prices were 54% lower than Medicare’s.

“Medicare is overwhelmingly the largest purchaser, and it’s ridiculous for Medicare not to get the best deal of all institutional purchasers,” said Ron Pollack, executive director of the advocacy group Families USA. The VA’s experience shows what the potential could be, he added.

Yet applying the VA approach to Medicare may prove difficult. For one thing, Medicare is much larger and more diverse.

VA officials can negotiate major price discounts because they restrict the number of drugs on their coverage list. Instead of seven or eight drugs for a given medical problem, the VA list may contain three or four. If a drug company fails to offer a hefty discount, its product may not make the cut.

For example, VA beneficiaries can get Zocor for high cholesterol, but not Lipitor. In all, the VA covers about 1,300 medications. By comparison, the most popular Medicare plan -- AARP MedicareRx -- covers about 4,300.

But VA patients who want drugs that are not on the department’s list must go outside the system.

In other words, the VA offers lower drug prices, but fewer choices.

American consumers have repeatedly resisted efforts to save money on medical care by restricting choice. Health maintenance organizations, for example, were once seen as the answer to rising healthcare costs, but millions of people rejected the approach, saying they wanted the freedom to choose their doctors.

One prominent advocate of government-negotiated prices has had a change of heart. Tommy G. Thompson, President Bush’s first Health and Human Services secretary, once expressed regret that he hadn’t been given the power to bargain.

But in a recent interview he said: “This plan is working much better than ever anticipated. When you’ve got a law that is working well in the federal government, why change it?”

If Medicare had the legal authority to negotiate prices, some experts predict it would do well in categories of drugs where there are lots of choices, such as blood pressure pills. But for new or cutting-edge drugs, a manufacturer could have the upper hand. A company could launch a television ad blitz to pressure Congress into raising Medicare prices.

“For categories of drugs that are not competitive, my guess is the manufacturer would not cave in on prices,” said economist John E. Calfee of the business-oriented American Enterprise Institute. “Those are the drugs that have defied price controls.”

Other experts say it wouldn’t be that easy to push Medicare around.

“The VA had to resort to a preferred drug list, but I don’t think that Medicare would have to restrict its list very much because it is such a huge purchaser,” said Dr. David Blumenthal, a professor of medicine and public health at Harvard University. “Medicare’s power in the marketplace is such that I think every manufacturer would have to take its prices.”

Two possible paths

House Democrats have promised action in the first 100 hours of the new Congress to give Medicare bargaining power. One poll showed that 77% of Americans supported the idea.

When the GOP-controlled Congress created the Medicare prescription plan in 2003, it expressly barred the government from negotiating prices on the theory that private insurance plans -- which were assigned the job of delivering the benefit -- could do a better job of getting discounts.

Critics called it a giveaway to the pharmaceutical industry.

“In the current program, there are no protections for beneficiaries that aren’t exceeded ten times over by benefits to the pharmaceutical industry,” said Rep. Pete Stark (D-Fremont), who is expected to lead the House subcommittee that oversees Medicare.

Democrats haven’t spelled out a specific proposal, and Stark said there were at least two possibilities.

One would repeal the prohibition on negotiating and order Medicare to set a top price for each drug available under the program. Private insurers would still be free to bargain for even lower prices.

Such an approach would be similar to how Canada and European countries control prescription drug prices. Canadian prices are 30% to 60% lower than in the U.S. Some critics say Canadian price controls mean that patients there are not always able to get the latest medications.

The other possibility is to set up a Medicare-run plan to compete against the private plans. That is, Medicare would set up a plan using drug prices it negotiated with manufacturers. The plan, available nationwide, would compete with the privately operated plans -- encouraging private plans to bargain harder for lower prices.

The two approaches aren’t mutually exclusive, Stark said.

The proposal to let the government bargain with manufacturers could face additional hurdles in the Senate, where a prominent Democrat is among the leading skeptics.

As chairman of the finance committee, Sen. Max Baucus of Montana will have jurisdiction over Medicare. This year he was one of only two Democrats to vote against allowing Medicare to negotiate drug prices.

A spokeswoman said Baucus planned to hold hearings next year but had not made up his mind on the issue.

The drug industry hopes that even if it loses the first high-profile battle in the House, it can still win the legislative war.

“We fully expect that Speaker-elect Nancy Pelosi will deliver on her political promise, but after that we are equally confident that we will have an opportunity to educate both the members of Congress and beneficiaries across America about the benefits of the current program,” said Ken Johnson, senior vice president of communications at the Pharmaceutical Research and Manufacturers of America.

Corporate outreach

Reaching out to seniors in the Medicare prescription plan, one major drug company has launched a discount program that softens one of the most worrisome gaps in the current benefit, known as the doughnut hole. Under that provision -- created to save money for the government -- seniors must pay the full cost after their annual drug spending exceeds $2,250; coverage kicks in again once the total exceeds $5,100.

To help seniors caught in the doughnut hole, AstraZeneca has created a program called AZ Medicine & Me.

It makes brand-name medications such as the widely used breast cancer drug Arimidex available to qualifying seniors at $25 or less for a 30-day supply. Arimidex could cost ten times that at regular prices.

The plan was announced two days after the election.

The timing was purely coincidental, said AstraZeneca spokeswoman Abigail Baron. The company’s plan had been in the works for months and was announced as soon as it received government approval, she explained.

Said Johnson: “I think you are going to see more and more of our companies trying to assist seniors who hit the doughnut hole.”