Analysis: Drug pricing options proposed, presupposed, opposed

Washington Watch

Most Americans and leading presidential candidates on both sides of the aisle support the idea that the federal government should lower drug prices. But it's not likely to happen any time soon even though the Obama administration and Congress are considering some proposals and ideas moving in that direction.

This is a key issue for the 55 million seniors on Medicare. A recent Stanford Center on Longevity study found that almost half (47 percent) of Americans age 75 and older took five or more prescription drugs in 2011, nearly double the 24 percent that did so in 1999. At the same time, the comparable percentage for Americans 65 to 74 also shot up from 23 percent in 1999 to 33 percent in 2011.

Legislative gridlock continues in Washington, D.C. with the pharmaceutical industry retaining a huge amount of influence. At the same time, the American health care system is structured so as to limit government intervention. It would take the next president getting workable majorities for his or her party in both the House of Representatives and the U.S. Senate in order to get the votes needed to change the law – if a consensus could be reached on what to do.

For now, legislative action has essentially stopped as lawmakers look to the November elections. Here are some of the options being discussed, their potential impact and the possibilities of success. Some facts first: Money matters when it comes to influencing Congress and the federal government. Large changes would require congressional action, where pharmaceutical companies and related businesses spent more than $235 million on lobbying last year – more than any other industry.

Also, a provision included in the 2003 law that set up Medicare Part D giving prescription drug coverage to seniors, specifically bars Medicare from negotiating drug prices. At the time, the Department of Health and Human Services (HHS) and Congressional Budget Office (CBO) officials argued that government involvement in price negotiation wouldn't lead to lower costs for taxpayers and might lead to significant restrictions to drug access for some seniors.

Medicare price negotiations

Since that law went into effect, Medicare drug plans have been managed by private insurers and pharmacy managers, who negotiate separately from one another. For years, that approach seemed effective: Medicare drug costs rose about 1.5 percent annually, on average, for most of the last decade.

But spending soared in 2014, up nearly 13 percent after the introduction of several pricey hepatitis C drugs. Those and other specialty medications are projected to increase spending by 6.5 percent annually in the next decade.

The leading proposal being floated on Capitol Hill would allow the federal government to negotiate lower drug prices for millions of seniors in Medicare. Polling by Kaiser Health Foundation found 83 percent of Americans singled out drug prices as the most pressing health care issue the next president and Congress should address.

Experts disagree on how much money could be saved by allowing Medicare to negotiate. When government budget folks last analyzed the idea in 2007, they estimated the savings would be "negligible." In part because it is unclear what specific powers the government would have in negotiations. For example, could Medicare refuse to pay for certain drugs? Or could Medicare set up its own formulary (a list of drugs) like those used in the private sector?

Depending on the answers to those questions, some academics suggest that Medicare could save between $15 billion to $54 billion a year. Medicare currently spends $78 billion a year on drugs so those numbers remain questionable. The lack of a clear consensus on what the measure would save remains a big hurdle in marshaling support for it, especially when the powerful drug lobby would likely oppose the idea of changing the law.

The pharmaceutical industry argues that high prices are necessary to fund research in lifesaving treatments and that even very expensive drugs can save money in the long run by extending people's lives and avoiding other costly medical care such as hospitalizations.

Extending Medicaid discounts

Perhaps the proposal that really might be able to get through Congress involves extending price rebates in Medicaid, the government state-federal health plan for the poor, to many low-income seniors.

Medicaid receives legally-mandated discounts from drug-makers that are roughly 50 percent below the market price of most drugs. At best, the privately-negotiated Medicare drug plans get discounts of about 30 percent. Extending Medicaid discounts to the 9 million poor Medicare enrollees would reduce government drug spending by $103 billion over 10 years, according to government budget analysts, and would bring retail drug spending down by about 5 percent.

But this idea would face the strong opposition of the drug-making industry. The Obama administration has proposed this idea before and has never received a vote in either the House or the Senate. Unless both chambers and the White House are from one party, chances are slim, despite the obvious financial savings.

Rare drug incentives

Another idea being floated involves some of the most expensive drugs hitting the market. Many of them are for rare diseases, including a record 21 drugs last year, nearly half of all first-of-a-kind approvals. Current law encourages the development of these drugs by providing tax breaks, accelerated reviews by the Food and Drug Administration and competition-free marketing for seven years to manufacturers.

Some lawmakers have proposed scaling back those benefits when drugs are priced above a certain threshold. But like the other ideas, any changes would face strong opposition from both the drug-makers and also from rare-disease advocates, who got the 1983 law put in place to encourage development of these drugs. Action is especially unlikely.

FDA drug reviews

Also being floated is another effort to get the FDA to review drugs and reorder the way its pipeline works to encourage competition. Congressional approval – unlikely again because this would need support from the pharmaceutical industry.

Obama Administration's plan

The Obama administration has proposed its solution, offering potential changes in how Medicare pays for some medications, including high-priced specialty drugs used to treat cancer and other costly diseases.

The recently proposed rules, published in March for public discussion, would initially affect a small portion of the nation's nearly $500-billion drug tab. But if it were to be widely implemented, it could overhaul the way Medicare pays for drugs by linking payments to the effectiveness of medications, not just their prices – following in line with the administration's push toward quality of medicine over quantity and the switch from fee-for-service medicine to an evidence-or value-based system. Under the new proposal, the prescription drugs affected are those that are administrated by physicians through the Part B program, which covers medically necessary services like lab tests, surgeries, doctor visits and supplies like wheelchairs and walkers. For example, this initiative would cover drugs for chemotherapy. The government and the program's beneficiaries spent nearly $21 billion on these medicines in 2013, 29 percent more than in 2007, according to a new GAO report.

It would not affect the much larger Medicare Part D program, which provides insurance coverage for prescriptions filled at a pharmacy. A big part of the reason spending has shot up is that drug prices have been going up faster than inflation or overall medical costs.

But everyone on Medicare Part D is going to notice higher co-pays and co-insurance costs, according to a new analysis by Avalere Health. The study finds that more than half of covered drugs in standalone plans require seniors to pay a percentage of the costs rather than a flat fee. An astounding 58 percent of covered drugs in Medicare Part D are subject to "coinsurance" in 2016 rather than flat copays, the analysis found. That percentage has climbed steadily from 35 percent in 2014.

For Medicare beneficiaries, drug plans' increasing use of coinsurance may mean higher out-of-pocket costs, among other things. If a drug costs $200, for example, instead of making a flat $20 copayment, you may owe 20 percent of the cost, or $40.

Your costs will also be less predictable, says Caroline Pearson, of Avalere, and may result in fewer affordable options if patients can't achieve any savings by substituting drugs in the same therapeutic class.. The shift toward coinsurance also means that you may have to rely on cost-estimating tools like the Medicare plan finder to figure out how much you owe out of pocket ( Most Medicare Advantage plans aren't shifting to coinsurance to the same degree as the standalone plan, Avalere found, with 26 percent of covered drugs requiring co-insurance.

Under the new Medicare plan, doctors and hospitals often have a financial incentive to pick more expensive medicines even when cheaper alternatives might be as effective. That's because Medicare pays doctors and hospitals the average selling price of Part B medicines plus 6 percent. So a medical provider will get $60 for administering a $1,000 drug and $6 for injecting a $100 medicine.

So Medicare wants to test what would happen if it instead paid providers 2.5 percent of average selling prices plus $16.80 per drug per day. That should reduce the financial incentive to pick the higher cost drug, Medicare argues, at least in theory.

Medicare is also trying to figure out what happens when it reduces or eliminates the 20 percent co-payment that beneficiaries are required to pay for Part B drugs. Since some patients cannot afford co-pays, some doctors prescribe cheaper drugs that may be less effective and that can actually increase Medicare spending if patients take longer to recover.

But the switch to success-based systems would ultimately force the federal government rather than doctors to make judgments about which treatments work best for which medical conditions. That could be politically explosive as it has sometimes been in other countries with more centralized government health insurance systems such as Britain.

Medicare stresses that the federal government is only seeking feedback on the proposals and Medicare has no plans to limit physicians' choices of drugs. Medicare is also proposing to limit how much patients must pay out of their own pockets for these drugs and seeking to scale back incentives that pay doctors and hospitals higher fees for prescribing higher-cost drugs, even if they are no more effective.

Insurance companies and interested others examining possible strategies

Some of the larger insurance companies are already testing out innovative payment strategies, approved as experiments under Medicare Part B. Aetna and Cigna, for example, reached agreement in February with drug-maker Novartis that offers the insurers rebates tied to how well a pricey new heart failure drug works to cut hospitalizations and deaths. If the $4,500-a-year drug meets targets, the rebate goes down. If it doesn't, the insurers get a bigger payment. Another approach is being tested by pharmacy benefit firm Express Scripts – they’d pay drug-makers a special negotiated rate for certain cancer drugs, designed to reward the use of the medicines for specific cancers for which they've demonstrated effectiveness.

Another effort has come from a group of 11 Democratic senators who have been pressing the FDA and HHS to investigate the impact of drug companies selling "one size fits all" vials of drugs to treat cancer and other deadly diseases. While the size of the container of breakthrough biometric drugs may seem somewhat trivial, a new study by researchers at New York's Sloan Kettering Cancer Center, recently found that nearly $3 billion a year is wasted by purchasing injectable cancer medicine in vials or containers that provide more medicine than is needed by a patient. The remainder of the drug is usually thrown away, rather than used on another patient.

Costly drugs like Velcade, used to treat multiple myeloma, are typically injected by a nurse working in a doctor's office or hospital and are only available in vials larger than the average dose. Unlike industry practices in Europe, where a variety of sizes are available, American drug manufacturers generally provide only the one-size-fits-all approach, leading to extraordinary waste.

Senators on the Senate Aging Committee also have been investigating spikes in drug prices. Committee members Claire McCaskill, D-Mo., and Susan Collins, R-Maine, have introduced a bill to speed up the process for approving generic drugs that could compete with drugs that have seen large price increases. In particular their investigation has focused on Turing Pharmaceuticals and Valeant Pharmaceuticals, two companies that have been under an intense media spotlight for their price increases. Turing is the company formerly headed by Martin Shkreli, now indicted, who bought an important but little-used drug with no generic competition and increased its price by 5,000 percent from $13.50 to $740 per pill overnight.

Also contributing were: AP, CBS, Kaiser Health News, Wash Post; Fiscal Times; The Hill newspaper and the Los Angeles Times.