Guest Article

(From the January 16, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

House Approves Bill to Allow HHS to Directly Negotiate Prescription Drug Prices for Medicare Part D

The Democrats' first full week in control of the U.S. Congress was a busy one, especially in the House of Representatives. The House debated and approved four of the Democrats' top legislative priorities, including a bill (H.R. 4, the Medicare Prescription Drug Price Negotiation Act) to require the Department of Health and Human Services to negotiate Medicare Part D prescription drug prices with pharmaceutical companies. Also last week the House passed bills to raise the federal minimum wage to $7.25 per hour (H.R. 2) and enhance federal support for embryonic stem cell research (H.R. 3). All three bills face uncertain futures, although the minimum wage hike appears to have the best chance of being enacted.

Summary of H.R. 4

Briefly, H.R. 4 would repeal the current rule prohibiting HHS from interfering in drug price negotiations between Part D plan sponsors and pharmaceutical companies, and replace it with a rule requiring HHS to negotiate Part D prescription drug prices. The HHS's mandate would be specifically limited to negotiating the prices pharmaceutical companies can charge Part D plans and Medicare Advantage (MA) organizations "for covered Part D drugs for Part D eligible individuals who are enrolled under a prescription drug plan or under an MA-PD plan." Of course, Part D plans and MA-PD plans still would be permitted to negotiate even deeper discounts, if possible.

Current law also specifically prohibits HHS from specifying a formulary or implementing a price structure for reimbursing covered Part D drugs. The bill would repeal that prohibition, but would specify that the requirement to negotiate prescription drug prices should not be construed to authorize HHS "to establish or require a particular formulary."

If enacted, H.R. 4 would apply to "negotiations and prices for plan years beginning on January 1, 2008." Beginning June 1, 2007, HHS would be required to submit a semiannual report to Congress on the status of prescription drug price negotiations, and the prices and price discounts achieved.

The Debate

Democrats have argued for giving HHS authority to negotiate prescription drug prices for Part D beneficiaries since Congress enacted the Medicare Modernization Act in 2003. In general, their position is that the Medicare program should be allowed to use its power as a market participant to negotiate cheaper prescription drug prices. That, in turn, would help keep down the Part D program's costs for beneficiaries and taxpayers.

The Republican counterpoint, in a nutshell, is that this is not just about using market power to get a better price on prescription drugs. Instead, they see government-imposed price controls in the future -- first on prescription drugs, and eventually on all health care-related goods and services. According to Grace-Marie Turner of the Galen Institute, "Price controls inevitably lead to scarcity of supply, reductions in quality, dampening of innovation -- and usually all of the above."

But ideological considerations aside, there are more immediate questions about whether the HHS can do a better job of negotiating prices than Part D and MA-PD plans already are doing. Average Medicare Part D monthly premiums are still significantly less than projected, and they have been holding steady for the last two years. Also, Part D accounted for only 0.4 percent of U.S. Gross Domestic Product (GDP) in 2006, less than the 0.6 percent that had been estimated.

Democrats claim HHS could do even better, and point to the Department of Veterans Affairs' (VA) health benefits program as an example. The VA directly negotiates drug prices with pharmaceutical companies and, according to a recent report by Families USA, achieves substantially lower prices than Part D plans for the 20 drugs most frequently prescribed to seniors. But federal law gives the VA more leverage in those negotiations than H.R. 4 would give to HHS. Specifically, the law requires pharmaceutical companies that sell to the VA to give the agency a discount of approximately 24 percent before negotiations begin. Additionally, the VA maintains a national formulary that some medical professionals consider very narrow, and thus has the ability to decide which drugs it will and will not cover. Also, the VA supplies most drugs by mail or directly from VA facilities rather than through local pharmacies.

Potential Affect on Employers

If HHS could achieve VA-like discounts for Part D beneficiaries, the question becomes whether and how that will affect prescription drug prices for everyone else -- including employers. Most Americans -- 174 million, or almost 60 percent in 2004 -- receive health insurance through employers, and 98 percent of covered workers in those plans have prescription drug coverage. If pharmaceutical companies end up providing even greater discounts for the approximately 22.5 million Americans covered by the Part D program, they may try to make up the difference by charging higher prices to everyone else.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.