Guest Article

(From the April 23, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Bill to Allow HHS to Negotiate Part D Drug Prices Stalls in the Senate

The debate over whether the Department of Health and Human Services (HHS) should be permitted -- or required -- to negotiate Medicare Part D prescription drug prices with pharmaceutical companies continued on both ends of Pennsylvania Avenue last week. President Bush on April 17, 2007 said he would veto a Senate bill (S. 3, the Medicare Fair Prescription Drug Price Act of 2007) that would permit HHS to negotiate prescription drug prices for Medicare Part D. But the veto threat must seem a distant hurdle to the bill's supporters, who on April 18 tried and failed to bring the bill up for a final vote in the Senate.

Background

During the first week of the 110th Congress the U.S. House of Representatives passed H.R. 4, the Medicare Prescription Drug Price Negotiation Act. 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.

The House passed H.R. 4 on a mostly partisan vote. (No Democrats voted against the bill and only 24 Republicans voted for it.) In order to gain more Republican support -- and possibly produce a bill the President would sign -- Senate Finance Committee Chairman Max Baucus (D-MT) took a different approach with S. 3. Specifically, Chairman Baucus's bill simply would repeal the rule prohibiting HHS from interfering in drug price negotiations between Part D plan sponsors and pharmaceutical companies. Unlike H.R. 4, S. 3 would permit HHS to negotiate Part D prescription drug prices but it would not require HHS to do so.

In spite of these differences, only two Republicans joined eleven Democrats to report S. 3 from the Senate Finance Committee on April 12. Even more important, Chairman Baucus and other Democratic leaders were able to get only 55 of the 60 votes needed to end debate on S. 3 and hold an up or down vote on the bill in the Senate.

What Are the Issues?

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 or S.3 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 Effect 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.

Looking Ahead ...

Chairman Baucus and other Senate Democrats will keep trying, but it is not clear if they will be able to break the current logjam in the Senate. Even if they do, the daunting task of reconciling S. 3 with H.R. 4 will remain. The challenge there will be crafting a compromise bill that President Bush will sign, or that enough Republicans will support to override a presidential veto. At this point, neither scenario seems likely.

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, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.