A reporter once asked me to explain why the government can’t negotiate lower Medicare drug prices than private drug plans run by Pharmaceutical Benefit Managers (PBMs). A related question is why state Medicaid agencies pay higher drug prices and fees than PBMs.
The Medicare Modernization Act of 2003, which created Medicare Part D drug plans for seniors, includes a noninterference clause. Federal law prohibits the Centers for Medicare and Medicaid Services (CMS) from interfering in negotiations between drugmakers and Medicare drug plans. Democrats routinely criticize the noninterference clause as a Republican gift to drugmakers. It is not; CMS could never negotiate lower prices than private drug plans in a competitive market. With purchasing power (as in the case of a enormous buyer such as the government) is not the same as bargaining power. Bargaining power comes from the willingness to say “no” and refuse to do business with a company. Only if a negotiator is willing to walk away from a deal does he have any bargaining power to negotiate lower prices.
Medicare and Medicaid often lack the political will (and sometimes the legal right) to prevent drugs from being used when they are prohibitively steep. Private drug plans run by PBMs, on the other hand, at least have the ability to compete with similar drugs in a single drug class. This forces drugmakers to compete by offering lower prices if they want to be included on the formulary. Preferred medications which plans most members lean towards.
I don’t think the reporter understood or even believed my explanation. It’s challenging to explain the problem in a compact sentence. Politicians routinely advocate on behalf of local drug companies and pharmacies in their state or districts. When that happens, federal and state bureaucrats are no match for lobbyists and politicians who try to influence policy. Industry lobbyist interference is greater when state and federal bureaucrats administer health and drug benefits. The reason is that agency officials often don’t want to risk political backlash when politicians and lobbyists oppose cost-cutting efforts.
A recent example of this is the Kentucky legislature, which passed Senate Bill No. 5 in early March in an effort to return Medicaid drug benefit management to the state. The goal was escalate fees paid to independent, rural pharmacies. Similar proposals are being discussed in Ohio and Arkansas
Half of the states now integrate drug benefits into Medicaid managed care plans to improve care coordination and lower drug costs. Managed care plans contract with PBMs, private companies hired to administer drug benefits. PBMs have far more bargaining power and experience than any state agency.
Why would politicians in Kentucky, Ohio, and Arkansas want to escalate Medicaid spending by paying pharmacies hundreds of millions of dollars more? Politicians protect obsolete, state-run fee-for-service (FFS) programs to benefit member pharmacies that lobby for higher fees than Medicaid managed care pays. When pharmacists flock to state capitols, they often meet with sympathy from state legislators.
One goal the pharmaceutical lobby hopes to achieve is to persuade lawmakers to raise dispensing fees. State-run Medicaid pharmacy programs typically pay much higher dispensing fees than managed care plans. It is estimated that every $1 escalate in Medicaid prescription drug costs in Kentucky will cost federal and state taxpayers $27 million. The Kentucky Cabinet for Health and Family Services has warned that if the state Medicaid agency takes control of drug benefit management from managed care plans, taxpayer costs would escalate by $161 million.
Too often, public programs like Medicare and Medicaid can become state and local economic development programs. Because the costs of running Medicare and Medicaid are funded by both federal and state taxpayers, advocates justify higher spending by arguing that the higher costs benefit local businesses but are partially passed on to taxpayers in other states.
There are many other examples of the healthcare industrial complicated being able to bypass bureaucrats who have little incentive to control costs or act quickly in the face of fraud. One example is drug testing. In the wake of the opioid crisis, pain doctors began testing their Medicare patients for drugs to make sure they weren’t taking multiple prescriptions or other illegal drugs. There’s a $10 urine test strip that tests for the 10 most commonly abused drugs. Yet some pain doctors charged exorbitant prices for the test. When CMS balked at the pricing, doctors bypassed the novel rules and used bureaucratic regulations to install steep diagnostic lab equipment in their offices that allowed them to run multiple tests on a single urine sample and charge Medicare for each test as if 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 a year for urine tests for patients taking opioids. Many pain management physicians now bill Medicaid more for urine testing than for pain management.
In other words, it’s a sophisticated scam. But it’s just one of hundreds of Medicare and Medicaid scams, perhaps thousands of different scams. Doctors and hospitals don’t even think of them as scams anymore; they think of them as revenue-raising strategies. Consultants lend a hand them set up scams. Yet try to explain this type of system-scamming to a reporter who doesn’t understand why Medicare can’t outsmart drugmakers or doctors with bureaucratic orders.
Another example is that Medicare has never been able to conduct competitive bidding, which excludes unsuccessful bidders. Why can’t Medicare reimburse only the doctors, hospitals, and medical equipment suppliers whose bids are accepted as the lowest? The answer is politics. Imagine the outcry and whining if Medicare or Medicaid said it would reimburse only two out of three hospitals in a given city. Or maybe Medicare would reimburse only a select few hospitals that won competitive bidding in a region for hip replacements.
In compact, if CMS tried cost-saving strategies that actually worked, every congressman from the districts of losing hospitals or drugmakers would call CMS to complain that their constituents were being taken advantage of. They would introduce bills in Congress or state legislatures to repeal cost controls. Yet Democrats continue to argue that Medicare (an agency unable to block losing bidders) and Medicaid (an agency that pays higher rates than private drug plans) have the potential to negotiate a better deal than private companies motivated by profits.
Devon M. Herrick, Ph.D., is a health economist and policy advisor at the Heartland Institute.
