Pharmacy Medicaid Rebates – and Unintended Consequences

Today’s Managing Health Care Costs Indicator is 237%

 

Click image to enlarge. Source 

There’s been a lot of tooth-gnashing lately about how Medicaid pays substantially less than Medicare to acquire prescription drugs.  For instance, the graph above is currently on the front page of the New England Journal of Medicine’s Health Policy and Reform website, and shows Medicaid rebates over twice as high as Medicare rebates  

It’s worth going back to the law that granted Medicaid its non-negotiated mandatory high rebates – the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990 for short).  OBRA is part of a long and proud history of passing important health legislation through the reconciliation process, which includes the Patient Protection and Affordable Care Act (2010) and the Consolidated Omnibus Reconciliation Act of 1986, which we all know as COBRA, – which allows departing workers to purchase health insurance for 18 months. 

OBRA 1990 is probably most famous for George HW Bush’s breech of his 1988 election promise, “Read my lips; no new taxes!” OBRA 1990 raised the ceiling on income for Medicare tax and extended taxes on gasoline and telephone service.  Conservatives were pretty angry.  It also implemented PAYGO, whereby legislators passing spending bills would have to identify a source of revenue. 

OBRA also allowed states to establish drug utilization review panels, and mandated that pharmaceutical companies offer a substantial rebate to state Medicaid programs for brand name drugs that were on each state’s preferred drug list.  That rebate would effectively allow the Medicaid program to get the “most favored” pricing.  Therefore, if the pharmaceutical company offered a deeper discount to any purchaser, its rebate to states would be increased.

You might have thought that would be a terrible blow to the pharmaceutical companies – forced against their will to offer big discounts without the ability to negotiate. But that’s not how this played out.   The mandate that Medicaid would get the lowest prices (without needing to negotiate) actually made the pharmas dramatically less likely to offer discounts to others, and indeed the Congressional Budget Office 

found that discounts to other purchasers declined dramatically after the ‘most favored’ pricing for Medicaid became effective.   That’s because the threat of having to offer large rebates to over 50 different state Medicaid agencies helped enforce pharmaceutical pricing discipline – and thus raised the overall acquisition cost for pharmaceutical agents.

I first learned about this in Coopetition (Brandenberg and Nalebuff, 1996) 

Click to enlarge. Source 

There is one more chapter to this saga.  Some of the sickest and neediest patients are dually eligible for both Medicare and Medicaid.  They are often either completely disabled, severely mentally ill, or residents of nursing home. Medicaid paid for all ambulatory medicines for these patients until the introduction of the Medicare prescription drug plan in 2003 – and Medicaid paid with this “most favored” pricing.  Medicare Part D, however, forced these patients to enroll in privately-run Medicare Part D pharmacy programs, which were not able to have the same low acquisition costs.  

This was great for the states, which liked the federal government picking up the entire tab for prescriptions for this sick population; states had previously paid half.  It was perfectly fine for the Medicare Part D plans, which gained more premium revenue.  It was especially fine for the pharmaceutical companies, since they were able to obtain higher prices for a population that used a lot of prescription drugs.  It wasn’t so great for patients, who often had difficulty navigating the confusing world of Medicare Part D plans.

Back to today – there are calls for the pharmaceutical companies to offer higher rebates to Medicare Part D plans.   I can’t say that mandating such rebates would be a windfall to the pharmas like OBRA 1990.  But I can say that mandating rebates for some parties while maintaining negotiated prices for others distorts a market.  We should be careful to “game out” the likely implications of higher mandatory rebates.   A hybrid system with some prices controlled and others unregulated is likely to lead to higher prices for at least some of those getting prescription medications.

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Health Plan Demands Lowest Rates and This Raises Prices

Today’s Managing Health Care Costs Indicator is 70

The US Department of Justice and the Attorney General in Michigan announced on Tuesday a suit against Blue Cross Blue Shield of Michigan (BCBSM) for demanding the lowest prices of hospitals in the state.   BCBSM has in place a “most favored nation” contract with at least 70 of the 131 acute care hospitals in the state.

Here is the Justice Department statement:

The department’s lawsuit alleges that the intent and effect of Blue Cross Blue Shield of Michigan’s MFNs is to raise hospital costs for competing health plans and reduce competition for the sale of health insurance. As a result, consumers in Michigan are paying more for their healthcare services and health insurance

Here is the BCBSM VP for Corporate Communications: 

Through this lawsuit, the federal government seeks to deny millions of Michigan residents the lowest cost possible when they visit the hospital.

Who is right here?  Is it really bad for society for BCBSM to insist for its members on always getting the lowest rate?

It certainly is!  

Most favored nation clauses feel like a good deal (“I get the best price.”) But what they really do is make it tough for suppliers to lower their prices for anyone else. See a recent blog on the effect of most favored nation pricing on pharmaceuticals.   The BCBSM contracts are especially inflationary –because they don’t merely demand the lowest price, but they specify how much higher a price other insurers would have to pay.

This is especially damaging to competition in Michigan, where BCBSM has a 60% market share.    There is no way for other insurers to compete effectively in that market, since hospitals cannot sell extra capacity at marginal prices.   Hence, despite the BCBSM cries that they are simply getting a good deal for their customers, BCBSM is causing all consumers in the state (including their own customers) to pay higher prices for health care.

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Drug Discounts Which Raise Health Care Costs

I’m a value shopper.  I like my clothes with large “percent off” labels.  Like many people, I want to be guaranteed that I’ll get the lowest price around.  But there is growing evidence that apparent deals to help us get lower prices on medications are costing American insurers and consumers billions of extra dollars.

Here are four examples of apparent discounts that are anything but a good deal.

1) Medicaid “Most Favored Nation”

Medicaid is guaranteed rebates from the pharmaceutical industry, based on the Omnibus Reconciliation Act of 1990.   The amount of these rebates will increase under the Affordable Care Act (health care reform of 2010). Further, Medicaid has a “most favored nation” clause under which any pharmaceutical company which sells a drug for less than the net Medicaid price must send a rebate to every state Medicaid program to ensure it got the lowest price around.

 Unfortunately, game theory shows is that most favored nation clauses actually RAISE prices. They make the supplier realize that the cost of discounting is very high, and thus they reinforce supplier price discipline.  Pharmaceutical companies that used to give Kaiser a huge discount, for instance, would suddenly have to give that same discount to 50+ Medicaid programs, which together represent almost a quarter of all pharmaceutical purchases.  Kaiser –say goodbye to your discount.

This works in the hotel business too.  Marriott (and others) promise that you get the cheapest price on their own website.  This forces them to avoid selling their surplus rooms at a very low rate, because they might then have to give a refund to people who purchased at the full rate.  Hence, an apparent discount leads to higher prices.

Here’s a link to a wonky Rand article showing that the Medicaid most favored nation clause raised the overall price of drugs by about 4%.   Harvard Link  NonHarvard Link 

2) Novartis Covers Copayments for Gilenya, a new oral multiple sclerosis drug.

Novartis just announced that it will charge $48,000 per year for its new MS medication.   Gilenya is reported to work as well as a number of other biopharmaceuticals, but requires no injection.  The drugs it replaces are among the most expensive around– they tend to cost between $20 and $30,000 annually. 

Novartis will give the medicine away to those with income less than 500% of the federal poverty level, and will cover many or even most copayments or coinsurance for others. 

Who could argue with that deal?

In fact, the fixed costs of drug manufacture are large, and variable costs are low.  Novartis will maximize its profit by offering the medicine without allowing patient price sensitivity to reduce demand.   Most of those who will take the medicine will switch from the less expensive medications. Hence, the total amount paid for effective MS medications will rise because Novartis is offering the drug for reduced prices.

3) Medicis, the maker of Solodyn, an extended release minocycline for acne, offers a card that guarantees a $10 per month copayment for this medicine, which otherwise costs over $400 per month. 

This might seem like a good deal, but generic minocycline (taken twice a day) costs 75 cents a pill!   Here’s a pharmacist’s rant on the topic (a bit obscene –don’t click unless you’re ready for some expletives)  

The discount card is a great idea for the pharmaceutical company, which has taken a generic drug that can be purchased wholesale for pennies and converted it into a very expensive brand name medicine.  For consumers and the overall health care budget, this is a bum deal indeed.

4) The pharmaceutical industry has volunteered to give Medicare beneficiaries 50% off the price of brand name drugs when they are in the “donut hole” between spending $2840 and $4550 each year.

Again, how can we go wrong with 50% off?

Brand names remain substantially more than twice as expensive then generics within the same class.  For instance, generic simvastatin to lower cholesterol costs about a dollar a day retain (drugstore.com, 20mg), while brand name Lipitor costs over $3 per day (drugstore.com, 10mg).  So, Medicare beneficiaries who have no generic choice will do well with the discount. However, Medicare beneficiaries who are convinced to take the discount instead of moving to a generic will continue to pay more than they should.

We have to look at the total cost of care – not just the prices or the discount for a particular product or service.  The great discounted prices sometimes camouflage  unnecessarily high costs.

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Pay for Performance Comes to Ambulatory Pharmaceuticals

The New York Times reports today that two pharmaceutical companies are entering the “pay for performance” market to preserve lower patient copayments for their expensive brand name medicines and maintain or grow market share. This is modeled after a Johnson and Johnson deal with the British NHS to offer refunds for an expensive oncology medicine if it did not shrink an individual patients’ tumor(s). See an earlier blog on how the British comparative effectiveness program led to this discount offer.

Merck will give discounts to the insurer Cigna on its diabetes medicine Januvia (and combination pill Janumet) if Cigna patients in the aggregate have lower blood sugars, and the makers of Actonel, an osteoporosis medication, will give a small insurer cash payments for adherent patients on this medication who have osteoporosis-related fractures. There are alternative far cheaper generic medications that can readily substitute for Actonel and Januvia/Janumet.

The Times does not mention that drug companies are subject to a “most favored nation” clause which guarantees Medicaid programs the lowest price – so that any price concession to even a small insurer can lead to large rebate checks for every state Medicaid programs. In general (and counterintuitively), this most favored nation arrangement keeps prices unnecessarily high – since it enforces price discipline among the pharmaceutical companies. My sense is that a refund for nonperformance would not “count” as a discount, and therefore this approach allows the pharmas to offer lower rates to the most price-sensitive health plans without jeopardizing Medicaid rates.

On one hand, this is a good move. Pharmaceutical companies are selling a result (lower blood sugars and fewer nonspine fractures) rather than selling a pill.

Will this lead to lower health care costs? My guess is “no,” since these are very expensive drugs, and even discounts or refunds are not likely to bring them down to the true cost of generic alternatives. There is a better argument that Januvia represents a real advance over other oral diabetes medicines. However, I doubt that the incremental value of Januvia, even with the discounts Cigna will obtain, will be cost-saving, as opposed to cost-effective. This also leads to some opacity in the pharmaceutical market, which will allow for more price discrimination and likely yield higher pharma margins. Even if this yields higher overall costs and higher pharma margins, though, it might lead to increased value in the health care delivery system.

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