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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"Truthiness" and the Republican Presidential Debate

Today's Managing Health Care Costs Indicator is

 800,000

The Kaiser Family Foundation  has done us the favor of extracting the health questions from last night’s Republican presidential debate.

My take on the ‘truthiness’ of selected answers:

The Congressional Budget Office has said that Obamacare will kill 800,000 jobs.  -  Michele Bachman

The CBO estimated that the Affordable Care Act would slightly lower the overall cost of health care premiums for large employers, which could create new jobs.   It will be hard to create net new jobs in health care and lower health care costs.  Politifact  calls this “barely true” because the CBO noted that ½% of the workforce that works for health insurance only might choose not to work.

Obamacare….  took away $500 billion, a half-trillion dollars out of Medicare  - Michele Bachman

The Affordable Care Act cut future growth of Medicare by $500 billion over 10 years.  There is no way to cure the deficit without cutting Medicare’s future growth.  It’s not nearly the cut in future Medicare costs envisioned by the Paul Ryan budget plan.  It’s also not taking money from Medicare beneficiaries, but lowering future rate increases for providers.

We didn't raise taxes in Massachusetts. – Mitt Romney

We were lucky in Massachusetts to have over half a billion dollars in federal Medicaid waivers to help support health care reform.  We also did use additonal money from general tax revenue. There was no tax increase simply because the economy was in good shape and we had dollars available in the then-current tax base.

When you get into a mandate, it ultimately ends up with unconstitutional powers. –Newt Gingrich

The courts will ultimately decide.   The individual mandate was initially championed by conservatives.  It’s hard to avoid adverse selection and make insurance inexpensive for all without some penalty for not having insurance.  John McDonough has an excellent commentary reviewing this history.

If you're an average couple and you paid your entire amount into -- into Medicare, you would have put $140,000 into it. And in your lifetime, you will take out more than three times that much.  –Ron Paul

This is true.  Medicare is a good bargain because it costs less than commercial insurance, and a better bargain still for beneficiaries because there is a considerable subsidy.  Medicare is not fully funded by taxes directed to Medicare only.  Paul goes on to say that Medicare is “insolvent.”  It’s not really – it just will require decreasing costs or increasing tax subsidies.

We have to have more competition in medicine.  – Ron Paul

Michael Porter and others argue that we don’t need more competition – we need different competition.  We need competition among providers for meaningful bundles of services, rather than competition among health plans that don’t have enough impact on actual care delivery.

Why can't we opt out of the whole system and take care of ourselves?  - Ron Paul

Works when you’re healthy, can be deadly if you’re sick unless you have huge personal wealth!

My own plan… will feature performance pay rather than just volume pay to hospitals and clinics and providers.  –Tim Pawlenty  

Many agree that fee for service payment is a major problem leading to considerable provider-driven overutilization. This is a good idea, and I’ll await his plan eagerly.

[I] would allow… private contracting so those people who want to voluntarily could contract with their doctor or their hospital in addition to Medicare, and it would be outside the current system and it would relieve the pricing pressure on the current system.  –Newt Gingrich

Individuals contracting with their physician or hospital would have little leverage to lower prices, and the administrative costs of such a system would be hard to imagine.

 We think you can save $70 billion to $120 billion in Medicare and Medicaid annually by not paying crooks... –Newt Gingrich

Many suspect that fraud and abuse could be as much as 10% of medical costs.  Medicare and Medicaid together cost almost $900 billion, so this is possible.  However, it’s not as easy as it looks, and many who oppose regulation have a difficult time accepting the type of oversight that could be required.

I wholeheartedly support…a program that is identical to what seniors already have. It’s called Medicare Part D….[and it] is 41 percent under budget because seniors are involved in controlling costs – Rick Santorum

The Ryan Plan, which Santorum supports, is very different than Medicare Part D.  The Ryan plan would cap government expenditure, whereas Part D allows government costs to rise with medical inflation rate.  Medicare Part D is under budget not because of competition or seniors with “skin  in the game,” but because of generic drugs and much lower senior enrollment than projected.

The Independent Payment Advisory Board [is going to] ration care from top to bottom –Rick Santorum

There is a good thought article yesterday from the Concord Coalition , a center-right anti-deficit group, about why the IPAB is a critical part of health care reform.   We need to make tough decisions, and this approach is much like the way we deal with potential military base closings.  

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Will eliminating the donut hole break the budget?

Good article in today’s Washington Post about the potential downside of closing the “donut hole” that forces seniors to bear full financial responsibility for all prescriptions between $2700 and $4350. 

Between ¼ and 1/8  of Medicare beneficiaries with Part D coverage fall into this gap – which was established to lower the total cost of Part D coverage, and also as part of the Bush administration attempt to keep patients’ “skin in the game” so that they would comparison shop. 

There’s been a sea change in Washington – in the prior administration the mantra was to keep patients engaged by exposing them to a portion of the price of care. The current administration is pushing to eliminate substantial gaps in coverage.  Congress enacted minimum out of pocket deductibles for health savings account eligibility in the past.  Congress is now seeking to enact maximum out of pocket deductibles.   Harry Reid called the donut hole an “indefensible injustice for American's seniors." 

The big problem with this plan is that the funding is in part from the $80 billion pledged by pharmaceutical companies, which will use this to subsidize 50% of the cost of brand name drugs prescribed for Medicare beneficiaries in the ‘donut hole.”  This is a terrible idea, since many of these brand name medicines could be substituted, and the brand names remain a bad value even at half price.  Some brand names, of course, offer unique advantages, and this will be a valuable break for Medicare beneficiaries on those medications.

Some have claimed that increased medication adherence will prevent hospitalizations and therefore save money.  Since almost all medications are cost-effective and not cost-saving, this is not true.  Purchasing medications so that beneficiaries follow their doctors’ instructions will buy us better quality – but will not save dollars to fund the increased pharmaceutical spending.

Politically, closing the donut hole is critical.  Clinically, decreasing nonadherence among sick elderly is an excellent idea.  This will likely raise the overall cost of health care, though, while improving quality.

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