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New HHS Study Emphasizes Value of Medicare?s Ability to Negotiate Prices for Drugs

June 12, 2002

New HHS Study Emphasizes Value of Medicare?s Ability to Negotiate Prices for Drugs

Study Showing Medicare Was Overcharged for Supplies Offers Lesson for Those Crafting Medicare Drug Benefit Proposal

WASHINGTON, D.C. ? A new study delivered to Congress today starkly illustrates the need for a Medicare drug benefit program that enables the government to negotiate with drug makers for deep discounts, Public Citizen said today.

The study, issued by the inspector general of the Department of Health and Human Services (HHS), finds that Medicare is being significantly overcharged for medical supplies such as wheelchairs and saline solution. The study finds that if Medicare paid the same prices for 16 health care supplies as the Veterans Affairs Department (VA), which negotiates for low prices with manufacturers, it could have achieved discounts amounting to $958 million, or 56 percent of the cost of those products.

“The lesson here for members of Congress drafting legislation to create a drug benefit in the Medicare program is clear,” said Frank Clemente, director of Public Citizen?s Congress Watch. “Drug benefit legislation must give the Medicare program the ability to negotiate deep discounts in the price of drugs directly with drug makers. Any other proposal will result in Medicare being dramatically overcharged for drugs, making it impossible to come up with an affordable program.”

Currently the VA negotiates deep discounts with manufacturers of medical supplies, including pharmaceuticals and durable medical equipment. These medical supplies are then made available to VA facilities and other federal government agencies at the agreed-to prices. Through negotiations with drug companies, the VA has been able to achieve discounts of approximately 50 percent off the retail price of prescription drugs.

“Rather than do the sensible, cost-effective thing and adopt the current drug cost containment program that saves 40 to 50 percent on the cost of drugs for the VA and other federal agencies, the Republican plan makes a modest gesture at cost-containment while making grandiose claims,” Clemente said.

Below is Public Citizen?s critique of the drug cost containment proposal that is expected to be included in the House Republican?s Medicare proposal next week:

  • While Republicans have claimed that their plan will allow Medicare to “use its purchasing power to negotiate drug discounts averaging 30 percent,” it in fact fails to do so. In the most recent available version of the Republican proposal, there is no language allowing the HHS Secretary or the Administrator of the Centers for Medicare and Medicaid Services to negotiate deep discounts directly with the drug industry. Instead, this legislation would rely on private insurance plans and HMOs to provide a drug benefit to Medicare beneficiaries. These private plans would negotiate some discounts with drug companies, but they would not have the market power of the entire Medicare population behind them and therefore would be limited in the discounts they could achieve.
  • The 30 percent drug discount claim is a distortion. The claim that their plan will produce “drug discounts of 30 percent” is based on a Congressional Budget Office (CBO) estimate that has not been made public. However, judging from similar analyses by CBO that have been made public, it appears to be a distortion of CBO?s conclusions. In June 2001, the CBO scored H.R. 4680, legislation very similar in structure to the most recent version of the Republican proposal. The CBO estimated that the legislation would result in a “cost management factor” of 30 percent. However, this is very different from Republican claims that their proposal will result in a “30 percent drug discount.” The “cost management factor” referred to by CBO is the result of all the features of a plan that reduce the amount spent on prescription drugs in comparison with an individual who faces no financial constraints on the ability to purchase prescription drugs. This includes savings that result not just from price discounts, which would increase drug usage, but from features of the plan that will discourage beneficiaries from purchasing drugs at all, such as deductibles, high co-payments and formularies.