By anybody’s standards the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) that created Medicare, Part D, was a very controversial piece of legislation.

This is reflected today in the budget request from the President to Congress which asks for the right for Medicare to negotiate drug prices directly with drug manufacturers, a practice that is illegal under the MMA as CMS may not “interfere with the negotiations between drug manufacturers and pharmacies and [Part D plan] sponsors”.

By comparison, the Veterans Health Care Act of 1992 allows pricing to be negotiated either based on vendor’s most favored commercial customer pricing or using statutorily-required pricing calculations. If you’re interested, further data can be found at the “National Acquisition Center (CCST)” website hosted by the U.S. Department of Veterans Affairs.

The impact on drug pricing for veterans has been profound, and some estimates place the savings at 40% of the payments made under Medicare Part-D. The financial benefit to society in 2012 using 200 brand name drugs was estimated at $66.5 billion.

For drugs to be included in the formulary their maker must list all of their drugs on the Federal Supply Schedule (FSS) at the negotiated price. If the drug makers choose not to comply all of their compounds are excluded from federal programs, with the notable exception of Medicare part D.

The VA approach does come with some unsavory limitations. Many authors have noted that less than one third of the compounds available to Medicare beneficiaries are listed in the VA formulary, and this number is notably skewed towards drugs that are more than five years old. Many veterans have adapted to this gap by holding supplemental or alternate insurance through spouses, employers, or private pay.

It is not at all clear that the approach used by the VA would work for the Medicare Part D population, which is, by its very nature, broader in scope, but drug prices overseas show that some form of negotiation can be successful, providing the limited formulary as a form of rationing is an acceptable approach.

From the Pharma perspective, drugs are risky complex endeavours whose fates can change like wisps of mist in the sun. Consider the case of Viox, a blockbuster that was eventually shown to produce heart valve defects resulting in massive litigation, or statins whose efficacy is now very much in question. The real cost of a drug can be unknown for years.

Would an Obama backed change to Part D have any chance of success in the United States? Given the highly devisive tactics used in the passage of the original MMA bill and the increase in pharma lobbying over time, it seems unlikely.

Politics aside, discussing these issues is important as the current pricing approach is fiscally unsustainable. The problem is complex and will require significant contributions from a wide group of stakeholders. In the end, a multi-factorial approach will be needed to arrive at a workable solution.

The use of generics is clearly a major component of the governments strategy as it relates to reduction in part D pricing, and there are initiatives to direct patients toward these cheaper drugs when appropriate. Yet, without pricing information being readily available physicians are placed in a difficult situation when writing scripts.

Biologics are also problematic as biosimilars may not be available. Take for example the case of RA where the use of Methotrexate remains a mainstay of clinical practice due to cost. Patients may do better on medications such as Humera or Embrel, but at a fill cost of roughly three thousand dollars, they may not have the option to experience these benefits.

Another contributing factor is patents where exclusivity varies from three to seven or more years depending on the type of compound, use in pediatrics, or patent challenge status. Pharma argues that these patent periods are crucial for them to recoup the cost of their compounds and will not easily reliquish their protections.

The crux of the matter is that capping prices may reduce competition and stifle innovation. Conversely, allowing uncontrolled pricing in a market where demand can be a matter of life and death leads to unsustainable costs.

Perhaps the best approach is to share risk with pharma and provide greater patent incentives when prices are controlled within certain limits. When mixed with a reduction in regulatory burden and control on litigation this approach will lead to a more sustainable cost model.

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