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Private Medicare Part D insurers pay 69% more for brand drugs than does Medicaid

Comparison of DOD, Medicaid, and Medicare Part D Retail Reimbursement Prices

United States Government Accountability Office (GAO), June 2014

GAO found that Medicaid paid the lowest average net prices across a sample of 78 high-utilization and high-expenditure brand-name and generic drugs when compared to prices paid by the Department of Defense (DOD) and Medicare Part D. Specifically, Medicaid’s average net price for the entire sample was $0.62 per unit, while Medicare Part D paid an estimated 32 percent more ($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). Similarly, Medicaid paid the lowest net price for the subset of brand-name drugs in the sample, while DOD paid 34 percent more and Medicare Part D paid an estimated 69 percent more. Medicaid also paid the lowest net price for the subset of generic drugs, while Medicare Part D paid 4 percent more and DOD paid 50 percent more.

GAO found that multiple factors affected the net prices paid by each program. Specifically, a key factor for the entire sample and the brand-name subset was the amount of any post-purchase price adjustments, which are the refunds, rebates, or price concessions received by each program from drug manufacturers after drugs have been dispensed to program beneficiaries. These price adjustments ranged from about 15 percent of the gross price for Medicare Part D to about 31 percent for DOD, and nearly 53 percent for Medicaid across the entire sample. The gross prices each program negotiated with pharmacies and the magnitude of beneficiary-paid amounts also contributed to differences in net prices paid by the three programs, but to a lesser degree.

In some cases, VA beneficiaries can obtain drugs on a fee-for-service basis through non-VA facilities. These make up a very small proportion of VA drug expenditures (less than 1 percent in fiscal year 2010). Therefore we did not include VA in this report comparing prices paid to retail pharmacies.

The statutory framework allowing each program to obtain post-purchase price adjustments contributes to the wide range of percentages observed. Medicaid’s federally mandated rebates apply to virtually all drugs, while DOD’s refunds only apply to certain drugs (i.e., primarily brand-name drugs). Furthermore, we found that even when DOD received a refund for a given drug, DOD’s per-unit refund amount was less than Medicaid’s per-unit rebate for most of the drugs in our sample even though we applied only the federally mandated (i.e., URA-based) rebates for the calculation of Medicaid net prices. If we had been able to accurately apply the Medicaid state supplemental rebates, the per-unit Medicaid rebate amounts would be even larger (i.e., a greater percentage of the gross unit price) than we report. Finally, we found that Medicare Part D obtained the lowest per-unit price adjustments among the three programs. In contrast to the statutory authority allowing DOD and Medicaid to collect specific refunds and rebates, Medicare Part D plan sponsors rely on independent negotiations to obtain price concessions from drug manufacturers. As we have previously reported, plan sponsors have noted limitations on their ability to negotiate price concessions for some drugs due to formulary requirements set by CMS, lack of competitors for some drugs, or low utilization for some drugs that limit incentives for manufacturers to provide price concessions.

http://www.gao.gov/assets/670/664521.pdf

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Comparison of DOD and VA Direct Purchase Prices

United States Government Accountability Office (GAO), Apr 19, 2013

When GAO compared prices paid by the Department of Defense (DOD) and the Department of Veterans Affairs (VA) for a sample of 83 drugs purchased in the first calendar quarter of 2012, DOD's average unit price for the entire sample was 31.8 percent ($0.11 per unit) higher than VA's average price, and DOD's average unit price for the subset of 40 generic drugs was 66.6 percent ($0.04 per unit) higher than VA's average price. However, VA's average unit price for the subset of 43 brand-name drugs was 136.9 percent ($1.01 per unit) higher than DOD's average price. These results were consistent with each agency obtaining better prices on the type of drugs that made up the majority of its utilization: generic drugs accounted for 83 percent of VA's utilization of the sample drugs and brand-name drugs accounted for 54 percent of DOD's utilization of the sample drugs. DOD officials told GAO that in certain circumstances they are able to obtain competitive prices for brand-name drugs - even below the prices for generic equivalents - and therefore will often preferentially purchase brand-name drugs.

http://www.gao.gov/assets/660/654019.pdf

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Comment:

By Don McCanne, MD

These two GAO reports explain prices that the federal government pays for drugs and the mechanisms for pricing of those drugs within the Department of Veterans Affairs, Medicaid, Department of Defense, and Medicare Part D programs. The mechanisms are complex, and you have to read the full reports to fully understand them.

The bottom line is that government agencies are far more effective in negotiating optimal pricing than are the private insurers that administer the Medicare Part D program. As an example, the Medicare Part D insurers paid 69 percent more for brand-name drugs than did Medicaid.

The private Part D plan sponsors tout their effectiveness in using market principles to obtain best prices - supposedly the reason for their existence -  yet they complain that they have not been as effective as the government because of “formulary requirements set by CMS, lack of competitors for some drugs, or low utilization for some drugs that limit incentives for manufacturers to provide price concessions.”

Formulary requirements? The government agencies include in their formularies the drugs that patients need. The private insurers attempt to exclude from their formularies drugs that do not provide optimal profit opportunities. Complaining about “formulary requirements set by CMS” does not explain their inability to to obtain best prices for the government since the government has its own de facto formulary requirements for the VA, DOD and Medicaid programs.

Lack of competitors for some drugs? The government agencies also negotiate within the same pharmaceutical environment wherein there is a lack of competitors for some drugs.

Low utilization for some drugs that limit incentives for manufacturers to provide price concessions?  The government agencies also include low utilization drugs in their formularies.

Medicare Part D was designed based on the fraudulent contention that private marketplace dynamics are more effective then government negotiation in obtaining maximum value - a position that wastes government/taxpayer funds by paying excessive prices in the private sector compared to the price concessions that the government can obtain. We would not be tolerating this fraud if we had a properly designed single payer national health program.