The O'Connor Report

Guest Column
A Two-fer: A Medicare Pharmacy Proposal that Also Lowers Medication Costs for Everyone

by Ivan J. Miller

The Medicare pharmacy benefit plan passed by the 2003 Congress is a mess. Insurance companies will siphon off billions of dollars needed for medical care, the government will incur excessive and unnecessary debt, and Medicare recipients will not get the assistance they need. Moreover, this proposal does not include an effective way to deal with the rising costs of medications. Fortunately, there is a better answer, the Competitive Pricing Medicare Pharmacy Proposal. It is a two-fer. One plan solves two problems--the need for a Medicare pharmacy benefit and the need to restrain the rising cost of medications.

The Competitive Pricing Medicare Pharmacy Proposal gives more assistance to Medicare recipients than the current plan, costs less, gives choice to consumers and providers, lowers the cost of medications for everyone, and accomplishes all this without government interference in the price of pharmaceuticals. Because the current plan will not be in effect until 2006, there is time to create and implement a simpler and better plan, especially since there will be an election between now and then.

The plan is simple. First, it makes competitive pricing lists available in the doctor’s office where medication decisions are made. Second, it stimulates patients’ concerns about price because in Competitive Pricing, Medicare pays a base amount for each category of medicines, and patients pay the full gap between the base amount and the actual charge for a specific medication.

How is the Competitive Pricing Proposal able to accomplish so much? It simply addresses the core problem in the price escalation of medications — medications have not previously had real price competition. Doctors and patients have not had enough price information available in the doctor’s office where medications are prescribed. Furthermore, too often when the price is known, patients have not cared because after a copayment, insurance is paying the bill.

The health insurance industry has known about this problem and has made some ineffective attempts to simulate price competition. Many managed care companies created drug formularies — books that either rated the cost of medications in a manner similar to the star systems used by movie reviewers or created barriers to obtaining medications thought to be too expensive. Unfortunately, formularies function more like annoying bureaucracy than a market force. Other managed care companies wait until prescriptions are taken to the pharmacy and have pharmacist benefit managers phone doctors in an attempt to persuade them to change the prescription to a less expensive medication. The use of pharmacist benefit managers is time-consuming and highly abrasive to patients and providers. The current fad is to have three tiered systems with a different copayment for each tier. The low copayment tier is for generic drugs; the middle copayment tier is for medications that are favored by the managed care company due to price, negotiated special deals, or rebates; and the high copayment tier is for drugs considered expensive. Tiers save money for managed care companies that may have negotiated a special deal or rebate for including a medication on the second tier, but they do not change the price of medication for the rest of Americans.

The above attempts to simulate price competition do not address the major cause of escalating prices in medication. Pharmaceutical companies raise the price of established medications frequently, sometimes even several times a year. These small price increases are not large enough to affect a medication’s star rating in a formulary or move it from one tier to another, but Families USA has found that in 2002 these price increases amounted to an annual rate of 8.1%. In Competitive Pricing Proposal, on the other hand, patients and providers would know the exact dollar difference between medications, and the market would react to even these small changes.

The Competitive Pricing Proposal creates price lists by first requiring that drug manufacturers publish the maximum price for their medications. The manufacturers can change the price or sell below this price at any time. The published price is then used by the Medicare system to create a cost comparison chart for the typical dose at a typical pharmacy. The list allows doctors and all patients to make price comparisons, and it also gives Medicare patients the amount of the anticipated gap payment they will need to make for each medication. Patients may achieve additional savings by shopping around for a discount pharmacy that lowers their gap payment.

Funding directly supports Medicare recipients by providing, directly to the pharmacy the patient has chosen, base payments that increase as the annual cost of medications increase. Most recipients would pay the gap between the base payment and the actual cost of medication at the pharmacy. The plan gives Medicare recipients the financial help they need because the base amount increases as annual medication expenses rise. Low-income recipients and those with huge costs would have all costs of medications paid by Medicare to assure that no Medicare patient would forego necessary medication for financial reasons.

The following fictional script for Dr. Goodheart and Mrs. Beewell shows how the plan works.

Dr. Goodheart: Considering your history of heart problems and high blood pressure, I would like to start you on a Beta-Blocker.

Mrs. Beewell: Okay, but my finances are tight so I would like you to consider cost in choosing a medication.

Dr. Goodheart: Gladly, I know that cost matters. I have in my hand here this month’s Competitive Pricing Medicare Medication Chart. There are five Beta Blockers, but only three that I would consider prescribing for you. Now on this Chart, the lowest priced one would have a gap payment of $30 per month, but more patients report side effects with that one. The next lowest priced one would have a gap payment of $39 per month and fewer people report side effects.

Mrs. Beewell: Why don’t I try the $30 per month one for a couple of weeks, and if I get side effects, I will try another.

Dr. Goodheart: Good idea. We have a plan. I will see you in two weeks to see how well the medication is working.

(As it turned out, Mrs. Beewell found a discount pharmacy that lowered her gap payment to $21 per month and the less expensive medication proved to be just right for her. Overall, Mrs. Beewell found her annual gap payments were lower than her combined copayment and deductible costs on the health insurance she had before Medicare had the Competitive Pricing Program.)

The second part of the two-fer solution is that price competition will cause the price of medications to fall for everyone. According to Families USA (Bitter Pill, 2002), Medicare recipients pay 42% of the cost of medications in America. There is tremendous power that will come from the cost-conscious senior and disabled Medicare recipients. In addition to Medicare patients, those who have no insurance or do not have a pharmacy benefit in their plan will also be interested in using the Competitive Pricing Medicare Medication Chart. The 44 million uninsured, and uncounted millions who have insurance but no pharmacy benefits will add their market power to Medicare recipients. Once millions of cost conscious consumers sensitize doctors to price, they will consider price differences even when insurance is paying the bill. The market will change from the current situation in which drug companies hardly ever face real price competition, to one where there is almost no place to hide from real price competition. The result should be a steady decline in the price of established medications.

This dramatic change can happen because a primary cause for price escalation in medications is periodic price increases for established medications, not the few medications that really have no competitors. Families USA (Bitter Pill, 2002) has identified the top 50 drugs used by the elderly, and according to the Physicians Desk Reference (2002), at least 47 of these have some competitor medication in their category. Families USA found that the brand name drugs on this list increased at three times the rate of inflation in 2002, while the generic drugs increased at less than the rate of inflation. Generic drugs compete on price at the pharmacy where the lowest cost generic is chosen. Brand name drugs, on the other hand, avoid price competition because they are selected by physicians who do not have the price information available.

It is true, that one medication cannot always be replaced by another in the same category, and therefore no two drugs are equal competitors. Two medications in the same category may be equally effective for only some patients. This is no different than most other parts of the free market system. Competitors are usually not offering identical products, and they still compete on price.

Patients are protected from putting too much emphasis on price in this proposal because the doctor still decides if it is appropriate to try a less expensive medication. The difference between the current situation and the Price Competition Proposal is that price can be one factor that the doctor-patient team uses in selecting medications.

If the Price Competition Proposal merely slows the rising cost of established medications, it would be a great accomplishment. Hopefully, Price Competition would take 10%, 20%, or more out of the bloated prices that have developed in the years without price competition.

When price competition begins to work, it will restrain medication costs without government cost controls that might stifle the invention of new drugs. After all, it is well established that price competition is merely a traditional component of free market systems that are known to stimulate innovation and new products. Pharmaceutical companies, just as other industries that cope with price competition, will be able to make healthy profits.

The Price Competition Proposal is better than the so-called “market-driven” proposals that ask consumers to pick between one or another giant HMO pharmacy benefit. These HMO pharmacy benefit packages are so complex that no one can understand how they will work in an individual case. From an economic perspective, HMO pharmacy benefits can be thought of as a huge bundle of services that must be accepted as a whole. The Price Competition Proposal unbundles the delivery of medications so that the doctor-patient team can make each medication decision independently.

The Price Competition Proposal saves money because it eliminates most of the administrative costs that occur in both giant HMOs and government bureaucracies. The Price Competition Proposal requires only a small administration to distribute price lists and make the base payments directly to pharmacies, thus cutting huge costs from the administration of the Medicare pharmacy benefit plan approved by Congress in 2003.

Still, there is another bonus that comes from the Price Competition Proposal. Critics have blamed expensive direct-to-consumer advertising for pushing up the cost of medications. The pharmaceutical industry defends itself by saying it is only educating consumers about the possibility of improving their health care. If the Price Competition Proposal is implemented, when Mrs. Beewell sees Dr. Goodheart and inquires about the medication she heard about on TV, he might say, “Yes, you have that condition, and because I know you care about cost, let’s see how much each of the different medications for that condition cost.” When advertising expenses push up the cost of the medication, the advertiser would lose the sale in the doctor’s office where price competition comes into play.

To cure the American health care systems we need new ideas that serve the interests of patients, employers, and providers of health care services, not the interests of bureaucracies, public and private, that control health care services. The Competitive Pricing Proposal is one such idea. It makes sense. Price competition has been proven to work in other parts of the free market system. Competitive Pricing serves the interests of Medicare recipients. By controlling the price escalation of medications, it relieves the health care cost burden on all patients and employers. This step can be the beginning of reshaping the health care system so that it better serves all Americans.

Additional information about the design of the Competitive Pricing Proposal is available at www.BalancedChoiceHealthCare.com under the Pharmacy Benefit section of the Balanced Choice Health Care proposal. The Pharmacy Benefit article on this website is an earlier and more detailed version of this proposal and some of the terms are different than in “Two-fer” article above. Instead of referring to a “base payment” and “gap,” the earlier article refers to “first” and “last” dollars. Also, instead of calling the proposal a Competitive Pricing Medicare Pharmacy Proposal, it calls the proposal the Balanced Choice Pharmacy Benefit System.

This prepublication copy of this article may be photocopied or distributed electronically as long as it is noted that it is copyrighted, and that it is not published anywhere, even on a website, without permission of the author, Ivan J. Miller, IvanJM@aol.com.