Moving beyond ACA repeal to address real health reform: Negotiating for lower drug prices under the Medicare Drug Price Negotiation Act

The Republican push to repeal the Affordable Care Act (ACA) seems to be on another hiatus, which is good news. At least some members of Congress are spending the time between efforts to gut the ACA pursuing socially useful reforms. For example, Senators Bernie Sanders (I-Vt.) and Patrick Leahy (D-Vt.), and Representatives Elijah Cummings (D-Md.), Lloyd Doggett (D-Texas), and Peter Welch (D-Vt.) have just announced they will introduce a bill that would instruct the Department of Health and Human Services (DHHS) to negotiate with pharmaceutical companies to get the lowest prices possible for drugs paid for by the federal government under Medicare.

The 2003 law that introduced a pharmaceutical benefit to the Medicare program by creating Part D specifically forbade such negotiation, thereby insuring that the program would be far more expensive than it had to be and that it would generate the maximum possible benefits for pharmaceutical corporations rather than the maximum benefits for America’s seniors. Crucially, the proposed bill to allow negotiation comes with real leverage—instructing the secretary to establish a formulary that will make it substantially harder for manufacturers that do not lower prices sufficiently to be reimbursed by Medicare. 1

A 2013 paper by Dean Baker estimates substantial savings from such a program. He finds that the federal government alone would save between $22–54 billion annually. Including the savings to households (who have to pay co-pays for drugs) and state governments would boost these projected savings to $30 to 70 billion annually. This is real money, even in health care terms.

To get a sense of what could be done with these savings, we can start with a commonly-cited complaint about the Affordable Care Act—one of the few complaints with actual merit: the ACA’s exchange-based insurance policies are too “thin”—meaning that deductibles, co-pays, and other cost-sharing burdens are too high. This complaint is understandable. For people used to getting employer-sponsored insurance (ESI) who find themselves now buying in the exchange, it is true that these exchange plans are thinner than most ESI plans. But we should remember that the pre-ACA individual market for insurance offered even much less comprehensive plans that required much larger out-of-pocket costs. For example, fully half of the plans offered on the individual market before the ACA would not be allowed today precisely because they demanded too-costly out-of-pocket exposure.

Fixing the problem of too-high exposure to out-of-pocket costs is straightforward: the exchange subsidies for premiums and cost-sharing could be increased. There would be plenty of members of Congress—mostly (or exclusively) Democratic—who would sign onto this. The obvious objection to this is that it costs taxpayer money. This raises the question: how far would the $22–54 billion in savings from negotiated drug prices go in solving this problem?

The ACA in total spends less than $50 billion annually on premium and cost-sharing subsidies in the exchanges. The savings from prescription drug bargaining could hence allow a potential doubling of subsidies to insulate households from out-of-pocket cost exposure in the ACA exchanges. In actuality, however, the ACA premium and cost-sharing reduction subsidies already likely pay over half of total costs for enrollees, so a doubling of subsidies would essentially leave these enrollees with zero in out-of-pocket costs—perhaps too ambitious a goal? The general finding, however, is that negotiating for drug prices in the Medicare Part D program would yield enormous savings, some of which could essentially solve the oft-cited problem of ACA exchange plans providing insufficient insulation against health care costs.

Real health reform can solve real problems faced by Americans. The Medicare Drug Price Negotiation Act is an example of such real reform.

1. While a strict formulary would provide real leverage for the HHS in negotiations, there would be a process (as there is today) for beneficiaries to request coverage for drugs off the formulary if there was a compelling medical reason why the formulary drugs were inappropriate for their care.