Negotiating Drug Prices

Donald Trump has said drug companies are “getting away with murder. We’re the largest buyer of drugs in the world, and yet we don’t bid properly, and we’re going to save billions of dollars” (link).

It seems by “we” he meant Medicare and Medicaid, and he was more specific on other occasions.

This was before Trump met with drug company executives. I know little about what happened at this meeting, and this article is very vague about it. Anyway, apparently after the meeting Trump abandoned the above ideas. Joe Nocera at Bloomberg wrote Trump Had One Good Idea. Then He Ditched It. His article also appeared in at least the Chicago Tribune and Cleveland Plain-Dealer.

Apparently what Trump did believe, and Joe Nocera still does, is that Medicare and Medicaid buy and dispense drugs and have the power to negotiate drug prices. They surely don't buy and dispense drugs. They are not set up – have the supply channel and direct contact with the patient/”dispensee” -- to do so. Hospitals, pharmacies, medical clinics, doctors, and some other entities buy and dispense drugs and can negotiate prices. That includes Veterans Administration hospitals. Medicare and Medicaid only (partly) reimburse those who do the buying and dispensing. Medicaid "negotiates", but  Medicare can’t by law. When Congress added the Medicare Part D prescription drug benefit in 2003, it prohibited the government from "negotiating" drug prices on behalf of Medicare beneficiaries and stipulated that outpatient drug coverage should be provided entirely through private insurers like UnitedHealth and Humana, under contract with Medicare.

Insurers have aggressively negotiated with pharmaceutical companies, so Medicare’s prescription drug program has cost the government less than originally predicted. But the private insurers have not obtained discounts or rebates as large as those secured by Medicaid. (Insurers also steer policyholders to particular pharmacies, e.g. Walmart, and particular drugs when there are substitutes).

Medicaid “negotiates” lower prices via rebates. Medicaid receives rebates from the drug companies related to the reimbursements the insurers receive. The rebate scheme is complicated with differences based on the particular drug (link). It is much closer to price and product controls than negotiation. The word "negotiate" is not in the linked page. In other countries a government is usually the main insurer. So, they really can  and do dictate prices to pharmaceutical companies. Medicare doesn't strictly dictate prices; it dictates how much it reimburses and for what. Yes, it pays attention to what private insurers pay, but “dictatorial” is the best fitting adjective.

The main counteracting force to the drug companies is pharmacy benefit managers. In order to get included in an insurance plan's formulary, the drug company needs to usually offer concessions to the pharmacy benefit manager in the form of rebates. That's really how they hold down pricing.  Express Scripts, CVS Health, and UnitedHealth are the three dominant companies. Drug companies oppose the type of discounts required by Medicaid, seeing them as government price controls. Of course, they are correct. Drug makers say they prefer Medicare’s market-oriented approach, in which discounts are negotiated between drug plans and manufacturers.

Are my points about buy-and-dispense versus reimburse and what “negotiate” means when the government is one party some of what changed Trump’s ideas after meeting with the drug company executives? If so, I’ll give him credit.