Want to lower drug prices? One Wall Street analyst ponders a seemingly simple scenario: allow Medicare Part D to get the same discounts that Medicaid receives. But while this may benefit taxpayers and possibly consumers, the biggest drug makers would take a 15 percent earnings hit, on average.
Thanks to federal law, the Centers for Medicare & Medicaid Services can’t negotiate prices for the Medicare Part D plan, which covers prescription drugs for roughly 39 million people. Countless proposals have been floated to allow CMS to haggle over medicines, yet the idea has never gained any serious traction.
But consider that Medicaid typically gets a 23 percent rebate. That could lower costs substantially. In 2015, for instance, Medicare Part D spending on prescription drugs was about $88 billion, or roughly $75 billion after rebates from manufacturers, according to Sanford Bernstein analyst Tim Anderson.
“Politicians often talk about allowing CMS to ‘negotiate’ drug prices, implying that it would act like a commercial payer or PBM and use a variety of tactics to lower spending,” he wrote in an investor note. “We argue that a simpler fix would be to make Medicare like Medicaid.”
The observation is not new. Last year, the US Office of the Inspector General released a report which pointed out that the average drug discount for Medicare Part D was around 15 percent versus 47 percent for Medicaid, based on 2012 data.
We should note that Anderson is not actually advocating this position. But he discusses the notion now because he believes it might get more attention, given that pricing has become still more controversial and the presidential campaign has, at times, demonized drug makers, which suggests policy changes.
Already, the Obama administration is taking steps to remake Medicare Part B, which pays for injectable and infusion drugs, by overhauling payment to physicians and assessing the value of medications. There are, however, sizable objections.
“To be clear, there do not appear to be any active proposals like this (to revamp Medicare Part D) currently ‘on the table’ in Washington,” Anderson wrote. “Nonetheless, we find it useful to run this scenario because, in our view, it represents the most realistic downside scenario the (pharmaceutical) industry could face if, in a future year, the president and Congress align on their views on ways to slow government drug spending.”
So what would this mean for drug makers and investors? To calculate the impact, Anderson assumed that companies would continue to pay Medicare Part D rebates to private sector health insurers as they do currently. But drug makers would also be required to pay an additional rebate, so total pricing would reflect Medicaid levels. He uses the same 47 percent rebate figure that was cited in the OIG report.
The effect on companies would vary considerably. For instance, he estimated that such a policy change would scrunch Bristol-Myers Squibb by 31 percent, making the company the biggest loser. Lilly is a runner-up with a 27 percent earnings hit. Conversely, Pfizer would suffer only a 7 percent hit to earnings, the smallest among nine large drug makers that he tracks.
The effects on earnings, of course, depend on the extent to which each company depends on Medicare Part D for revenue. About one-fifth of Bristol-Myers revenue is in this category, whereas just 5 percent of GlaxoSmithKline sales are derived from the government program, according to Anderson.
One expert believes the likelihood is low that Medicare Part D would be changed in this way.
“There are trade-offs. It might save money, but what does it do to industry desire to put money into research? Will it impinge or limit that research investment? The industry will tell you it would,” said Ira Loss of Washington Analysis, who studies the intersection between politics and the pharmaceutical industry.
“We still have a lot of unsolved diseases around here that depend on private industry to find the answers. It won’t come from the government putting money into the federal budget,” he continued. “This is not a solution but there will be advocates. For the drug industry, it’s a nightmare that it does its best to prevent from happening. So I think the chances of anything like this being passed or adopted is very low.”