Paul Howard

By Paul Howard || As Congress teeters on the fiscal cliff, expect liberal advocates to resurrect the idea of having HHS “negotiate” directly with drugmakers for medicines covered by Part D, in addition to inflicting automatic Medicaid rebates onto medicines for dual eligible seniors (eligible for both Medicare and Medicaid) as well as seniors who are eligible for low-income subsidies.

This is a bad idea. First, the Congressional Budget Office (CBO) has said that there is no evidence that HHS could get any better deals than the Part D Pharmacy Benefit Managers (PBMs) are getting, at least not without creating a restrictive drug formulary that would ration seniors’ access to new medicines. Since Medicare accounts for about 25 percent of U.S. prescription drug sales, this would represent a tremendous blow to innovation, allowing some savings today in return for fewer medicines tomorrow – along with more unalleviated suffering and death.

The President is always talking about the need to invest in the nation’s future “infrastructure,” and Part D is a market-based investment in America’s ability to continue to produce cutting edge medical advances. It’s a program with a proven track record of high satisfaction among seniors (about 90 percent), fiscal savings for taxpayers (about 40 percent below initial estimates), and promotes a much needed focus on competition and value in health care markets. Rather than figuring out how to gut Part D, we should be modeling the rest of Medicare around it.

Markets also show signs of developing new paradigms for cost control in areas that haven’t seen much evidence of it in the past, like oncology. Take the recent decision by Memorial Sloan Kettering to not use a high priced colon cancer drug from Sanofi that doesn’t (at least according to MSK) offer any advantage compared to existing colon cancer therapies like Avastin.

Individual cancer centers haven’t normally entered into the cost debate, because they are directly reimbursed by Medicare at cost-plus, a 6 percent mark-up based on the average price of the drug. Kudos to MSK for pushing back, and getting a price concession from Sanofi.

This is the way markets are supposed to work, with providers, insurers, and manufacturers negotiating in an open market. Insurers can then compete on price and quality for consumers’ business – something that doesn’t happen much in Medicare outside of Part D and Medicare Advantage plans. Instead, most seniors opt for fee-for-service health care provided by any willing provider, no matter how inefficient or expensive. Until seniors have better incentives to actually shop for value, Medicare won’t be able to consistently deliver high quality, cost effective care.

For all of the bad press that drug companies get, pricing for pharmaceuticals is actually much more competitive and transparent than in many other parts of the health care sector (like surgery, for instance), because drug companies submit reams of data on product safety and effectiveness when they submit New Drug Applications to the FDA. This data can then be mined by insurers and PBMs to create drug formularies and tiered pricing arrangements for consumers. Also, when drugs lose patent protection, they become cheap generics, generating massive cost savings for the health care system while still delivering enormous benefits.

But this all depends on companies being able to recoup their massive costs in drug research and development during the relatively brief time their medicines are still protected by patents. Price controls for Medicare Part D would undermine incentives for innovation – without encouraging providers to create better bundles of care that would also include drugs, tests, physician services, etc.

In other words, we shouldn’t be setting prices in any discrete health care silos (for drugs, hospital care, etc.) if we want to generate maximum value for seniors and taxpayers.

Medicare’s history of price setting has unleashed a tsunami of unintended consequences across the health care system, since it is the nation’s single largest health insurer. As the HHS inspector general noted recently, providers are in the habit of gaming Medicare reimbursement costs (“upcoding”) to maximize reimbursements.

As a result, under Medicare’s administered pricing scheme we get both too little of some services (that are poorly reimbursed) and too many of other services (that are overcompensated). Medicare can never find the “right” price, because providers have much more fine grained information about the costs of their products and services, and their own patient mix, than Medicare does. The result is a game of Medicare price whack-a-mole that never really controls costs or offers consistently high quality care across Medicare’s vast universe of doctors and physicians.

Since premium support is likely off the table for the time being, there are still many other things that Medicare can do to improve care coordination and value. We should bundle Medicare services by putting Parts A&B together, with one premium for seniors, which would encourage providers to better coordinate care. We should allow administrative services organizations (ASOs), widely used by large private employers, to set up networks of preferred providers in Medicare, and offer seniors incentives – through reduced co-pays or enhanced benefits, to utilize low-cost, high quality providers.

ASOs could also represent an appealing ideological mid-point between premium support, traditional Medicare FFS, and Medicare Advantage plans. The key would be to bundle payments and have all providers “go naked” on their outcomes data so we have some correlation between the money spent and actual performance. Additional, web-based tools could then help seniors find the providers who offered the best care at the lowest cost.

Indeed, this apporach is already being tested by United Healthcare at a number of oncology centers around the country. In an effort to control costs of cancer treatment, the insurer will provide up-front payments for a typical 6 to 12 month course of treatment, and allow the oncologist to determine the specifics, rather than paying by volume of care.

An earlier study published in the Journal of Oncology Practice found evidence to support this type of approach, identifying some $9,000 in savings for patients on evidence-based pathways in the treatment of lung cancer, with little change in 12 months survival rate. Studies like this can provide a benchmark for weighing how different treatment strategies and practice designs affect the cost of care and health outcomes and – most importantly – inform patient choice in the oncology setting.

ACOs, traditional insurers, physicians groups, etc. could all bid to create these types of networks, available on the same type of exchange mechanism used in Medicare Part D. The upside of this approach is that providers will finally have better incentives to offer the best bundle of care for seniors, rather than perennially lobbying Medicare and Congress for this or that billing code or reimbursement tweak (think SGR). For more information on how this might work, see my colleague Avik Roy’s discussion of ASOs on his Apothecary blog.

There are very few true pricing signals available to seniors in Medicare today. Without those signals, Medicare will inevitably drag the rest of the economy over a fiscal cliff, no matter how many price controls Congress mandates for the program.


Paul Howard, Ph.D. is director of the Manhattan Institute’s Center for Medical Progress.