01/13/2007 01:23 pm ET Updated May 25, 2011

The Right Prescription

Medicare should negotiate drug prices AND formularies

The arguments used by Big Pharma's apologists on the Hill yesterday in their last ditch effort to defeat Medicare price negotiations are worth exploring, since we'll hear them again when the bill gets taken up in the Senate. Those arguments were repeated in the lead Washington Post editorial this morning.

Negotiating prices for Medicare like they do at the Veterans Administration are bad because:

• The VA achieves lower prices "because it is free to deny coverage." Fully 3,000 of 4,300 medicines covered by Medicare are unavailable at the VA, thus reducing the quality of their plan. Proof? 1.5 million vets buy into the Medicare program.

• Average monthly premiums in the existing Medicare benefit fell this year, showing that competition among insurance companies is working. How are they doing it? By establishing the very formularies that Medicare, by the 2003 law, is prohibited from using.

• The insurance industry's formularies, however, are not "unappealingly narrow" because they "need to keep customers."

• To keep the dollars flowing to industry R&D, consumers need to pay high prices for significant new drugs. Only industry formularies, flexibily adapting to consumer preferences, can efficiently achieve that goal by refusing to pay for "pseudo-new drugs that merely mimic cheap generics."

The touchstones of their arguments are that the drug marketplace is working, restrictions on consumer and physician choice are bad, and the private sector is always better than the public sector at achieving results.

Let's start at the top. If the VA is such a fiasco, why is that government-run system now considered the best health care delivery system in America? Phil Longman of the New America Foundation documented the dramatic turnaround at the VA in a January 2005 article in the Washington Monthly. His book on the subject will be out soon.

While the original article did not address the issue of VA drug purchasing directly except to say it delivers lower prices, how bad can the effects of its formulary restrictions be if its hospitals are more highly ranked in quality measures - including the provision of life-saving drug therapies - than Johns Hopkins, the Mayo Clinic and Massachusetts General? My monitoring of leading medical journals suggests that the some of the best comparative drug and therapeutic intervention studies being done in America today are being done by researchers at the VA. That's the evidence that drives their formulary decisions.

So how do we explain the 1.5 million VA recipients who apparently applied for drug supplemental insurance plans through the new Medicare drug benefit? Let's put that number in perspective. There are 7.7 million veterans and their families members who get their health insurance through the VA. Fully 3.5 million are disabled, pensioners or their surviving spouses - in other words, dually eligible for Medicare benefits. It's entirely possible that they signed up for the Medicare drug benefit because the VA has its own co-pay system of $8 for a 30-day supply of any drug, and they are wisely getting every government benefit they can for financial reasons. Indeed, the better question to ask is why haven't the other 2 million folks signed up? That high number doesn't suggest widespread revulsion at the VA's "restrictive" formulary.

The rest of the arguments are contradictory and ignore how the drug marketplace really works. Premiums may be down this year from last year, but if insurance company negotiators are so successful at lowering prices, why did drug expenditures in the private marketplace rise at a nearly six percent clip the year before the Medicare drug benefit went into effect? If the insurance industry's formularies aren't going to be "unappealingly narrow," how are they going to weed out useless but pricey me-too drugs, the best way to hold down prices in the long run?

The Post editorial's final point actually brings the whole logical edifice crashing down. Consumers are going to police the system through their individual choices? Are these the same consumers who are bombarded daily with direct-to-consumer ads touting the latest me-too drug on television, in the pages of their daily newspapers and in weekly magazines? Such poorly informed consumers will likely gravitate over time to the least restrictive formularies precisely because they include drugs that are no better than generics.

It's fascinating to me that we never hear about the physicians' role in the system. They need someone to sort out the evidence for them, too. How likely is it that doctors who attend industry-paid continuing medical education, have their staffs wined and dined by drug salesmen, and write their prescriptions with drug company logo-ed pens will go strictly by the evidence when prescribing drugs on the competing insurance industry formularies?

And who wrote that evidence anyway? In all likelihood, drug companies financed many of the latest studies in their specialty's top journal. Meanwhile, the clinical practice guidelines for their specialty were written by a committee from their professional society whose roster had a majority of physicians who either consulted for, did research for or spoke on behalf of the drug manufacturers. Finally, all this evidence is wrapped up with a tidy bow in expensive journal reprints, which are conveniently delivered to the doctor's doorstep by drug reps.

Are Americans quaking in their shoes at the prospect of kneeling before a formulary written by a government bureaucracy like the one they have at the VA? If they had any idea how the insurance industry and organized medicine established their formularies, I suspect most of them would choose the big government program - and its lower prices - any day.

Merrill Goozner
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