Medicine & Markets
Democrats Opt For Socialism Over Success
Scott Gottlieb, M.D.
A series of sharply worded letters fired off by a California congressman to health insurance companies, demanding that they disclose proprietary price data on what they pay for drugs they dispense to Medicare members, could undermine the governmentâ€™s new drug benefit--a program that by all measures is working.
Medicareâ€™s new program relies on networks of private drug plans, all competing to offer attractive benefits and discounted drugs in order to sign up new members. Most of the health plans have enrolled millions of members, and they have used this purchasing clout to extract deep discounts from the drug makers, translating into cheaper health coverage for Medicare members.
But even a successful program, so long as it relies on elements of the private market, is anathema to politicians if the political aim is health care run solely by Washington.
Enter Rep. Henry Waxman, D-Calif., the new head of the House Committee on Oversight and Government Reform. Under the guise of "oversight," Waxman sent letters to the 12 largest prescription drug plans, including Aetna, Humana and Wellpoint.
He demanded that they divulge data on the prices that they are paying for the drugs they offer beneficiaries, along with their administrative costs, negotiated price discounts and other price concessions obtained from drug makers. Waxman said he wants to determine how profitable they are and how much of the savings they negotiate is passed on to Medicare beneficiaries.
Rest assured, the Waxman dispatches wont push the plans off the cliff, so do not expect near-term impacts. But disclosing this commercial and confidential data could slowly erode the competitive activities that enable the Part D plans to save consumers' money and the new benefit program to lower drug costs.
Competition between the plans to lower costs turns on the negotiations that take place between the health plans and drug makers, and the ability of a drug maker to offer a preferred health plan more favorable pricing, often bundling together different drugs in one negotiation, without having to offer the same price to everyone else. This kind of price discrimination enables health plans use leverage and dealmaking to extract the lowest price for the panels of drugs that are most suitable to their members.
Disclosing the price breaks would probably quash the ability to work these bundling deals, which are at the heart of many discounts. With all the prices made public, every plan will get the same deal regardless of what they are willing to offer. You can bet the public price they are offered will be higher than the private deal they might have been able to cut.
The irony is, by all measures, this competition is working for consumers. Why would Washington want to abate it?
The average monthly premium that seniors pay is $24, far lower than the $37 originally estimated by government actuaries. While Democrats have hammered away at the idea that having seniors choose among competing drug plans is too "confusing," recent polls show satisfaction with the benefit at about 80 percent.
In 2007, insurers are marketing more than 50 different drug plans in every state except Alaska and Hawaii--up from an average of about 40 in 2006. Seventeen insurers are selling nationwide plans, up from nine last year. That compares with the one or two that critics of including private plans predicted would be available in many markets.
The Medicare program agrees that disclosing the price breaks would undermine the ability of health insurers and pharmacy benefit managers like Caremark Rx and Medco Health Solutions, who also administer drug plans, from obtaining discounts.
The program cites an FTC analysis concluding that whenever competitors know the actual prices charged by other firms, tacit collusion and thus higher prices may be more likely. Separately, the Congressional Budget Office said a proposal to disclose the price data would add $40 billion over 10 years to the cost of the Medicare drug benefit.
Right now, Medicare has held firm and is not disclosing the data. The Medicare law prevents public disclosure of the prices that Medicare drug plans pay drug makers for their medicines. Waxmanâ€™s letters to the private plans are a clever attempt at end-running this law. These plans are harder pressed to hold out, since the Waxman request carries the threat of a subpoena.
But they too would be wise to hold firm and let the courts decide just what Congress has a right to access. At least one company has sent a box of files with a nice note attached, but has not yet sent what the congressman asked for. Worst case, a judge rules the raw data must be turned over and empowers a monitor with explicit restrictions on how Congress uses the information.
The only prices that really matter, the ones that beneficiaries pay, are all publicly disclosed on Medicareâ€™s Web site so that consumers can be smart shoppers. The broader lesson that bears reminding is that the government makes a bad business partner, especially when it comes to health care. Just ask the HMOs, who signed on a decade ago to treat Medicaid and Medicare beneficiaries only to see reimbursement rates slashed when the plans turned profitable. Now drug companies are seeing the consequence of their own Faustian bargain.
In Washington, the only health care businesses that continue to get honest funding by Congress are the ones that do not work. As soon as something turns a profit, Congress looks to take it away. The fear about Part D was always that the drug program would devolve into price controls, thus destroying incentives for research and development as European governments have done.
Ironically, the politicians working the hardest to hobble the successful Part D plans are those like Waxman who are also advocating a universal health care system. Given the political track record they are laying, what health care venture is going to ever trust them? If Waxman succeeds, Part D will be added to a long list of cautionary tales for health companies contemplating work with Washington.