Last week, the new Democratic Congress passed House Bill H.R.4 by a vote of 255-170. H.R.4 requires the Secretary of Health and Human Services to negotiate Medicare prescription drug prices. It changes the Medicare Part D drug benefit (PL108-173) - and bars the government from setting up a formulary, or restricting access to drugs as a way of leveraging lower prices. The new Congress deserves a c for chutzpah.
This is the most deceiving piece of doublespeak passed by the Congress in the past 20 years. It is also a blatant lie to the folks who elected them. Unfortunately, most of them will never know it. All they will hear is hype about how the Democrats fixed the Republican, i.e. Bush’s, drug bill by requiring price negotiations, thus “leveraging the bigness of Medicare”. Anyone who believes that the Secretary of Health and Human Services has a snowball’s chance of negotiating anything with this turkey is smoking something other than tobacco. This bill makes things worse, not better. Here’s why.
The art of negotiating – and I do mean art – is performed well by very few, because very few take the time to understand the underlying dynamics. In the 35 plus years that I’ve been in healthcare supply chain, I have been frustrated by the exploitation of this simple fact by those with hidden agendas. The most blatant example was by hospital group purchasing organization (GPO) executives who convinced the CEO’s of their member hospitals that bigger was always better, and that through sheer volume hospitals could drive a better price in the market. The hidden agenda here was expansive administrative fees controlled by the GPO executive and a larger membership where each individual voice was diluted, thus made ineffective, in affecting the bigger scheme. In essence, the hospitals gave away their control of the GPO and any market advantage they may have actually possessed to the benefit of the GPO executive staff.
A classic example of this is the Premier group. In the early 1990’s it had 50 or so members. This small group controlled something like 13-15% of the teaching residencies in the United States. Their leverage at the table was huge. High tech (aka high price) manufacturers wanted to place products in the hands of the members’ residents who would then, when they moved on to practice as physicians at community hospitals, demand those same products. Companies could (and did) give the Premier hospitals the products for next to nothing while charging high margins at the community hospitals. The prices were so low it was worth the while of hospital executives to convince their physicians to standardize on these products. It was a way of buying future market share at relatively low cost. Much to the glee and economic benefit of the then Premier membership, this is the contract strategy that was largely used by Johnson & Johnson to take over market dominance in endosurgicals from prior market leader US Surgical.
The CEO’s never saw it coming. They were convinced that bigger meant better. The rest is history. Premier went on a growth spurt through recruitment and mergers. Today Premier obtains me-too prices for all of its huge membership on a take-it-or-leave-it basis. Small to medium size health systems, with a savvy supply chain staff that are able to make and keep market share commitments, now routinely negotiate better deals than most GPOs. The largest individual health system still represents a small percentage of any average market. The supplier community translates extreme volume customers into being a large part of their average market - which is where profits reside. Since the goal here is making a profit they never give the average market any true long term advantage.
Without the threat of keeping drugs off a federal formulary, and thus limiting access to a firm’s products, what leverage does the Secretary have? This is the only economic clout available. What does the Secretary have to exchange for better pricing? In the world of government, if the leverage is not economic then it must be political. Does the average American really want the pharmaceutical manufacturers having more leverage in our political processes? I think not. But, this will be the result of House Bill H.R.4. And anyone who is looking for pricing equivalent to the Canadian experience is in for a rude shock.
The existing insurers and hospital GPO’s already have discounted prices with the drug firms. Any discounts given to the government will need to be extended to every other contractor. The drug companies know this. Some symbolic price concessions will be made to make the Secretary and the Congress look good – in exchange for something. Actual prices paid may be reduced by a few dollars to the individual while being reported in the press as tens of millions of dollars in aggregate.
In November, 2006 I wrote about my own displeasure in having the government negotiate prices (“$1.2 Billion”). Naturally, as a negotiator, I assumed a federal formulary that would limit choice with the well-intended, though misguided, goal to bring short term economic benefits to the consumers, i.e. voters. It was the impact of a huge restriction on markets that would limit long term R&D that I feared. As a negotiator I should know to never assume. Who envisioned a bill that would further engage deep pocket pharmaceutical firms in the political process (make that money to politicians and/or their pet causes) while offering no real economic impact to the voters? I never saw it coming.
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