10

The recent question Why did it take so long for the U.S. government to give Medicare the power to negotiate prescription drug prices directly with drug companies? reminded me of the old season 8 Saturday Night Live skit Nukes in Dunkerton

Pharmaceutical industries (in the US at least) are well known for having extremely robust legal, marketing and lobbying teams with resources comparable to their actual R&D efforts.

Question: What leverage or negotiation tools do government agencies actually have to negotiate prescription drug prices directly with drug companies?

Do they threaten to not extend Medicare coverage to a drug unless its price is lowered? It seems if there were a lower cost alternative they'd already be buying that instead.

Anecdotally, I live in Taiwan which has a very efficient and very affordable national health insurance. I take a pill that costs US $1.60 / day and have to go outside the NHS pharmacy to buy it. Everyone thinks I'm crazy because "pills should cost $0.15 or $0.30 max". Basically the NHS abhors anything that's not generic.

Clearly Medicare doesn't (yet) have the same spartan attitude towards drugs, but what leverage do they have to get better prices for those "fancy, store-bought" pills?

10
  • 2
    "It seems if there were a lower cost alternative they'd already be buying that instead." Drugs are chosen by patients and their physicians. The Medicare program has no say over that. It can decide what it will cover, but not what patients will buy and what physicians will prescribe. It likewise can't regulate what purpose drugs will be prescribed for, thus it can't, for example, refuse to pay for off-label uses of a prescription drug.
    – ohwilleke
    Feb 22 at 0:35
  • @ohwilleke ok would simply replacing the word "buying" with "covering" provide a remedy for that? I wasn't being precise, but I meant money out of Medicare for the purposes of getting into the hands of the pharmaceutical manufacturer (exchange $$ for drugs) I understand covering ≠ buying.
    – uhoh
    Feb 22 at 0:38
  • 1
    My point is mainly that a system like Medicare has much less of a role in care management than a health insurance company or a provider network, unlike many national health care systems outside the U.S. This isn't a widely known fact and is somewhat anomalous. Many people assume that Medicare has more power to manage care than it does. In general, for example, Medicare can't mandate that it will only cover generic drugs.
    – ohwilleke
    Feb 22 at 0:41
  • Doesn't that miss its own point? In what jurisdiction do 'government agencies' negotiate prices with drug companies? How could such a process not, almost by definition, give the government agency the power of monopoly not merely to negotiate but to dictate the price? Feb 23 at 19:32
  • 2
    @RobbieGoodwin sounds like Norway doesn't forbid private sale, they only negotiate for public (gov't subsidized) sale. Individual citizens can still purchase the drugs for what the manufacturer is charging (list price). Norway just wont subsidize it.
    – GOATNine
    Feb 25 at 5:41

6 Answers 6

17

The leverage isn't in purchasing a cheaper alternative. The leverage is by not purchasing the product at all as described here.

To develop its initial offer, CMS will start with Medicare’s price for a therapeutically comparable drug, or if none exists, the drug’s Federal Supply Schedule price. Then CMS adjusts that price for differences in the negotiated drug’s therapeutic benefit compared to the therapeutically comparable drug. Furthermore, CMS adjusts for six factors (described below) deemed crucial to fair pricing. The manufacturer can make a counteroffer. Each side can make reasonable fairness arguments to justify its preferred price, and both can make concessions to reach a deal. All offers must be supported by data on the six factors and a concise justification. If they are unable to agree by a deadline set by statute, then CMS will set the MFP, which constitutes the maximum Medicare is allowed to pay. They will publish that price. The manufacturer must then accept the published MFP or terminate all of its Medicare and Medicaid contracts, which represent about 42 percent of US sales across all manufacturers.

The nearly 66 Million Americans on Medicare in 2023 represents a massive market, to the point that pharma companies would rather sell for less profit than be unable to access that market. The simple threat of "Negotiate with us or be excluded from our market" is sufficient to bring prices down.

The Centers for Medicare & Medicaid Services (CMS) released the latest enrollment figures for Medicare on January 5th. As of March 2023, 65,748,297 people are enrolled in Medicare, an increase of almost 100,000 since the last report in September.

The CMS Data on enrollment can be found here.

The NHS has a peer reviewed article on the topic of Single Payer in the USA. This paper is also published in the Lancet, a premier medical journal of great repute.

While only tangentially related, the article touches on a real-world US based example where pharma price negotiations is actually working, namely in the VA. Bolded by me for emphasis.

As a potential model for the federal single-payer system, the US Department of Veterans Affairs (VA) does have the capacity to negotiate for prices that align with the therapeutic value of pharmaceutical drugs. This bargaining power results in pharmaceutical prices that are 40% lower in the VA system than under Medicare. Permitting negotiations for pharmaceutical prices with a formulary similar to that used by the VA would boost savings by over $180 billion, which we apply for our base case.

As has been pointed out, the consideration that a pharma company may dig its heels in has not been directly addressed, except in the first quote I used. The simple matter is, for the vast majority of pill/shot based treatments, the vast majority of the cost is in the first pill/shot manufactured, and subsequent production runs less than a penny a unit (though it can be much higher in specific types of treatments, such as the COVID Vaccine). Pharma manufacturers are interested in making money, and even a negotiated price is a profit, with large markets representing a tremendous pot of money for them to earn from.

7
  • Medicare cannot negotiate per the 2003 act of Congress that created Medicare Part D (the prescription drug part of Medicare). It has a "non-interference" clause that explicitly forbids negotiation. Feb 21 at 16:42
  • 1
    @Barmar -- The IRA did indeed do just that, and they intentionally picked ten widely-used drugs that appear to be egregiously overpriced. Getting this small change into the IRA and getting it passed by Congress was no mean feat due in part to big pharma's lobbying efforts and campaign funding. Feb 21 at 21:06
  • 1
    Also, Medicare provides essentially universal coverage to Americans age 65 years of age or older. Since many drug treat conditions that are predominantly prescribed in the U.S. for people in that age range, the impact of not being covered can be very great for some drugs.
    – ohwilleke
    Feb 22 at 0:31
  • 1
    updated with link-death-proofing, more support from more reputable sources. I can continue down the rabbit hole if thats whats wanted, but it will take me a couple days per each update.
    – GOATNine
    Feb 22 at 14:00
  • 1
    looks great, thank you!
    – uhoh
    Feb 22 at 14:30
11

What leverage or negotiation tools do government agencies actually have to negotiate prescription drug prices directly with drug companies?

It depends on the agency. Congress has enabled the Veterans Administration to negotiate directly with the drug manufacturers, so that's what the VA does. There is lots of transparency here, and the action is direct between the VA and the manufacturers.

Compare that with Medicare: In the 2003 act that created Medicare Part D, Congress explicitly forbade Medicare / Medicaid from such negotiations via the non-interference clause to the 2003, the law that authorized Medicare Plan D. Instead, Medicare recipients must pay for medications at prices dictated their Prescription Drug Plan provider. These PDP providers apparently have very cozy relationships with pharmaceutical manufacturers (and of course add a nice middleman fee). There is no transparency.

The end result is that patients who purchase medications via the VA pay about half of the price that patients who purchase medications via Medicare pay, per the Government Accountability Office.

4
  • How does this answer the question? Authorizing the VA to negotiate doesn't actually give them leverage. If the drug companies all refuses to lower their prices, what can the VA do? There's no competitor to go to.
    – Barmar
    Feb 21 at 20:34
  • 3
    @Barmar -- It most certainly does give them leverage; the GAO study confirms it. Many high priced brand name prescription drugs have generic equivalents, and the VA can certainly negotiate over these. Many high priced brand name prescription drugs have older near-equivalents on which the patent has expired, and the VA can similarly negotiate over these. There are very few drugs that are truly unique and for which no competitor exists. Feb 21 at 21:23
  • I assume even the generics are overpriced, and that's who we're negotiating with. Why waste time with the vendors of the costlier alternatives? Then again, I've never understood how big name gas stations survive when there's a no-name station down the block that costs 10c/gallon less.
    – Barmar
    Feb 21 at 22:25
  • @Barmar: Because the product is not the same...
    – Ben Voigt
    Feb 23 at 16:27
9

Here is a description of how drug pricing works in the UK:

The second approach for value assessment (as applied in England) is to additionally evaluate a drug’s comparative cost-effectiveness. In England, a drug’s value is determined by considering the additional cost required to generate an additional unit of health from the new drug, as compared with established treatments in the health system. This incremental cost-effectiveness ratio guides decision-making via the National Institute for Health and Care Excellence, which typically recommends new drugs for coverage in the National Health Service if they have incremental cost-effectiveness ratios ranging between £20 000 and £30 000 per additional unit of health (as measured in quality-adjusted life years). Manufacturers whose drugs are not considered cost-effective in England can negotiate with the government and offer confidential discounts to lower their prices within the health system’s explicit incremental cost-effectiveness ratio threshold.

So the leverage is simple - unless the drug compares well with others in terms of the number of positive health outcomes per pound spent, then the drug won't by available through the UK health system. It doesn't matter if there isn't a comparable drug (although it's pretty rare that only one drug is available to combat a condition). Drug companies can lower their prices so as to bring the "cost effectiveness" up to an appropriate level; most will do that because a little profit on 60 million patients is better than a high profit margin on zero patients.

It's also worth pointing out that the marginal cost (cost to manufacture) of most drugs is very low. Drug companies can reduce their prices a long way and still make more money than they would not selling them.

10
  • 1
    "a little profit on 60 million patients is better than a high profit margin on zero patients". What about zero profit for a few months, until enough patients die that NHS is forced to capitulate and pay the high price? It's kind of a loss leader.
    – Barmar
    Feb 21 at 20:45
  • 1
    @JackAidley What does it matter who the public blames? Are the politicians OK with the suffering as long as they can deflect the blame?
    – Barmar
    Feb 21 at 22:14
  • 3
    @Barmar: It matters who the public blames because the UK is a democracy and politicians are only going to be dumb enough to fold to the pharmaceutical companies in these cases if there is large public outcry. Remember the NHS's system of allocating funds minimises suffering; and every deviation from it to buy medicines that do not offer value for money increases suffering by diverting it into less effective spending. Feb 21 at 22:16
  • 1
    @Barmar having worked in pharmaceutical research, there's actually a few more levers the government has than just straight up denying the claim. They might super limit the supply to only those who need the drug most, there's a lot of interdependence as well between drug companies and the wider UK health system, from recruitment of patients for trials, access to data, and ultimately for regulatory approval. There's also provisions in UK patent law allowing the government to, essentially, ignore patents if they'd like to.
    – lupe
    Feb 22 at 14:30
  • 1
    Basically, a drug company that absolutely refused to play ball might find it difficult to bring other drugs to market, and also the government could just start making it. (section 55 in the consolidated patents act) . That's a nuclear option, as it might scare any other pharmaceutical companies, harm the economy, etc, but it's perfectly legal.
    – lupe
    Feb 22 at 14:35
4

You wrote in your question that if there were a lower cost alternative they'd already be buying that instead. This situation is actually the case where the health care provider has the strongest negotiation power. If they believe the two treatsments are equally good, they can just go to both of them and then tell them they will only pay for the cheaper of the two and then let the two suppliers battle it out among themselves.

This is basic ecomonic setting, if you have alternative options you are in much stronger negotiation position not weaker.

11
  • 1
    But there may not be a cheaper alternative. For diabetes, insulin is the treatment.
    – Barmar
    Feb 21 at 20:43
  • 2
    @Barmar: For insulin the alternative is synthesize it yourself. It's a lot cheaper after you gear up than the thousand dollar a month prices you see on the news. Pig insulin is not patented; and we know how to synthesize arbitrary proteins in the lab using cDNA and microbial synthesis.
    – Joshua
    Feb 21 at 20:55
  • 2
    If it's so easy, why are they buying from drug companies in the first place? And what about drugs that are still patented?
    – Barmar
    Feb 21 at 22:11
  • @Barmar: They didn't say it was easier - they said it was cheaper. It's a lot of work to do that, and it would be preferable to just essentially pay someone to do that. Similar to the difference between buying a plot of land and constructing your own home versus paying a landlord to rent their apartment; in the long run, the former may be cheaper, as you wouldn't be paying rent to pay their mortgage, and just a mortgage, but it's relatively difficult to build one's own home by hand. Feb 22 at 6:19
  • 1
    @Barmar Insulin is a particular chemical, not a brand of medicine. So insulin for diabetes is an example where the negotiation power of health care providers is very strong. They need some medication that provides insulin but there are several competing pharma companies that can provide it and it doesn't matter which one. So in systems with health care providers that negotiate well, insulin is about as cheap as it can be made.
    – quarague
    Feb 22 at 6:35
3

Change IP Laws

I don't know that anyone with power in the US government is currently advocating for this, but governments have the ability to change the laws regarding Intellectual Property. The "nuclear option" is to make all drugs generic by completely doing away with patent protections.

Pharmaceutical companies argue that IP laws are necessary to fund R&D that produce new drugs, and their critics complain that massive compensation packages for executives and lavish spending on advertisements implies that IP laws could be significantly less generous and still support robust R&D.

Even if it's not explicitly brought up, there's always the knowledge that drugs are only valuable because laws prevents other manufacturers from making them, and the government can change those laws.

That's leverage.

14
  • Such a system would quickly result in most companies shutting down their R&D departments and just making generic drugs, with zero innovation. Feb 21 at 21:41
  • 4
    @JonathanReez - If the nuclear option was taken, I would expect most pharmacological R&D would be done by non-profits and/or using government research grants. (which already fund a lot of industry R&D!)
    – codeMonkey
    Feb 21 at 22:00
  • 4
    @JonathanReez "People only work well when their job and livelihood is on the line" is patently false, and trivially proven so. There are countless counter examples, but I'll point to the open source software community as just one.
    – asgallant
    Feb 21 at 23:05
  • 4
    @uhoh Note that this negotiation strategy is actively used for example by India. They demanded massive price reductions for some generic medications and when the Western pharma companies refused they stopped recognizing the patents for these and cover their own market with cheap home made generica. These can not be exported from India because of intellectual property laws in the rest of the world but inside India they selectively override a few medicine patents.
    – quarague
    Feb 22 at 6:45
  • 2
    @uhoh - I upvoted GOATNine's answer, because I think denying federal dollars is the primary leverage that agencies have, but government agencies work for the Executive Branch. If the head of an Agency goes to the President and says "this important drug isn't making it to people who need it because...." - well, that's an action that an Agency can take that might impact IP laws.
    – codeMonkey
    Feb 22 at 15:04
1

The government can simply make the drugs themselves

title 28 of USC section 1498 gives the US government the rights to eminient domain over patents - they can, if they choose, produce the drugs themselves, and would have to "reasonably compensate" drug companies for use of their patent.

What that shakes out to is pretty untested with drugs - it could be a court rules that the full cost of the medicine is reasonable compensation, it could be that it rules something closer to production or wholesale costs.

This is very much the nuclear option - it would shake confidence in the patent system, probably cause a reduction in R&D spending from drug companies, but it is possible.

This makes the game of chicken much more complicated. A theoretical exchange could go:

  1. Medicaid demands a drug is lowered in price
  2. The drug company refuses to lower said price, cutting patients off from a supply of this medication
  3. After some time of no resolution, the government takes the step of contracting out production of this drug to a rival drug company, using eminent domain laws, and citing patient safety.
  4. A large court case follows, in which the drug company tries to justify the price being charged, and the government tries to counter.
  5. The case either sets the price at the original cost, or allows the government to produce a generic version much more cheaply.

Used carefully, the use of eminent domain could act as a reasonable cap on drug costs. Used poorly, it could collapse the pharmaceutical industry in the USA.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .