what can hospitals do internally to help reduce the rise in drug costs

  • Journal List
  • J Gen Intern Med
  • 5.23(9); 2008 Sep
  • PMC2517993

J Gen Intern Med. 2008 Sep; 23(9): 1435–1440.

What if the Federal Government Negotiated Pharmaceutical Prices for Seniors? An Estimate of National Savings

Walid F. Gellad, Doc, MPH,i Sebastian Schneeweiss, MD, ScD,2 Phyllis Brawarsky, MPH,1 Stuart Lipsitz, ScD,ane and Jennifer S. Haas, MD, MSPH corresponding author i

Walid F. Gellad

aneDivision of General Medicine and Main Care, Brigham and Women'southward Hospital, Boston, MA U.s.a.

Sebastian Schneeweiss

2Partitioning of Pharmacoepidemiology and Pharmacoeconomics, Department of Medicine, Brigham and Women's Hospital and Harvard Medical School, Boston, MA U.s.

Phyllis Brawarsky

1Division of General Medicine and Main Care, Brigham and Women's Hospital, Boston, MA U.s.a.

Stuart Lipsitz

aneDivision of General Medicine and Primary Care, Brigham and Women'southward Infirmary, Boston, MA United states

Jennifer Due south. Haas

1Division of Full general Medicine and Principal Care, Brigham and Women'due south Hospital, Boston, MA The states

Received 2007 Oct 22; Revised 2008 May 14; Accepted 2008 May 20.

Abstruse

Background

The government is prohibited from directly negotiating drug prices for Medicare Office D, resulting in substantial policy debate. However, the regime has an established mechanism for setting prices with pharmaceutical manufacturers for certain other federal programs - the Federal Supply Schedule (FSS).

Objective

To estimate how much could exist saved nationwide if prices equivalent to the 2006 FSS were achieved for the top 200 drug formulations dispensed to seniors.

Design/Setting

Cross-sectional analysis of drug utilization patterns and costs from the nationally representative Medical Expenditure Panel Surveys (MEPS), 2003–2004, and the 2006 FSS.

Participants

Seniors who filled a prescription for whatsoever of these common drugs (n = half dozen,135 individuals).

Measures

Prescription expenditures were obtained from MEPS, and a price/unit was calculated in 2006 dollars. This price/unit was compared to the 2006 FSS, and a savings/unit was calculated and summed across the observed units dispensed in MEPS.

Results

The potential annual savings with FSS prices would be $21.9 billion [95% conviction interval (CI), $21.1 billion to $22.8 billion]. If FSS prices were substituted for just the elevation x drugs, the annual savings would exist $5.9 billion (95% CI, $5.seven billion, $six.1 billion).

Conclusions

Extension of existing price setting mechanisms to Medicare could save tens of billions of dollars if prices like to those already achieved by other federal programs could be reached. Whether or not this is a political or economic possibility, the magnitude of these savings cannot be ignored.

KEY WORDS: medicare, pharmaceuticals, costs of care

INTRODUCTION

Federal negotiation of prescription drug prices on behalf of Medicare beneficiaries is a contentious, simply timely, consequence. In authorizing Medicare Part D in 2003, Congress explicitly forbade the federal government from direct negotiating prices with pharmaceutical companies.1 The rationale was that the marketplace would lower prices and that each of the private prescription drug plans, in competition to concenter more Medicare beneficiaries, would negotiate with prescription manufacturers to reduce costs.

Whether the market has truly been successful in lowering prescription drug prices to the extent that the writers of the legislation had hoped is a subject of current debate. A survey of almost two,000 seniors in late 2006 found that 52% were saving money with Part D.2 Early nationally representative information recently released propose a small, just appreciable, decrease in out-of-pocket spending and price-related medication nonadherence with Function D.iii , 4 In that location is some evidence of price increases under Part D, however,5 and many critics of the not-negotiation clause indicate to Veterans Administration prices to show that direct negotiation by the federal authorities and price command statutes could effect in greater savings. A report by Families USA, which looked at the top 20 drugs prescribed to seniors, establish that VA prices were essentially lower than the cheapest Part D plans, with a median toll difference of 58%.6

With Medicare and Medicaid spending projected to account for over xxx% of the federal budget in 10 years, every possible avenue for cost savings in prescription drugs must be entertained.7 The Federal Supply Schedule (FSS) is a federal contract and list of prices for prescription drugs available for purchase by certain federal agencies, which include the VA, Department of Defense force (DOD), Public Wellness Service (PHS), Bureau of Prisons, the District of Columbia, U.Due south. territorial governments, and some Indian Tribal governments.viii Drug manufacturers are effectively required to limit their FSS price to the everyman price that is charged to whatsoever private purchaser in the US, net of all rebates or other price concessions. Under the Veterans Health Care Human action of 1992, drug manufacturers are required to list their brand-name drugs on the FSS for them to be covered past Medicaid. In 2003, sales under FSS contracts totaled around $four.5 billion for brand-name drugs, and costs were approximately 53% of the boilerplate wholesale price (AWP).8 Drug manufacturers are also required to sell certain drugs - about i/3 of the drugs on the schedule - to the VA, DOD, PHS, and Coast Guard (the "Big 4") at a cost that is often even lower, the Federal Ceiling Price (FCP), which is statutorily divers rather than negotiated (approximately 50% of the AWP).viii Finally, statute determines that FSS prices are not immune to rise faster than full general aggrandizement over the class of multi-yr contracts Past contrast, drug prices in the private marketplace take grown considerably faster than the CPI.9

The FSS is publicly bachelor and represents prices that are set through authorities statute and negotiation without formularies. To inform the debate about the potential savings associated with government negotiation of drug prices, we used actual prescription utilization and cost data from the nationally representative Medical Expenditure Panel Survey (MEPS) to approximate the potential savings prior to Part D if FSS prices were bachelor to seniors.

METHODS

Data

This analysis is based on data from the 2003–2004 Medical Expenditure Panel Survey Household Component (MEPS), a nationally representative survey of the US civilian, non-institutionalized population, conducted by the Agency for Healthcare Research and Quality. Details of the survey design have been previously published.10 MEPS provides data on demographic characteristics, insurance coverage, and the utilization of health-care services for all individuals in the sampled households. Household respondents were asked to provide the names of all outpatient medications used by each household member, the names and locations of the pharmacies where each medication was obtained, and for permission to obtain records from each of the pharmacies.xi Pharmacies then provided information on total expenditures paid past all parties for the drug and the information necessary to assign a National Drug Code (NDC) to each prescription. The NDC is specific for prescription characteristics, including the manufacturer, ingredients, strength, and bundle size.

The Federal Supply Schedule (FSS) was obtained on 16 November 2006 from the VA website (http://world wide web.pbm.va.gov/DrugPharmaceuticalPrices.aspx). MEPS data were merged with this list of FSS prices using the NDC, drug name, dose, class, and unit to obtain the FSS price for each drug-dose combination plant in MEPS.

Study Sample

Adults who were at least 65 years of age and used at least 1 of the 200 drug formulations virtually ofttimes used by adults 65 and older in 2004 were included in this assay (75% of all prescriptions dispensed for this population). Nosotros chose to study savings based on participation by all Medicare beneficiaries as a chief analysis since these data were collected prior to Role D, and therefore we could non distinguish between those who would join Part D in 2006 and those who would non. In addition, nosotros believe an assay of savings with FSS prices for all Medicare beneficiaries has relevance regardless of the current political feasibility of a unmarried Medicare formulary. As a secondary data analysis, all the same, we did calculate savings using FSS prices for the subset of seniors with current supplemental coverage in addition to Medicare. Seniors with private supplemental coverage presumably accept plans that have negotiated for the best prescription prices, allowing a comparison of prices on the FSS to prices that are already negotiated by market forces, alike to Medicare Part D.

Any two drug formulations that represented one unique drug were combined (e.thousand., diltiazem and diltiazem hcl). Drugs that were subsequently withdrawn from the market place (i.e., rofecoxib) were excluded. In addition, aspirin was excluded because information technology is bachelor over-the-counter, and insulin preparations were excluded besides because of difficulty calculating dose in MEPS. After bookkeeping for like formulations and exclusions, 161 unique drugs were included in this analysis, which accounted for 71% of full prescription spending amid this age grouping.

Calculation of Prices and Potential Savings

We obtained data almost the total expenditure for each drug from MEPS, including the amount spent by the individual and the corporeality paid by any insurance coverage. We calculated the expenditure per unit of measurement (i.east., tablet, vial, tube) for each drug in MEPS and in the FSS, in 2006 dollars. The availability of the actual drug expenditures for each production is an comeback over previous estimates of drug costs, which use a standard discount off the average wholesale price because actual expenditures are not typically available.10 Prices from the FSS were current for 2006. To inflate MEPS expenditures to 2006 dollars, we increased the 2003 expenditures by 8.four% and the 2004 expenditures past vi.1%, representing the increase in the consumer price index over those years.12 Nosotros and then subtracted the FSS cost from the MEPS expenditure to get a savings per unit and multiplied this by the observed number of units purchased in MEPS to go a savings for each prescription. Savings for all prescriptions were totaled for each subject to calculate the almanac per capita savings (both out-of-pocket savings plus savings to any insurance program). Nosotros and then calculated overall savings from a population perspective. The calculation using the top 200 drug formulations was the primary analysis. We also calculated the potential savings for the subgroup of the top 10 most commonly used drugs, every bit information technology may be more feasible initially to negotiate a more limited sample of drugs. Finally, as an boosted sensitivity analysis, we calculated savings for the entire sample assuming varying abilities to negotiate prices downwardly to the FSS level (i.eastward., prices of FSS v%, FSS x%). This sensitivity assay was also done to address the concern that MEPS data may not reverberate the rebates that health plans receive for drug costs.

Data Analysis

Median almanac savings per person were compared across demographic groups using Wilcoxon rank sum or Kruskal-Wallis tests when advisable. The MEPS data include sampling weights that reverberate the survey pattern, sampling frame, and adjustments for household non-response and planned over-sampling. The weighted results therefore stand for estimates for the non-institutionalized US population. All analyses were performed using SAS (version ix, SAS Plant, Inc., Cary, NC) and SUDAAN (version ix.0) and employed the appropriate weighting and survey design variables to obtain these population estimates.

RESULTS

Characteristics of the Sample

In that location were 150,687 prescriptions for eligible drugs. A total of four,412 prescriptions (two.9%) could not be matched to a FSS price, and an additional 836 (0.5%) were missing a prescription quantity in MEPS. Thus, the last sample was 145,439 prescriptions and 6,135 individuals, weighted to represent i,354,700,000 prescriptions and 60,071,166 individuals over these 2 years. In 2004, the full expenditures for these drugs were $48 billion. More than half of the sample were 65–74 years of age, and they were predominantly white, with a high school degree or less (Tabular array1). In addition to Medicare, 54% of the sample had supplemental insurance.

Table ane

Characteristics of US Seniors 65 Years and Older Taking at Least Ane of the Top 200 Drug Formulations in 2003–2004, Included in the Medical Expenditure Panel Survey (MEPS)

Unweighted (N) Percent*
Full 6,153
Historic period
 65–74 years three,230 52.0%
 75–84 years 2,282 37.ane%
 >85 years 641 ten.8%
Gender
 Male 2,365 41.5%
 Female person 3,788 58.5%
Race/ethnicity
 White 4,372 82.6%
 Black 753 8.0%
 Hispanic 789 5.7%
 Asian or other 239 three.7%
Education**
 Loftier school or less 4,189 62.9%
 College 924 17.6%
 Post-college 976 19.5%
Household income**
 <$12,000 one,183 13.4%
 $12,000–$23,999 1,458 25.5%
 $24,000–$47,999 1,722 29.two%
 ≥$48,000 1,684 31.8%
Insurance
 Medicare alone 2,167 34.8%
 Medicare with supplemental insurance 2,875 54.3%
 Medicare with Medicaid or other public plan 1,062 10.2%
 Other*** 49 0.six%
Chronic weather condition
 0 3,463 55.7%
 1 1,535 24.2%
 >=two 1,155 20.1%

Potential Annual Savings

The potential annual savings in drug expenditures if FSS prices were substituted for current prices is $21.nine billion [95% confidence interval (CI), $21.1 billion, $22.8 billion]. The median per capita annual savings in total expenditures is $483 (interquartile range $194 to $975). Seniors with less education and income, more than chronic conditions, and older age have more than savings with the substitution of FSS prices (Table2; p < .001, p < .001, p < .001, and p = .004, respectively). For the subset of seniors who currently accept supplemental coverage in addition to Medicare, using FSS prices rather than the prices they currently pay would salve $11.3 billion (95% CI, $10.six billion, $11.nine billion).

Tabular array 2

Potential Per Person Annual Savings in Total Drug Expenditures with Federal Supply Schedule Prices, for US Seniors 65 Years and Older*

Median (interquartile range)** P value***
Total $483.46 (194.38–974.87)
Age .004
 65–74 years 438.02 (170.forty–938.04)
 75–84 years 510.79 (226.95–1,032.07)
 >85 years 534.83 (242.xc–988.37)
Gender .67
 Male 471.34 (196.01–945.78)
 Female 491.90 (192.87–1,004.74)
Race/ethnicity .03
 White 496.66 (199.thirty–983.58)
 Black 469.67 (187.44–983.22)
 Hispanic 450.twenty (177.02–916.07)
 Asian or other 304.02 (147.07–868.18)
Education <.001
 Loftier schoolhouse or less 519.18 (211.27–1,048.49)
 Higher 440.12 (186.74–944.17)
 Mail service-college 383.twenty (159.93–809.49)
Household income <.001
 <$12,000 560.09 (235.88–one,127.15)
 $12,000–$23,999 515.44 (209.92–1,052.23)
 $24,000-$47,999 468.05 (195.25–990.sixteen)
 ≥$48,000 430.71 (176.60–847.48)
Insurance <.001
 Medicare alone 458.28 (185.22–970.23)
 Medicare with supplemental insurance 473.36 (193.65–937.32)
 Medicare with Medicaid or other public program 633.00 (248.79–i,250.42)
Chronic atmospheric condition <.001
 0 389.91 (159.83–811.88)
 ane 590.52 (276.25–1,134.49)
 ≥two 625.90 (253.08–ane,246.eleven)

The top x drugs used by seniors are listed in Tabular array3, with the associated annual savings if FSS prices were substituted for the unabridged sample. Atorvastatin (Lipitor) was the near ordinarily prescribed medication among the sample, with a national estimated savings of $1.iii billion, which represents a savings of 29% off current expenditures for Lipitor. Overall, savings from the top ten drugs using FSS prices would exist approximately $5.ix billion (95% CI, $5.7 billion, $6.1 billion).

Table three

Top Ten Drugs Used in the Us past Volume and Associated Savings with Federal Supply Schedule

Prescription drug Annual # prescriptions (weighted) Current expenditures, Medical Expenditure Panel Survey* Absolute savings with Federal Supply Schedule prices * Percentage of current expenditure saved*
Atorvastatin (Lipitor) 39,604,209 $4,503,599,518 $i,321,679,381 29.iii%
Furosemide 25,436,137 285,571,827 263,271,595 92.2%
Lisinopril 23,265,084 1,164,407,869 one,061,399,316 91.2%
Hydrochlorothiazide 22,127,830 210,155,282 182,224,109 86.7%
Atenolol 21,679,039 993,571,279 945,249,018 95.1%
Amlodipine (Norvasc) xix,960,498 1,493,847,690 456,753,328 30.six%
Levothyroxine (Synthroid) 19,666,947 523,465,215 443,815,117 84.eight%
Simvastatin (Zocor) 19,224,615 2,358,898,147 662,973,114 28.1%
Metoprolol SR (Toprol XL) 15,998,237 840,934,795 169,061,035 20.1%
Clopidogrel (Plavix) thirteen,132,527 1,753,964,659 390,588,927 22.three%

*All amounts are calculated in 2006 dollars

Savings with Varying Assumptions Near FSS Price

Figure 1 shows the savings with varying assumptions about the success of any negotiations on drug pricing, represented every bit a percentage difference from the actual FSS price. For example, if prices were to accomplish FSS prices 5% (slightly higher than FSS prices), the amount saved would decrease slightly to $20.seven billion, which is a 45.i% savings. Similarly, if prices were to decrease only to FSS levels 50%, the amount saved would exist $9.ix billion, or 21.six% of current expenditures.

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Sensitivity analysis, showing savings using federal supply schedule prices for seniors with varying assumptions most the government's ability to negotiate (all in 2006 dollars).

Word

This analysis, using nationally representative information from MEPS that captures the actual utilization of prescription drugs, suggests an approximate annual savings of $21.9 billion, or $483 per person, with the exchange of the FSS price for seniors prior to Part D. A substantial savings of over $11 billion dollars is nowadays if FSS prices are substituted simply for the subgroup of seniors with private supplemental coverage in addition to Medicare. A savings of $483 per person is a significant discount, considering that in 2004 the corporeality of money spent per capita for prescription drugs for those over the age of 65 was $1,550.thirteen Whether these savings would exist passed on to patients or retained by their health plans, they would potentially go out more resources in the wellness-care system to treat more patients and more than conditions. Fifty-fifty if the prices were set at 50% higher than the 2006 FSS, the savings would still be over 20% for these drugs. The magnitude of these numbers has significant implications in the debate on whether or not the regime should be directly involved in setting drug prices on behalf of Medicare Part D.

To our knowledge, there have been no prior national estimates of the potential savings to Medicare if FSS prices were used for drug purchases. A study past Families United states of america comparison prices constitute in the VA with prices under diverse Part D plans plant a 58% median difference in prices, which is consistent with the substantial savings demonstrated in this analysis.6 In improver, there is prove that FSS prices are fairly like to prices paid past the Canadian authorities,14 and prior piece of work has compared Canadian prices to the higher current commercial US prices.15 , 16

There is considerable debate virtually whether negotiation by the federal regime would actually lead to lower prices without the imposition of nationwide formulary restrictions that the public might not accept.17 19 The nonpartisan Congressional Budget Role (CBO) stated in a letter of the alphabet to Senator Bill Frist in Jan 2004 that removing the "noninterference" provision of the Medicare Modernization Act of 2003 (the section of Part D that forbids the government to directly negotiate drug prices for seniors) would have a "negligible result on federal spending."20 The CBO letter of the alphabet went on to say that for drugs that confront competition with other therapeutically similar drugs, the market would be every bit successful equally government negotiation in lowering drug prices. However, definitive empirical evidence as to how successful the marketplace has been in lowering prices is lacking, and at that place is as well no consensus about what a "successful" reduction in drug prices by market forces would exist. The little nosotros know almost 2006 PDP drug prices comes from the Families U.s.a. study showing that prices in PDPs are not about as low as at the VA, and from a separate analysis released by CMS showing that drug prices in the median price PDP are on average but 25% lower than cash prices, although significant variation exists.21 Some information propose that prices for certain drugs have actually increased with Part D, and data from the National Health Expenditure Accounts prove that overall drug prices increased in both 2005 and 2006 at 3.6 percent.v , 22

The CBO did say that some savings were possible if the government could negotiate prices with manufacturers of drugs with no contest from therapeutic alternatives - drugs such as clopidogrel (Plavix).20 Our assay quantifies some of these potential savings. Included in the list of elevation 10 drugs used past seniors is one that has no real therapeutically equivalent competitor on the market [clopidogrel (Plavix)]. Combined savings from using FSS prices for only this i drug would full about 400 million dollars annually. Clopidogrel is one of the medications whose price has reportedly increased in Part D.five

The power of the regime to extend prices from the federal supply schedule to the much larger population of Medicare beneficiaries is uncertain. However, the FSS is a clear case of a set of drugs bachelor to federal purchasers that is negotiated by the authorities without a formulary. Nosotros believe this makes the FSS, and our assay, very relevant to the discussion on federal negotiation of drug prices and important for moving the Medicare debate forward. While these exact FSS prices may not be negotiated for Part D, our sensitivity analysis suggests that nigh $10 billion could still be saved annually if these drugs were subjected to FSS prices plus l%. In addition, for seniors who already have private supplemental insurance in improver to Medicare, price differences with the FSS amount to billions of dollars. The magnitude of these price differences betwixt commercial and FSS prices is striking, regardless of the economic feasibility for Medicare of this kind of negotiation. This paper estimates the savings that could exist if FSS prices were substituted for current drug prices among seniors, and it is not meant to be an exhaustive analysis of the economic complexities surrounding federal negotiation of pharmaceutical prices. The bodily consequences of opening up the Federal Supply Schedule to a larger group are unknown.23 There would likely exist spillover effects with college prices for cash-paying customers and individual health plans equally manufacturers piece of work to regain profits, or possibly less capacity for enquiry and development by pharmaceutical manufacturers. In that location would be administrative costs associated with federal negotiation of prices that are not modeled hither, although there may also likely exist savings to the manufacturers in having to negotiate only once. A total discussion of these complexities is beyond the telescopic of this newspaper.

The results of this written report must be interpreted in the context of the written report pattern and data sources. While the use of 2003–2004 data is not ideal, there is no public nationally representative information of this kind about expenditures under Part D. While market forces may have changed the prices and patterns of utilization of drugs somewhat over the two–3-year period (between 2003–2004 and 2006), MEPS is the most recent nationally representative source of prescription expenditures available that reflects actual drug utilization patterns nationally. This allows us to utilise the detailed data that are bachelor in MEPS on individual insurance, copays, the frequency of refills, the number of pills per prescription (30 vs. 90 day), etc. It will exist disquisitional once 2006 information become available to determine whether negotiation of prices in function D has saved money for seniors and for club. We do note, however, that one study described above does demonstrate that Part D prices are very much college than VA prices - on the aforementioned order of magnitude as found in this study. Additionally, our inflation of MEPS expenditures by the consumer price index may actually underestimate true prices in 2006, since drug prices are known to increase faster than inflation - this would lead to an underestimation of savings.24 In fact, recent data have shown that prescription spending outpaced inflation by significant amounts between 2004–2006, and the number of prescriptions purchased by Medicare beneficiaries actually increased more chop-chop in 2006 than in 2005.22

MEPS also unfortunately does not account for the rebates that period from manufacturer to payor and PDP, which may lead to an overestimate of drug expenditures in MEPS. Even so, data on rebates are proprietary, and it is unknown how significantly they would touch overall expenditures, and for what drugs. A recent congressional study estimated that insurers in Medicare Role D received rebates from pharmaceutical manufacturers of 5% in 2006.25 A previous government estimate in 1997 reported manufacturer rebates of 7% on average.26 Bones Medicaid rebates are on average xv% of the Average Manufacturers Cost (AMP); notwithstanding, the AMP is also not publicly available.8 Ultimately, our sensitivity analysis shows that these rebates are unlikely to exist large enough to completely remove the savings calculated in this study. Finally, FSS prices are available to those agencies that dispense their own drugs and therefore do non accept into account dispensing fees, while MEPS expenditures include the cost to the pharmacy of dispensing the medicine. Although this may overestimate the savings nosotros calculate, it besides would non likely be enough to change the results of the sensitivity analysis.

While the contend about negotiation of drug prices continues, prescription spending continues to increment faster than aggrandizement and occupies a growing percentage of our national health expenditures.9 , 22 , 27 , 28 The apply of lower-price generic drugs through tiered benefits, shifts towards mail-order pharmacy, and the removal from the market place of highly priced drugs that turned out to be dangerous take contributed to some pocket-sized slowing in the rate of growth in drug spending until recently.ix However, as rates of diabetes and other chronic diseases increase and a larger percentage of the population enters Medicare, these rates of growth may not be sustainable. The pricing of prescription drugs under Medicare Part D will be a fundamental issue for toll containment in the future.

An annual savings of over $xx billion could be realized if FSS prices could exist achieved by the federal government for the majority of drugs used by seniors in 2003–2004, and in that location would be substantial savings if prices were just to accomplish FSS levels plus 50%. Whether or not cost negotiation or toll setting for prescription drugs in Medicare is a political or economical possibility, the magnitude of these savings should non be ignored.

Acknowledgements

This work was supported by the National Cancer Found (R01 CA112451) and by a National Enquiry Service Award (T32HP11001-18). The analysis was reviewed and canonical by the Institutional Review Board of Partners HealthCare.

Disharmonize of Interest Dr. Schneeweiss previously received research grants from Pfizer and Merck for unrelated work (on the rubber of coxibs). None of the other authors accept a conflict of involvement.

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