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Negotiating Prices in Part D

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Post by Kevin Outterson
Associate Professor & Co-Director of the Health Law Program
BU Law

Last week, Rep. Peter Welch (D-VT) introduced a bill (H.R. 4752) to overturn the 2003 ban on government-led price negotiations for Medicare Part D drug plans.  The bill has 73 co-sponsors so far.  While perhaps well intentioned, this bill will do little to reduce Part D drug prices.

Giving the government the power to negotiate drug prices can work only if we have credible alternatives to the drug on the table.  Plans need: (1) generics or similar drugs in the therapeutic class; and (2) formulary flexibility to drive market share in exchange for price concessions.

First, many complex specialty drugs are biological and don’t have generic equivalents.  Proposals debated in this Congress would establish a regulatory pathway for bio-similars, but the current language mandates a long exclusivity period, twelve years after patent expiration.  Market competition can’t work without competing products.  Billions of dollars are at stake here.

Second, Congress has tied the hands of Part D drug plans by mandating a highly inclusive formulary – at least 2 drugs from every class, and every drug from 6 protected classes.  Part D plans are required to include these drugs, which destroys any ability to negotiate price.  As Aaron Kesselheim and I said recently in Health Affairs: “Successful negotiations would require a credible threat of formulary exclusion, which is difficult in a national public plan with a safety-net role.”

Both of these problems were mentioned in a recent GAO report:  “Plan sponsors reported having little leverage to negotiate price concessions from manufacturers for most specialty tier–eligible drugs” – negotiation doesn’t work without competitive drugs on the market and the ability to exclude some of them from the formulary.

How exactly will CMS do a better job in this reality?  No wonder CBO generally scores these types of bills as not saving significant money.  The most important changes will come from expanding the availability and use of generics (including bio-similars) and permitting Part D plans to tailor their formularies.

The Welch bill discusses formularies, but in an irrelevant way.  The bill opposes a national Part D formulary.  No one really wants a uniform national Part D formulary, so this is not a controversial stance.  But if Part D plans are to negotiate lower prices, with or without government help, they need the ability to experiment with different formularies.  In short, formulary diversity is necessary if this price negotiation strategy will work.  (Formulary diversity also introduces problems if Part D plans design them more for adverse selection purposes, to discourage the sick from joining their plan).

In addition to these two key proposals, Kesselheim and I outlined several other suggestions for reducing Part D drug prices, including expanded forms of generic and therapeutic substitution; limited anti-trust waivers to allow Part D plans to voluntarily band together to negotiate with drug companies; importation; and value-based pricing.  If readers are interested, I can take these topics up in future posts about Part D.

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