This analysis, using nationally representative data 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 substitution of the FSS price for seniors prior to Part D. A substantial savings of over $11 billion dollars is present if FSS prices are substituted only 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 amount of money spent per capita for prescription drugs for those over the age of 65 was $1,550.13
Whether these savings would be passed on to patients or retained by their health plans, they would potentially leave more resources in the health-care system to treat more patients and more conditions. Even 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 government 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 report by Families USA comparing prices found in the VA with prices under various Part D plans found a 58% median difference in prices, which is consistent with the substantial savings demonstrated in this analysis.6
In addition, there is evidence that FSS prices are fairly similar to prices paid by the Canadian government,14
and prior work has compared Canadian prices to the higher current commercial US prices.15,16
There is considerable debate about whether negotiation by the federal government 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 Office (CBO) stated in a letter to Senator Bill Frist in January 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 effect on federal spending.”20
The CBO letter went on to say that for drugs that face competition with other therapeutically similar drugs, the market would be as successful as government negotiation in lowering drug prices. However, definitive empirical evidence as to how successful the market has been in lowering prices is lacking, and there is also no consensus about what a “successful” reduction in drug prices by market forces would be. The little we know about 2006 PDP drug prices comes from the Families USA study showing that prices in PDPs are not nearly as low as at the VA, and from a separate analysis released by CMS showing that drug prices in the median cost PDP are on average only 25% lower than cash prices, although significant variation exists.21
Some data suggest that prices for certain drugs have actually increased with Part D, and data from the National Health Expenditure Accounts show that overall drug prices increased in both 2005 and 2006 at 3.6 percent.5,22
The CBO did say that some savings were possible if the government could negotiate prices with manufacturers of drugs with no competition from therapeutic alternatives - drugs such as clopidogrel (Plavix).20
Our analysis quantifies some of these potential savings. Included in the list of top ten drugs used by seniors is one that has no real therapeutically equivalent competitor on the market [clopidogrel (Plavix)]. Combined savings from using FSS prices for just this one drug would total almost 400 million dollars annually. Clopidogrel is one of the medications whose price has reportedly increased in Part D.5
The ability of the government to extend prices from the federal supply schedule to the much larger population of Medicare beneficiaries is uncertain. However, the FSS is a clear example of a set of drugs available to federal purchasers that is negotiated by the government without a formulary. We believe this makes the FSS, and our analysis, 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 almost $10 billion could still be saved annually if these drugs were subjected to FSS prices plus 50%. In addition, for seniors who already have private supplemental insurance in addition to Medicare, price differences with the FSS amount to billions of dollars. The magnitude of these price differences between 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 actual consequences of opening up the Federal Supply Schedule to a larger group are unknown.23
There would likely be spillover effects with higher prices for cash-paying customers and private health plans as manufacturers work to regain profits, or perhaps less capacity for research and development by pharmaceutical manufacturers. There would be administrative costs associated with federal negotiation of prices that are not modeled here, although there may also likely be savings to the manufacturers in having to negotiate only once. A full discussion of these complexities is beyond the scope of this paper.
The results of this study must be interpreted in the context of the study design and data sources. While the use of 2003–2004 data is not ideal, there is no public nationally representative data 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 2–3-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 use the detailed data that are available in MEPS on individual insurance, copays, the frequency of refills, the number of pills per prescription (30 vs. 90 day), etc. It will be critical once 2006 data become available to determine whether negotiation of prices in part D has saved money for seniors and for society. We do note, however, that one study described above does demonstrate that Part D prices are very much higher than VA prices - on the same 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 rapidly in 2006 than in 2005.22
MEPS also unfortunately does not account for the rebates that flow from manufacturer to payor and PDP, which may lead to an overestimate of drug expenditures in MEPS. However, data on rebates are proprietary, and it is unknown how significantly they would affect overall expenditures, and for what drugs. A recent congressional report estimated that insurers in Medicare Part 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
Basic Medicaid rebates are on average 15% of the Average Manufacturers Price (AMP); however, the AMP is also not publicly available.8
Ultimately, our sensitivity analysis shows that these rebates are unlikely to be 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 not take into account dispensing fees, while MEPS expenditures include the cost to the pharmacy of dispensing the medicine. Although this may overestimate the savings we calculate, it also would not likely be enough to change the results of the sensitivity analysis.
While the debate about negotiation of drug prices continues, prescription spending continues to increase faster than inflation and occupies a growing percentage of our national health expenditures.9,22,27,28
The use of lower-price generic drugs through tiered benefits, shifts towards mail-order pharmacy, and the removal from the market of highly priced drugs that turned out to be dangerous have contributed to some modest slowing in the rate of growth in drug spending until recently.9
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 central issue for cost containment in the future.
An annual savings of over $20 billion could be realized if FSS prices could be achieved by the federal government for the majority of drugs used by seniors in 2003–2004, and there would be substantial savings if prices were only to reach FSS levels plus 50%. Whether or not price negotiation or price setting for prescription drugs in Medicare is a political or economic possibility, the magnitude of these savings should not be ignored.