The Senate Finance Committee recently unveiled a bipartisan bill to lower drug prices for seniors. In the House, Speaker Nancy Pelosi’s latest draft of drug price legislation would also allow Medicare to negotiate lower drug prices directly with manufacturers. This seems like just the latest episode of annual outrage over drug pricing transparency. It was exactly one year ago that house members introduced The Medicare Negotiation and Competitive Licensing Act, aimed at allowing the government to negotiate drug prices with manufacturers.
If there is one thing these bills have accomplished, it’s drawing attention to the fact that our government is not currently allowed to negotiate drug prices with manufacturers. But is this really true?
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In the Medicare Modernization Act of 2003 that established Medicare Part D (the drug benefit coverage under Medicare), it is written that “the Health and Human Services (HHS) Secretary may not interfere with the negotiations between drug manufacturers and pharmacies and plan sponsors.” Clear enough.
However, more than a decade before that Act became law, in 1992, Congress enacted Section 340B of the Public Health Service Act (created under Section 602 of the Veterans Health Care Act of 1992). Section 340B requires pharmaceutical manufacturers to enter into an agreement, called a pharmaceutical pricing agreement (PPA), with the HHS Secretary in order for their medications to be covered by Medicaid and Medicare.
How deep of a discount can HHS negotiate under the 340B program? The HHS’s own study in 2009 gives an example in which a manufacturer must offer a $45 brand medication for just 1 cent. More recently, Drug Channels showed how the hepatitis C drug Harvoni with a list price of $94,500 has a 340B price of $24,000. That is a whopping $70,500 discount that the government negotiated for just one prescription!
What’s the catch?
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The 340B program only applies to prescriptions received at clinics and hospitals classified as “covered entities.” Covered entities must be a non-profit or owned by the government and must fall into one of the following categories: disproportionate share hospitals (DSHs), children’s hospitals and cancer hospitals exempt from the Medicare prospective payment system, sole community hospitals, rural referral centers, or critical access hospitals (CAHs).
While initially only a small portion of prescriptions qualified, the program has expanded over the years. The number of hospital organizations participating in 340B grew from 583 in 2005 to 1,365 in 2010 and to 2,140 in 2014. As of October 2017, there are 12,722 covered entities participating in the program and $19.3 Billion worth of drug purchases (6 percent of the total), in the US were negotiated by the government through 340B, a program many have never heard of.
A big reason for the expansion has been the guidance issued by HHS in 2010, in which a hospital may provide 340B drugs not just through their hospital pharmacy, but also community pharmacies. What this means is that if a patient goes to a hospital or affiliated clinic and receives a prescription for a blood pressure medication, that prescription qualifies for 340B even when they pick it up at their community pharmacy miles away from the clinic. Unbeknownst to the patient, their insurance pays for the prescription, but on the backend, the pharmacy passes ~80 percent of the insurance payment back to the doctor’s clinic that wrote the prescription. In exchange, the clinic orders that same medication via their wholesaler at a fraction of the cost to be delivered to the pharmacy the next day. Moreover, every time that patient fills their blood pressure prescription going forward, the same process happens again.
As we look to increase drug pricing transparency and empower our government to negotiate with manufacturers, let’s remember the power HHS already has today and how it can wield it to pass these savings to consumers. With 1 in 12 of prescriptions qualifying as 340B, most people are unaware that HHS has already negotiated a much lower cost for the medication their doctor prescribed. So, if the government already negotiates these drug prices, why not go the extra step and pass these savings on to the consumer?
Photo: AndrijTer, Getty Images
Flaviu Simihaian is CEO and co-founder of Troy Medicare, a health insurance startup aiming to fix the healthcare system from the ground up. Prior to Troy Medicare, Flaviu co-founded Amplicare, a SaaS platform that 6,000+ pharmacies use to help millions of seniors compare health insurance plans.
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