Rerun: Locking out lock-in pricing

The Health Business Blog is taking a break and re-running some posts from 2008. If you’d like to comment, please do so on the original post.

In Medicare Moves To Limit Costs In Drug Plans the Wall Street Journal discusses “lock-in pricing,” whereby Medicare agrees to pay pharmaceutical benefit managers (PBMs) a fixed priced for a given drug, but the PBM can keep the difference if they negotiate a lower price from the manufacturer. The Journal has adopted an uncharacteristically populist tone for this piece. (See my emphasisbelow for the heartstring tuggers.)

Medicare is trying to curb an opaque industry practicethat inflates what some older and disabled people pay for medicines under the federal insurance program’s prescription-drug plan…

Lock-in-pricing can boost costs for Medicare beneficiaries because they pay a percentage of their drug costs. Also, the practice can more quickly drive consumers into thenotorious gap in coverage known as the doughnut hole, where they generally must begin paying the full cost of their medicines.

Apparently the Journal is more comfortable with pass-through pricing, which is essentially a cost-plus arrangement.

Lock-in pricing doesn’t bother me. I’m in favor of incentives for PBMs to negotiate better prices, and there’s nothing like the profit motive to drive behavior! It also doesn’t bother me that beneficiaries have to pay more as a result. First, the cost differences to beneficiaries are pretty minor. Second, Medicare beneficiaries should pay more for their benefits (including the Part D drug benefit) anyway. I have very little sympathy for victims of the “notorious gap in coverage known as the doughnut hole” considering that Part D and other Medicare coverage is heavily subsidized by the working population, many of whom have no drug coverage at all!
The article also inadvertently points out the stupidity of first-dollar drug coverage in its explanation of how some Medicare patients are dealing with gaps in their benefit:

In the meantime, Medicare drug-benefit participants buying drugs should consider checking low-price sellers of generic medications, such as Costco Wholesale Corp. and Wal-Mart Stores Inc., to see if their retail prices are lower than those in the insurance plan.

That is what Len Steinberg of Scottsdale, Ariz., did, and he found that Costco’s retail price for his generic nasal spray was about half of the drug’s total cost under his plan.

Mr. Steinberg, a 73-year-old retired employee-benefits consultant, says he now pays cash for certain cheap generics at Sam’s Club and Costco, rather than using his drug coverage. That allows him to avoid the doughnut hole and continue receiving coverage for his more expensive branded medications, he says.

The reason Wal-Mart prices are low is that they are looking at the end consumer as the customer and striving to offer the best value possible, just like they do with any other product. That means playing tough with suppliers and driving costs down. PBMs that have “lock-in pricing” contracts are more likely than those with pass-through arrangements to do something similar. Assuming we keep Part D (which unfortunately I think we will) then the best thing Medicare can do is to have the PBMs disclose the prices they pay –perhaps with a lag of a year or two. Then Medicare can use that information to ratchet down reimbusrements where feasible. PBMs will still have an incentive to keep on negotiating lower prices because they will continue to enjoy a window of “locked in” profits before the ratchet kicks in.

A simpler, money saving policy would be to cap reimbursement at the level of Wal-Mart’s retail pricing.