Medicare Compliance & Reimbursement

Health economist Joseph Newhouse predicts that the Medicare prescription-drug law's "non-interference clause," which prohibits the federal government from using its clout to achieve lower drug prices, is unlikely to last long.

The language - for which pharmaceutical manufacturers fought hard - "will be modified at some point," said the Harvard University economist and Medicare Payment Advisory Commission member at a Jan. 8 forum sponsored by Health Affairs.

For most drugs, the law sets up a market-pricing system that likely will persist, says Newhouse. Most drugs have either generic or other brand-name competitors, and for those products, private plans bargaining on beneficiaries' behalf should be able to exert negotiating pressure and hold down prices.

However, for drugs without competitors - many of which likely would be drugs purchased by beneficiaries after they'd reached the catastrophic-coverage threshold, when their individual cost-sharing responsibilities are a relatively low 5 percent - the non-interference rule would essentially force Medicare to pay any price manufacturers name. In such cases, there is significant potential for "abusive" pricing, Newhouse writes in a paper in the Jan./Feb. 2004 Health Affairs.

So, what kind of administrative price-setting structure would be fairest for the drugs that are eventually exempted from the non-interference language?

At a Dec. 10 conference sponsored by the Institute for International Research, Newhouse dismissed as arbitrary and/or inaccurate several possible formulas for setting prices by reference to average wholesale price, returns on drug company assets, or other factors. Instead, he would "give the Centers for Medicare and Medicaid Services explicit authority to consider cost in the coverage decision, which would give them a modest amount of leverage if they thought the manufacturer's price was just outrageous."

For clinically important drugs, the federal government's leverage to ratchet down prices too far would be constrained because there "would be lots of political pressure to cover" the drug, including "TV pictures of dying patients in extreme cases," he says.

"I think the industry is quite right in its fear that [price] controls could inhibit research and development" by "driving away capital" that's required many years in advance of a drug's appearance on the market, if regulators set prices too low, Newhouse said Jan. 8.

If potential investors believe that regulators won't ultimately set prices that will cover "the cost of development plus a return to capital," the manufacturer won't develop a drug, "even though the willingness to pay for the drug in the world might greatly exceed the drug's development cost."