Drug reimbursement is a pretty complex topic, so unfortunately I can't provide a single source that sums things up nicely. The AMCP guide to Pharmaceutical Payments is probably the best single source, but it's long.[1]
One key thing is it depends on how you define "negotiate". Does Medicare Part D sit down with drug companies and argue over the price? No. In fact, Medicare doesn't play a huge role in Part D, private companies do. So they do the negotiating. This is actually a pretty good way to do it, since the private insurers are already negotiating for their commercial book of business, so they know a thing or two about getting better prices (i.e. "Hey drug company! Let's negotiate our Medicare Part D price. It looks like you're giving me a 20% discount on this drug for my commercial patients, so why don't we start the negotiations there?")
How Part D works is Medicare pays out a premium to private insurers. It's usually a set rate per life covered (i.e. here is $8K for this patient, please cover their drug spend, if $8K doesn't cover it, tough). Yes, there are risk-adjustments, but that's at the margin. The private insurers then pool all of the premiums and use that to pay out for the benefits. The private insurers are competing for customers since each plan is different and the premium from the patient are different. They have every incentive to provide the best coverage for a given dollar. So they go out to drug companies and say "If you give me a 20% discount, I'll make sure your drug has a low co-pay". Obviously this only happens in really competitive spaces where there are multiple, mostly undifferentiated drugs. Regardless, the private insurers cut their costs which means the following year, they can offer a better plan for the same amount of money.
So with Part D, Medicare doesn't negotiate, but it benefits from the negotiation that private insurers do. That's why the Part D budget has come in way under what was projected.
For Part B, Medicare doesn't negotiate either, but rather says to drug companies "I'm not paying more for this drug that the average price all of your customers pay." Again, not a negotiation, but rather a pronouncement. Could Medicare negotiate even lower costs? Probably in a few places, but overall it's getting a better deal than a lot of private insurers.
Your source is correct that Medicare doesn't get the "best price" for drugs. That's what Medicaid gets ("I want the lowest price you offer any customer"). However, Medicaid has "negotiated" (again, I use quotes since it was more of a "you will do this" than a negotiation) some pretty insane discounts on drugs. They either get the best price offered or they get 23.1% off the average price, whichever results in the lowest cost.
The other "negotiated" price that Medicare gets (in a roundabout way) is 340B. Again, this was "negotiated" with drug companies where hospitals/clinics who serve a large number of low income people automatically get a 23.1% discount on all out-patient drugs. Now, in this case, Medicare doesn't get that discount, the hospital does. However, that money goes to pay for things that Medicare would have paid for anyways, so in essence it's going back to the insurer, in this case Medicare.
That's how it works with Medicare. It would be correct to say it doesn't negotiate like the Department of Defense (as a part of the Federal Supply Schedule), which basically knocks 24% of the price of the drug as a starting point. However, the DoD is a small book of business, so drug companies pretty much roll over on that negotiation. Plus, many of these discounts are actual law, so it's not like the drug companies have a choice in the matter.
Thanks for taking the time to put this together. So, as I understand it, a simplified summary of Part D:
* There are a number of plans provided by private companies available under Medicare Part D.
* The government pays certain rates for these plans.
* The private companies negotiate the prices they pay with the drug companies.
I'm purposely omitting details as I want to make sure I'm understanding the overall picture.
If this is the case, I can see how it phrasing such as "the government can't negotiate prices" is true but misleading. True in that the government doesn't work directly with the drug companies so there is no negotiation, and misleading because it implies that there is such direct contact.
Is that fair?
This has been useful. I appreciate the time you've taken.
That is fair. Saying "Medicare can't negotiate" is misleading because it infers Medicare is paying too much for drugs, when in fact, private companies negotiate on their behalf and pass along savings.
One key thing is it depends on how you define "negotiate". Does Medicare Part D sit down with drug companies and argue over the price? No. In fact, Medicare doesn't play a huge role in Part D, private companies do. So they do the negotiating. This is actually a pretty good way to do it, since the private insurers are already negotiating for their commercial book of business, so they know a thing or two about getting better prices (i.e. "Hey drug company! Let's negotiate our Medicare Part D price. It looks like you're giving me a 20% discount on this drug for my commercial patients, so why don't we start the negotiations there?")
How Part D works is Medicare pays out a premium to private insurers. It's usually a set rate per life covered (i.e. here is $8K for this patient, please cover their drug spend, if $8K doesn't cover it, tough). Yes, there are risk-adjustments, but that's at the margin. The private insurers then pool all of the premiums and use that to pay out for the benefits. The private insurers are competing for customers since each plan is different and the premium from the patient are different. They have every incentive to provide the best coverage for a given dollar. So they go out to drug companies and say "If you give me a 20% discount, I'll make sure your drug has a low co-pay". Obviously this only happens in really competitive spaces where there are multiple, mostly undifferentiated drugs. Regardless, the private insurers cut their costs which means the following year, they can offer a better plan for the same amount of money.
So with Part D, Medicare doesn't negotiate, but it benefits from the negotiation that private insurers do. That's why the Part D budget has come in way under what was projected.
For Part B, Medicare doesn't negotiate either, but rather says to drug companies "I'm not paying more for this drug that the average price all of your customers pay." Again, not a negotiation, but rather a pronouncement. Could Medicare negotiate even lower costs? Probably in a few places, but overall it's getting a better deal than a lot of private insurers.
Your source is correct that Medicare doesn't get the "best price" for drugs. That's what Medicaid gets ("I want the lowest price you offer any customer"). However, Medicaid has "negotiated" (again, I use quotes since it was more of a "you will do this" than a negotiation) some pretty insane discounts on drugs. They either get the best price offered or they get 23.1% off the average price, whichever results in the lowest cost.
The other "negotiated" price that Medicare gets (in a roundabout way) is 340B. Again, this was "negotiated" with drug companies where hospitals/clinics who serve a large number of low income people automatically get a 23.1% discount on all out-patient drugs. Now, in this case, Medicare doesn't get that discount, the hospital does. However, that money goes to pay for things that Medicare would have paid for anyways, so in essence it's going back to the insurer, in this case Medicare.
That's how it works with Medicare. It would be correct to say it doesn't negotiate like the Department of Defense (as a part of the Federal Supply Schedule), which basically knocks 24% of the price of the drug as a starting point. However, the DoD is a small book of business, so drug companies pretty much roll over on that negotiation. Plus, many of these discounts are actual law, so it's not like the drug companies have a choice in the matter.
[1] http://www.rbshelp.com/articles/AMCP-Pharmaceutical-Guide-Fi...