A Two-fer: A Medicare Pharmacy Proposal that Also Lowers Medication Costs for Everyone

Copyright © 2006	Ivan J. Miller
An earlier version of this article was published in the Code Blue Now Newsletter, 3/04. A more complete description of the Balanced Choice pharmacy plan is available in Balanced Choice: A Common Sense Cure for the U.S. Health Care Systems.

The Medicare pharmacy benefit, Medicare Part D, is a mess. Not only is it confusing, provides incomplete coverage, and offers patients only limited assistance, but in addition to those problems, it is very expensive. Balanced Choice, in contrast, would cost less than Medicare Part D. In fact it would be a two-fer, it would accomplish two goals with one program. It would both lower the costs of medications for everyone and provide good pharmacy benefits for those with Medicare.

What is wrong with Medicare Part D?
Choosing a Medicare Part D plan has been a mind-boggling task. There are an average of 15 of these plans in each state1 and as many as 67 different insurance plans in some places.2 Each plan has different premiums, deductibles, copayments, medications in their formularies, pharmacy networks, and areas of geographic coverage.

Medicare also has major gaps in coverage that result in patients being underinsured. Some medications are unavailable on any plan. Many medications and pharmacies are unavailable on any given individual plan. A financial gap results in high out-of-pocket expenses for many beneficiaries.3 For example, patients whose medication costs $5,100 per year will still pay $4,020.4 It is no wonder that twice as many seniors view Medicare Part D unfavorably as view it favorably.5

Until now, the major argument against reforms in the Medicare Plan D program is that alternative proposals have focused on the government negotiating or setting the price of medications. Such price negotiations are so similar to price controls that these proposals have not been able to overcome economic and political concerns.

What is the Balanced Choice alternative?
Although Balanced Choice is primarily a comprehensive system for changing the way the U.S. finances all health care, the Balanced Choice Pharmacy Plan could be implemented for Medicare without changing the rest of health care financing. Compared to Medicare Part D, this Pharmacy Plan would give more assistance to Medicare recipients, cost less, and give greater choice to consumers and providers.

Balanced Choice is an option that allows the market to determine price and is administratively much less complex than subsidizing scores of insurance plans as Medicare Part D does. The plan is simple. First, it makes competitive pricing lists available in the doctor’s office where medication decisions are made. Second, it stimulates patients’ concerns about price. With Balanced Choice, Medicare pays a base amount for each category of medicines, and patients pay the full gap between the base amount and the actual charge for a specific medication. When the provider-patient team chooses a medication, they would be able to consider even small differences in price.

Balanced Choice addresses the core problem in the price escalation of medications — medications have not previously had real price competition. Doctors and patients have not had adequate price information available in the doctor’s office where medications are prescribed. Furthermore, too often even when the price is known, patients have not cared because after making a standard copayment, they knew insurance will cover the remaining costs.

The health insurance industry has known about this problem and has made some ineffective attempts to simulate price competition. The current fad is to have three-tiered systems with a different copayment for each tier. The low copayment tier is for generic drugs; the middle copayment tier is for medications that are favored by the managed care company due to price, negotiated special deals, or rebates; and the high copayment tier is for drugs considered expensive. Tiers save money for managed care companies that may have negotiated a special deal or rebate for including a medication on the second tier, but they do not change the price of medication for the rest of Americans.

The three-tiered attempt to simulate price competition does not address the major cause of escalating prices in medication. Pharmaceutical companies raise the price of established medications frequently, sometimes even several times a year. These small price increases are not large enough to move a medication from one tier to another. Families USA has found that in 2002 these price increases amounted to an annual rate of 8.1%. In the Balanced Choice Pharmacy Plan, on the other hand, patients and providers would know the exact dollar difference between medications, and the market would react to even these small changes.

The Balanced Choice Pharmacy Plan
The Balanced Choice Pharmacy Plan creates price lists by first requiring that drug manufacturers publish the maximum price for their medications. The manufacturers can change the price or sell below this price at any time. The published price is then used by the Medicare system to create a cost comparison chart for the typical dose at a typical pharmacy. The list allows doctors and all patients to make price comparisons, and it also gives Medicare patients the amount of the anticipated gap payment they will need to make for each medication. Patients may achieve additional savings by shopping around for a discount pharmacy that lowers their gap payment.

Base payments would be sent directly to the pharmacy the patient has chosen. These base payments would increase as the annual cost of medications increase. Most recipients would pay the gap between the base payment and the actual cost of medication at the pharmacy. The plan gives Medicare recipients the financial help they need because the base amount increases as annual medication expenses rise. Low-income recipients and those with huge costs could have all costs of medications paid by Medicare thus assuring that no Medicare patient would forego necessary medication for financial reasons.

The Medicare Patient and the Doctor
The following fictional script for Dr. Goodheart and Mrs. Beewell shows how the plan works.

Medication prices will decline for everyone
One part of the two-fer solution is that price competition will cause the price of medications to decrease for everyone. According to Families USA (Bitter Pill, 2002), seniors pay 42% of the cost of medications in America. There is tremendous power that will come from cost-conscious senior and disabled Medicare recipients. In addition to Medicare patients, those who have no insurance or do not have a pharmacy benefit in their plan will also be interested in using the cost comparisons in the Medicare Medication Cost Comparison Chart. The 47 million uninsured, and uncounted millions who have insurance but no pharmacy benefits will add their market power to Medicare recipients. Once millions of cost conscious consumers sensitize doctors to price, they will consider price differences even when insurance is paying the bill. The market will change from the current situation in which drug companies hardly ever face real price competition, to one where there is almost no place to hide from real price competition. The result should be a steady decline in the price of established medications.

Will price competition work for medications? Of course it will; it does in every other sector of a functional market. Other countries have tried versions of the Balanced Choice plan called “reference pricing.” Most notably, Germany has had reference pricing on some medications since 1989. In the time period from 1989–2001, the price index for reference-priced medications decreased 30% while the price index for medications not reference priced rose 25%.6 Although some other cost-control measures during this time period made it difficult to evaluate the precise effect of reference pricing, it shows that there is great potential for price competition to reverse the rising cost of medications in the United States. It would be a great accomplishment if, in the United States, the Balanced Choice Pharmacy Plan would take 30% or more out of the bloated prices that have developed in the years without price competition.

This dramatic change can happen because a primary cause for price escalation in medications is the periodic price increases for established medications, rather than the few medications that really have no competitors. Families USA (Bitter Pill, 2002) has identified the top 50 drugs used by the elderly, and according to the Physicians Desk Reference (2002), at least 47 of these have some competitor medication in their category. Families USA found that the brand name drugs on this list increased at three times the rate of inflation in 2002, while the generic drugs increased at less than the rate of inflation. Generic drugs compete on price at the pharmacy. Brand name drugs, on the other hand, avoid price competition because they are usually selected by physicians who do not have the price information available.

It is true, that one medication cannot always be replaced by another in the same category, and therefore no two drugs are equal competitors. Two medications in the same category may be equally effective for only some patients. This is no different than most other parts of the free market system. Competitors are usually not offering identical products, and they still compete on price.

Patients are protected from putting too much emphasis on price in this proposal because the doctor still decides if it is appropriate to try a less expensive medication. The difference between the current situation and the Balanced Choice Pharmacy Plan is that price can be one factor that the doctor-patient team uses in selecting medications.

When price competition begins to work, it will restrain medication costs without government cost controls that might stifle the invention of new drugs. After all, it is well established that price competition is merely a traditional component of free market systems that are known to stimulate innovation and new products. Pharmaceutical companies, just as other industries that cope with price competition, will be able to make healthy profits.

The Balanced Choice Pharmacy Plan is better than the so-called “market-driven” proposals in Medicare Part D. These Part D pharmacy benefit packages are so complex that no one can understand how they will work in an individual case. From an economic perspective, Medicare Part D pharmacy benefits can be thought of as a huge bundle of services that must be accepted as a whole. The Balanced Choice Pharmacy Plan unbundles the delivery of medications so that the doctor-patient team can make each medication decision independently.

The Balanced Choice Pharmacy Plan saves money because it eliminates most of the administrative costs that occur in both giant HMOs and government bureaucracies. The Balanced Choice Pharmacy Plan requires only a small administration to distribute price lists and make the base payments directly to pharmacies, thus cutting huge costs from the administration of Medicare Part D.

Still, there is another bonus that comes from the Balanced Choice Pharmacy Plan. Critics have blamed expensive direct-to-consumer advertising for pushing up the cost of medications. The pharmaceutical industry defends itself by saying it is only educating consumers about the possibility of improving their health care. If the Balanced Choice Pharmacy Plan is implemented, when Mrs. Beewell sees Dr. Goodheart and inquires about the medication she heard about on TV, he might say, “Yes, you have that condition, and because I know you care about cost, let’s see how much each of the different medications for that condition cost.” When advertising expenses push up the cost of the medication, the advertiser would lose the sale in the doctor’s office where price competition comes into play.

Conclusion
To cure the U.S. health care systems we need new ideas that serve the interests of patients, employers, and providers of health care services. The Balanced Choice Pharmacy Plan is one such idea. It makes sense. Price competition has been proven to work in other parts of the free market system and has worked with medications in Europe. Balanced Choice serves the interests of Medicare recipients. By controlling the price escalation of medications, it relieves the health care cost burden on all patients and employers. Replacing Medicare Part D with the Balanced Choice Pharmacy Plan can be the first step toward curing the U.S. health care systems.

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1 Kravitz, R. L. & Change, S. (2005). Promise and perils for patients and physicians, New England Journal of Medicine, 353, 2735–2739.
2 Families USA. (2005). Pick a plan: The new CMS drug benefit game for seniors, Washington DC: Author.
3 Families USA. (2005). Gearing up: States face the new Medicare law. The holes in Part D: Gaps in the new Medicare drug benefit (Part 1 of 2), Washington DC: Author.
4 Families USA. (2004). The Medicare road show. Washington DC: Author. Families USA explains that in the model program there is a $35/mo. premium, $250 deductible, insurance coverage of 75% for expenses between $250 and $2,250, and a $2,850 gap in coverage for expenses between $2,250 and $5,100.
5 Kaiser Family Foundation. (2006). Selected findings on seniors’ views of the Medicare prescription drug benefit. Publication #7463. Washington, DC: Author.
6 Kanavos, P. and U. E. Reinhardt. (2003). Reference pricing for drugs: Is it compatible with U.S. health care? Health Affairs, 22(3), 16–30.