Drug price hikes trigger big Medicaid rebates. Medicare? Not so much

President Barack Obama

Is momentum growing behind the idea of Medicare taking a harder line on drug prices? Not in the pharma industry, that's for sure. But a new Inspector General's report adds some numbers to the argument, and as The New York Times reports, the government's precision medicine initiative might just push the issue.

In his latest budget, President Obama calls for new negotiating powers for Medicare, which is prohibited from pressing drugmakers for better deals--unlike government health programs in other countries. That idea has been a nonstarter before. And the industry trade group PhRMA is perennially against it.

Meanwhile, new reviews by the Health and Human Services Office of the Inspector General took another approach: What if Medicare Part D simply adopted the same mandatory rebates as Medicaid? Not only are the Medicaid rebates bigger to start with, but they include adjustments for price increases that outpace inflation.

According to the OIG's numbers, rebates due to Medicaid ranged three times higher than those due to Medicare. For one group of more than 100 meds, Medicaid's per-unit costs were less than half of Medicare Part D's. For a group of 200 meds, Medicaid spent $35.7 billion during 2012, with almost half as much due in rebates--$16.7 billion. That same year, Medicare Part D laid out $66.5 billion for the same meds, with less than one-sixth of that amount in rebates.

In a follow-up to that calculation, the OIG determined that rebates based on price hikes accounted for much of the difference between Medicare and Medicaid. By its calculations, base rebates amounted to $4.2 billion, or 46%, of Medicaid's total, while the price-related rebates amounted to $4.9 billion, or 54%.

The OIG suggests that Congress take a new approach: "While we recognize the statutory limitations surrounding rebate collection under Part D, we encourage CMS and Congress to explore the costs and benefits of obtaining additional rebates," the report states. One suggestion, it says? Check out "methods to protect Part D from increases in drug prices."

Of course, rising drug prices have been increasingly controversial over the past year, as sky-high costs of hepatitis C drugs triggered public hearings, public rebukes, state budget consternation and, eventually, a payer crackdown. And with new meds for rare diseases--and certain cancers--making their debuts every month, that debate promises to get louder.

And as the NYT points out, Obama's budget also includes investment in "precision medicine," or drugs targeted to a patient's genetic particularities. Today's meds in that category are among the costlier drugs on the market, and future installments are likely to be just as expensive. Patients foot the bill for a big share of those costs, too, unless they qualify for copay assistance through the manufacturers themselves.

NIH Director Francis Collins

Would Medicare pricing power forestall the "grave concerns" of patient advocates worried that people won't be able to get access to the new treatments? It might help; U.S. drug costs are substantially higher than those in countries that allow that sort of thing. Of course, drugmakers could themselves take a more conservative approach to pricing in the U.S., but recent history doesn't bode well for that idea.

NIH Director Francis Collins told the Times he's concerned about the prices on targeted meds. "Is that the path that precision medicine inexorably is going to take?" he asked. "I should hope not." Unfortunately for payers and patients, hope won't be enough.

- see the NYT piece
- read the latest OIG report

Special Reports: 10 big brands keep pumping out big bucks, with a little help from price hikes | The top 10 most expensive drugs of 2013

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