Feds Look to Play Bigger Role in Cutting Health Costs

Plans by the new Democratic-controlled Congress to negotiate Medicare drug prices directly with manufacturers could lower the cost of the federal health insurance program for seniors and make it easier for employers to discontinue retiree health benefits.

Experts agree that by using its huge purchasing power to negotiate lower prices for prescriptions, the federal government could lower the cost of Medicare Part D, the prescription drug benefit for retirees. It would lower overall premiums for supplemental insurance, which is more expensive for individuals than insurance purchased by employers.

Should this occur, it could “make Part D even more attractive from a retiree’s perspective and result in a further acceleration of the trend among employers to drop retiree medical, at least for post-Medicare retirees,” Eric Grossman, a health benefits consultant with Mercer Health and Benefits, writes in an e-mail.

Reining in the cost of health benefits for retirees is a major issue for employers because retirees spend more per capita on health care than younger workers do. That spending will increase significantly as baby boomers retire.

Employers struggling with health care costs have been slashing retiree health benefits. Last week, Ford Motor Co. announced it would end retiree health benefits and opt instead to give retirees and their spouses $1,800 each to put toward health care. Earlier this year Chrysler made similar plans for retiree health benefits beginning in 2007.

The percentage of Medicare-eligible retirees who had employer-based supplemental health insurance dropped to 36 percent in 2004 from 66 percent in 1988, according to the Kaiser Family Foundation. Employers could opt to pay for Medicare premiums or a portion of out-of-pocket expenses, if the cost of doing so saves them money.

Beyond retirees, any new legislation allowing for the federal government to negotiate drug prices directly with manufacturers could affect employers in their efforts to pay less for prescription drugs. For employers struggling to tamp down increased pharmaceutical costs for their working population, a savings in Medicare Part D could give employers greater leverage when negotiating how much they will pay for pharmacy benefits, says Edward Kaplan, a pharmaceutical benefits consultant at the Segal Co.

Under the Medicare plan as passed under the Medicare Modernization Act of 2003, insurance companies and pharmacy benefit managers negotiate drug prices with manufacturers and fold that cost into their premium prices. Though Democrats have not unveiled details of the plan for how the government would negotiate prices, Kaplan believes it could include an open bidding process aimed at getting a manufacturer’s generic drug on the government formulary. The competition for business would likely drive down price, even though the final price would be fixed.

“If they do something like that, I think employers very quickly will want to leverage what is published,” he says.

Kaplan says lower prices could be used as a new benchmark for employers as they negotiate what they will pay for drugs.

But drug manufacturers could raise prices in other ways, possibly shifting the cost onto private employers either directly or indirectly, says Paul Fronstin, director of health research at the Employee Benefits Research Institute.

“You could argue drug companies would raise prices to pay for active employees and there will be a cost shift,” he says. “They are going to rob Peter to pay Paul.”

If pharmacy benefit managers play a smaller role in procuring discounts on drugs covered by Medicare Part D, they would likely make up the squeeze on their profit margin by increasing the fees they charge to adjudicate drug claims. An upside to this possibility, Segal says, is that administrative fees are more transparent.

The plan, which is scheduled to be taken up within the first 100 hours of the new Congress in January, will be among the first tests of the Democratic-controlled House. Lawmakers can expect heavy opposition from the pharmaceutical industry. With President Bush’s veto power, Fronstin says, “this thing is not a slam-dunk.”