The Impact of Medicare’s Ability to Negotiate with Pharma

We’ve probably all experienced sticker shock at the pharmacy counter. We can be simultaneously grateful to live in a time when there’s a prescription drug to cure so many illnesses, and frustrated by how much those drugs cost. For self-insured employers, who pay for their employees’ health claims directly, skyrocketing drug prices are a serious matter of concern. How can employers with self-funded plans continue to provide high-quality health benefits when so many of their healthcare dollars are going to prescription drug costs? A piece of legislation that would allow Medicare to negotiate some drug prices could possibly provide some relief, for both Medicare members and self-insured employers alike.  

What’s Going on with Medicare Drug Prices?

Under current federal law, Medicare is not allowed to negotiate prices for drugs covered under Part D. Private companies can administer Part D plans. The law creating Part D included a noninterference clause that prevents the federal government from interfering with “the negotiations between drug manufacturers and pharmacies and [prescription drug plan] sponsors.” In other words, Medicare—as a federal program—can’t get involved in setting drug prices. Pharmaceutical companies have the freedom to set whatever prices they think the market will bear. 

H.R. 3 (the Elijah E. Cummings Lower Drug Costs Now Act) was introduced in the House of Representatives in April 2021. One of its provisions would amend the noninterference clause to give Medicare negotiating power for a limited number of high-cost drugs. Specifically, the bill would make at least 25 high-cost drugs price-negotiable starting in 2024. At least 50 high-cost drugs would be price-negotiable in 2025. 

The HHS Secretary would be empowered to choose the drugs from a curated list of 250. The list would include the 125 part D drugs that were the most expensive in the previous plan year. Insulin would also be on the list of possible drugs that HHS could choose to be price-negotiable. 

The Congressional Budget Office analyzed the bill and concluded that the price negotiation provisions could lower Medicare spending by $456 billion between 2020 and 2029. The CBO also estimates that drug companies would see their profits drop by 15 to 25 percent for their most expensive drugs. Pharmaceutical companies that don’t agree to negotiate or don’t honor negotiated prices would be taxed. 

There are detractors to this legislation. For one thing, some opponents want to let the free market continue to set drug prices rather than having the government intervene. They also say that pharmaceutical companies will have less money and motivation to pump into creating new drugs. The CBO’s analysis acknowledges this, concluding that about eight fewer drugs would be introduced to the marketplace between 2020 and 2029 if the bill becomes law. (For context, the FDA typically approves about 30 new drugs a year.) 

The bill does have overwhelming bipartisan public support, with 88 percent of people surveyed in a 2021 KFF Health Tracking Poll saying they were in favor of the federal government being able to negotiate drug prices.

Why Medicare Drug Prices Matter For Self-Insured Employers

So what does Medicare drug negotiation have to do with your self-insured business? If this legislation passes and Medicare is able to secure lower prices for the most expensive drugs, it’s not just Medicare and its members who would benefit. The negotiated prices would be available to private insurers and non-Medicare health plans too. That means businesses with self-funded health plans could see reductions in drug spending.

Because prices would only drop for a small number of drugs, this legislation might not have a significant impact on your self-insured business’s drug spending. But it could represent big savings if anyone covered by your self-funded plan is prescribed one of those price-negotiated drugs. Depending on how you’ve designed your self-funded plan and the specific drug costs incurred by your covered plan members, lower prescription prices could reduce your direct health care expenses. Lower drug prices could possibly even reduce your stop-loss spending too. Paying less for prescription drugs could help some self-insured businesses keep their costs below the threshold at which stop-loss coverage kicks in. And the less you need your stop-loss coverage, the less you could pay for premiums in the future. 

Everything is hypothetical at this point because H.R. 3 is still with Congress. We don’t know whether it will ever become law or how its provisions might change by the time it does. Right now, the progress of this piece of legislation is just one of the developing healthcare stories we’re tracking.  

Stop Loss Insurance always keeps our clients up-to-date about new laws, shifting trends and everything else they need to know about self-funding and stop-loss. We’re here to answer any questions you have about ways to control your organization’s healthcare spending. Contact us today!

Stop Loss Insurance Brokers, Inc. is your source for information about all things related to self funding. We are here to answer questions you have about stop-loss provisions, switching from fully-funded to self-funded insurance, or whatever else you may be wondering about around health insurance plans. Contact us today!