How Our Government Delivers Lower Drug Prices to Select Americans

When most Americans see the latest news about prescription drug price hikes (e.g., Mylan N.V.’s EpiPen),  they immediately point the finger of blame at the greedy drug companies.    What most Americans do not know is that it is in our government’s power to contain these drug price hikes for the benefit of consumers. In fact, our government delivers lower drug prices to SELECT groups of Americans and, unfortunately, most Americans do not fall in this category!  The SELECT groups include  Americans covered through the Department of Veterans Affairs (VA), the Department of Defense (DoD), the Public Health Service, and state Medicaid programs. The rest of the American population (the NON-SELECT Americans) are covered through Medicare stand-alone Part D, Medicare Advantage Prescription Drug (MA-PD), employer-sponsored and non-group health plans.  The uninsured are also part of the NON-SELECT group and pay the highest rates of all.

How Our Government Delivers Lower Drug Prices

Our federal government delivers lower drug prices through various mechanisms (laid out in various laws).  These drug price-reduction mechanisms fall into two categories:

  1. Federal price controls

These federal price controls define maximum prices (i.e., price ceilings) that drug manufacturers can charge the SELECT buyers. These price ceilings are calculated using a specific price paid by others  in the United States (like the non-federal average manufacturers price or the most-favored customer price) and then applying a specific rebate or discount (24%) below it. In addition, if a drug price increases more than inflation (which it does constantly), then the drug purchaser receives an additional rebate off the price paid. This inflation-protection insulates the SELECT from those nasty double and triple digit price hikes the rest of us have to eat.  As drug manufacturers try to circumvent the impact of these price ceilings, the federal government has tweaked the laws over the years to ensure that the SELECT groups continue to receive the lowest drug prices in the United States.

2. Direct Negotiation for Additional reductions in the price of drugs

All of the SELECT groups have the authority (and right) to negotiate for lower prices than guaranteed by the federal price controls above. These discounts can be obtained when the SELECT group uses a formulary (i.e., a subset of all generic and brand name prescription drugs that are available for purchase) and agrees to buy a specific quantity of drugs over a specified period of time. In the VA, the formulary is managed in much the same way as it is in the United Kingdom’s National Health Service—but the latter gets a much better price!

The relative drug price reductions obtained using these federal government mechanisms are given in the figure below.

government delivers lower drug prices for SELECT groups

As you can see in the figure above, the federal price controls and additional negotiations between payer and drug companies reduces the drug prices for SELECT groups (in yellow in the figure) in the United States. All other Americans (NON-SELECT), covered by private for-profit health insurance companies (in red in the figure), pay higher drug prices.  As is always the case, the NON-SELECT Americans covered by smaller private for-profit insurance plans pay higher prices than do those covered by larger plans.  .The United Kingdom (in green) is obviously a better negotiator for its citizen and delivers the lowest drug prices.  (putting the public interest over the financial interests of the drug manufacturers).

The federal government delivers lower drug prices to the SELECT groups (in yellow in the figure above) on the backs of NON-SELECT Americans (in red) who must keep drug manufacturers happy.  The NON-SELECT Americans are the ones who didn’t get the 24+% off coupon at the door.

government delivers lower drug prices to select americans

The Bottom Line

The ability to deliver the lowest prescription drug prices to ALL Americans rests firmly with our federal government. To get lower prescription drug prices, the federal government uses federal price controls to define a maximum drug price it is willing to pay. This maximum price is then negotiated downward through volume purchasing using drug formularies .

So far, our government delivers lower drug prices only to SELECT groups of Americans. The SELECT groups include beneficiaries of Department of Veterans Affairs (VA), the Department of Defense (DoD), the Public Health Service, and state Medicaid programs. The beneficiaries of all private for-profit health insurance company plans (Medicare Part D stand-alone, Medicare Advantage Prescription Drug, employer-sponsored, and non-group plans) are not eligible for federal mechanisms that reduce drug prices to the lowest in the United States. The uninsured, as always, pay full price for any prescription drugs they purchase.

Our federal government chooses not to enlarge the reach of existing prescription drug price regulation for the benefit of ALL Americans because our governmental healthcare policy is aligned with the financial interests of the private healthcare businesses and therefore does not act.

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