In fact, our government does “negotiate” drug prices

doctor shaking hands with pharmaceutical rep

The cost of pharmaceuticals is often in the news. Sometimes the story revolves around price-gouging (think Tura Pharmaceuticals). Other times the story revolves around life-saving therapies that come at high costs (think Sovaldi and Harvoni). Sometimes the national conversation leads many people to ask “why doesn’t our government negotiate the price it pays for drugs?”

You’ll be glad to hear that our government does “negotiate” the price it pays for drugs. It accomplishes this by several means.

Consider the Medicaid program. When a provider writes a prescription for a Medicaid patient, it gets filled with medicine pulled from the same shelf of the pharmacy that is used for commercially-insured patients. But the price is “negotiated” down in several ways:

  1. The Affordable Care Act dictates that the government gets at least a 23.1% discount on drugs for Medicaid patients. Technically there is no negotiation involved, but regardless, the government still gets drugs at lower cost!
  2. If a drug manufacturer has negotiated with insurance companies, and the price agreed upon by the two parties is even less than the 23.1% Medicaid discount, then the government also get the drug for that price. This concept is called “Best Price”; the law states that the government gets drugs for the “best price” available on the private market. It’s kind of like the government has businesses negotiating on its behalf!
  3. The discount for Medicare is not quite as good, but it still saves us money. Generally, a physician who infuses a Medicare patient with an IV drug will get reimbursed about 6% more than he or she paid to acquire the drug. Commercial insurers have to pay that physician an average of about 15% more than was paid to acquire the drug. In effect, Medicare pays about 9% less for a drug than commercial insurance companies have to pay for it. Again, not much negotiation going on here. Medicare publishes the formula, and providers can take it or leave it!

So, what about patients with little to no insurance? Those who don’t qualify for Medicaid, but are too young for Medicare? Does the government help that population with drug costs?

Kind of.

In another published, “take it or leave it” formula, the government has defined a “340B” price for most drugs. The 340B program is intended to allow hospitals (and some other providers) to buy drugs at greatly discounted prices, with the intent of helping those hospitals treat uninsured or under-insured patients. Here is how the 340B program results in lower drug costs:

  • If a hospital meets certain criteria (non-profit, treats a high percentage of needy patients, and some other criteria), they may be allowed to buy drugs at the discounted 340B price
  • This price is at least as low as Medicaid’s price (remember, a 23.1% discount)
  • The 340B price can also be lowered to the “Best Price”, just like Medicaid
  • On top of that, if the manufacturer raises the standard list price of its drugs faster than the rate of inflation, the price of the drug is further reduced by a penalty as defined in the 340B law

The result of this formula sometimes means the manufacturer must give its drugs to 340B providers virtually for free.

Yes, virtually free. You may not hear of many virtually free drugs being made available to patients through the 340B program, but that’s a topic for another blog…

In the meantime, be assured that our government does in fact dictate that they have access to drugs at a discount, mainly through laws that take advantage of the significant buying power of being the largest purchaser of healthcare (and drugs) in the world!


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