Report: Medicare pays, on average, 50% more for drugs than the VA
A recent report conducted by the Government Accountability Office (GAO) revealed that, on average, Medicare Part D pays 50% more for the same drugs than the VA. The study compared a “basket” of 399 generic and brand name drugs and compared the total overall costs per drug from each program. We’re going to break down the findings of the study and the reasons why drugs are generally cheaper at the VA. It’s important to note that the drug market in the US is cast and complex. This is a summary of a complete study and has been condensed for easier understanding. You can read the full report by clicking here.
First, it’s important to recognize how these two programs function. The VA covers about 9 million beneficiaries and is a single, integrated health system. In other words treatments and drugs are administered directly from the VA by the VA. Medicare Part D covers about 53 million people but coverage is separated between multiple Part D plans managed by multiple private insurance companies. Each plan is negotiating which drugs are covered, at what cost and at what pharmacies.
Second, what drugs did the study include? The study compared costs, for 2017, between 399 brand name and generic drugs (the basket). The basket was chosen based on 3 key criteria: “the highest expenditures; the highest utilization (based on number of units dispensed); and the highest expenditures per unit (excluding any drugs with fewer than 50 associated claims).” Several other factors like, weighted average unit prices for each category of drugs, were also used in selecting the basket of drugs included and analyzing price difference.
When comparing the costs of these drugs and the 3 subcategories the study found that, on average, the VA pays 50% less than Medicare Part D across the board. The price difference between brand name drugs was about 49% or a difference of ~$4.11 per unit. The price difference between generic drugs was about 68% or a difference of ~$0.19 per unit. Individual drugs were also cheaper on average at the VA. 316 of the 399 in the basket were at least 25% cheaper at the VA. 233 out of the 399 in the basket were at least 50% cheaper at the VA.
So why is this? Why are the same drugs, sold by the same manufacturers, being administered in the same country priced so differently? According to the study there are numerous reasons.
Program Size: Even though Medicare Part D has roughly 34 million more people enrolled than the VA, those enrollees are spread out among numerous plans. These plans all handle negotiations separately with most having less than 1 million enrollees. The VA is a single integrated system with 9 million beneficiaries using a universal formulary. Theoretically, this allows the VA to have more bargaining power when negotiating with drug manufacturers.
Fixed Discounts and Negotiations: in short, the VA has access to discounts not available to Medicare Part D plans.
Federal Supply Schedule - these are prices that are available to all direct federal purchasers. Prices are meant to be equivalent to prices charged by manufacturers to their “most favored non-federal customers.”
“Big Four” prices are available to four federal agencies, the VA being one of them. These prices are on average 24% lower than average non-federal prices.
The VA also receives additional discounts and can negotiate discounts directly with the drug manufacturers if they choose. Conversely, Health and Human Services cannot negotiate drug prices on behalf of Part D plans. They also don’t have access to things like the Federal Supply Schedule or other rebates. Part D negotiations are done privately by each plan individually.
Restrictive or Broad Formularies: The VA, as an integrated system, uses a universal national formulary. Since providers and the drugs they can prescribe fall into this integrated system, the VA can theoretically steer providers and patients to utilize certain drugs over another. Part D plans on the other hand all have different formularies and a larger network of pharmacies. Since doctors aren’t technically tied to Part D plans the drugs they prescribe are based on their clinical decision, not whether it’s covered by the plan.
Costs Included in Drug Prices: Since the VA negotiates and purchases directly from the manufacturer, then distributes these drugs directly from the VA, they don’t incur many additional administrative costs ie: dispensing fees, sales tax, ingredient costs etc. Since Part D drugs are sold by pharmacies to the beneficiary, the trip the drug takes from manufacturer to middleman, from middleman to insurer, from insurer to pharmacy causes markups and additional costs to be tacked on to the total price.
Again, the drug market is a vast, complex system with various factors all contributing to costs. However, with price fluctuations this great it begs the question as to why can’t prices be lowered across the board? Why can’t negotiation rules be changed to benefit the individual not the entity? Of course, these questions would have complex answers and require compromise from all parties. We hope that this sheds some more light on the current situation and highlights some possible improvements. If you have a comment or suggestion you would like to share, please feel free to reach out in the comments or send us a note at help@doctorschoiceusa.com. As always, thanks for reading!
Source: https://www.gao.gov/assets/720/711235.pdf
