Making sense of drug costs

An astounding study by the inspector general of the Department of Health and Human Services earlier this year found that Medicare pays nearly twice as much for the same drugs purchased by the Department of Veterans Affairs. The study should prod Congress to reform a system that is costing an additional $1 billion annually.

Medicare does not generally cover over-the-counter drugs, but Part B will pay for drugs used with durable medical equipment and drugs associated with organ transplants, dialysis, chemotherapy and pain management for cancer treatment. It also covers some vaccines, such as those for the flu or Hepatitis B. Even so, the HHS study found the median Medicare allowance for 34 drugs totaled $1.03 billion higher than the VA acquistion cost for the same drugs. In 1997, Medicare paid out $2.07 billion for the drugs, so the savings is nearly half the entire cost.

The difference is in how the drugs were purchased. Medicare reimburses doctors and suppliers for drugs they administer or supply to beneficiaries. The VA buys drugs directly from manufacturers or wholesalers with prices based on what is known as the Federal Supply Schedule, which contains the price the federal government negotiates with pharmaceutical companies for the drugs it buys. Though the solution is slightly more complicated than simply telling Medicare to use the same system the VA uses, Congress can, and should, allow Medicare beneficiaries to obtain the lower-priced drugs.

A bill introduced recently by Rep. Tom Allen would do just that. It allows qualified pharmacies to sell covered outpatient drugs to holders of Medicare drug benefit cards at a reduced price. The retail outfits would get the drugs at a lower price — through, perhaps, the Federal Supply Schedule — then pass the savings onto customers.

Such a law is particularly important in light of two recent cases. In the first, a U.S. District Court judge last week looked at evidence of conspiracy among four major drug companies and HMOs to set a dual price system that charged retail pharmacies more and concluded, “the evidence of conspiracy is meager, and the evidence as to individual defendants paltry or nonexistent.”

In the second, in D.C. Superior Court two days later, another judge looked at the price difference pharmaceutical companies charge retail outlets and HMOs and concluded that a conspiracy was very much alive, and that 23 companies sold drugs to HMOs for lower prices than they charged retail pharmacies and, therefore, deprived consumers of savings they would have had if the retail stores had been allowed to compete with HMOs. Among those 23 was Johnson & Johnson, which was one of the four cleared of a similar charge in the District Court case.

If the courts are contradictory, the rest of us are just confused. Sometimes drugs are expensive for excellent reasons: the R&D that went into them cost a fortune, or the opportunity to strike it rich was the incentive to develop life-saving medicines. But why does one company pay one price when an equally large and efficient company must pay a far higher one?

The Allen legislation doesn’t erase the entire disparity: it covers just Medicare and its mechanism for savings is not yet fully developed. But it is an excellent start to making sense of the increasingly expensive part of nearly everybody’s life. Congress should make it a priority next session.