Congressman Wants to End Secrecy Involving Drug Pricing for Elderly

By Christine Hall | July 7, 2008 | 8:28 PM EDT

( - With only days left on this year's Congressional calendar, House Energy Committee Chairman Billy Tauzin (R-La.) is trying to ignite support for his plan to force drug makers to disclose the way they price prescription drugs.

Relying on a September government report, Tauzin says senior citizens pay hundreds of millions of dollars in inflated drug prices every year, and the taxpayer-funded Medicare program pays upwards of one billion, because Medicare is being over-charged.

"This system must be changed," Tauzin and health subcommittee chairman Michael Bilirakis (R-Fla.) wrote in a Nov. 14 letter to Health and Human Services official Thomas Scully.

The chairmen want a law to force drug manufacturers to report to the government all rebates, "charge backs" and other purchaser discounts. It's an idea likely to generate opposition if it gathers political momentum, with some economists insisting it would only make matters worse.

In their letter, the chairmen also promised to look into complaints from health care providers that Medicare's overpayments help offset losses from the program's too-low reimbursement rates for other medical services.

However, the chairmen have not yet completed work on a bill. And spokesmen for two major drug industry lobbies, the Pharmaceutical Research and Manufacturers of America (PHRMA) and the Generic Pharmaceutical Association, indicated the issue is not an industry priority right now.

The trouble started with a September General Accounting Office (GAO) report that concluded Medicare's method for establishing drug payments is flawed. That's because under the current system, Medicare automatically pays "average wholesale prices" provided by drug companies that, according to the GAO, do not reflect the prices of any actual sale of drugs by a manufacturer.

The report found that physicians and pharmacies were paying drug prices "substantially below" the average wholesale prices charged Medicare.

While Medicare does not have a comprehensive outpatient prescription drug benefit, Medicare part B, which covers physician and other outpatient services, covered about 450 drug products at a cost of almost $4 billion in 1999. According to the GAO, a large chunk of the spending is for doctor-administered drugs for cancer treatment.

"Physicians and pharmacy suppliers contend that the excess payments for covered drugs are necessary to offset what they claim to be inappropriately low or no Medicare payments for services related to... these drugs," GAO health care director William J. Scanlon told Tauzin's committee in September.

"Yet oncology is one of the specialties to gain" under the current system, said Scanlon. "Payments to oncologists were 8 percent higher than they would have been" otherwise.

Regardless of whether Medicare is being overcharged, forced price disclosure is a bad idea, says John Calfee, resident scholar at the American Enterprise Institute.

"The government is getting into very dangerous territory when it tries to make all those prices public," said Calfee, "because competition is through those secret rebates. You eliminate the secrecy prices, you're going to dampen competition."

Government has been down this path before with the state Medicaid program, said Calfee, and the results weren't good.

"Congress passed a law saying that the Medicaid price had to be the same price given to... managed care," Calfee said. "Everyone studied that, and they all come up the same way: as a result of that law, drug manufacturers raised their prices to managed care, because they knew whenever they gave someone a really good price, they'd have to match it when they sold stuff to Medicaid.

"So it didn't really lower Medicaid prices, but it did raise prices to managed care," said Calfee.