A Sweetener for Health Reform

Politico reported today that Democrats—worried that the health reform bill delays most changes until 2013—want to add some provisions that will benefit Americans immediately. Great idea! For example, there’s a little-known bill by Congressman Chris Van Hollen that would enable neighborhood pharmacies to sell prescription drugs to about 50 million uninsured Americans at near-Canadian prices. And it would cost the government nothing.

Quite reasonably, Democrats are concerned about the politics of health care reform:

Democrats are pushing Senate leaders and the White House to speed up key benefits in the health reform bill to 2010, eager to give the party something to show taxpayers for their $900 billion investment in an election year.

The most significant changes to the health care system wouldn’t kick in until 2013—two election cycles away. With Republicans expected to make next year a referendum on health care reform, Democrats are quietly lobbying to push up the effective dates on popular programs, so they'll have something to run on in the congressional midterm elections.…

Under the Democratic wish list, senior citizens would receive discounts on brand-name drugs next year. Small businesses that provide insurance would see tax credits. And a $5 billion high-risk pool would cover people with preexisting conditions.

These are all good ideas. But there’s another idea that has received virtually no attention: H.R. 1725, sponsored by Chris Van Hollen who is both Chairman of the Democratic Congressional Campaign Committee and Assistant to the Speaker. The bill is cosponsored by Representatives John Conyers, Donna Edwards, Frank Kratovil, Chellie Pingree, Nick Rahall, Dutch Ruppersberger, and John Sarbanes.

How does it work? Understand that drug manufacturers routinely provide discounts to public and private insurance programs through a system of rebates. Under H.R. 1725, the manufacturers would be required to pay the rebate they currently pay to Medicaid for drugs purchased through new state discount programs for families earning less than 300 percent of the federal poverty level. States would be required to use the rebates to provide consumer discounts, which would be in the range of 40 to 45 percent off retail prices.

Until all Americans are eligible for comprehensive health insurance in 2013, this would provide the best drug discounts in the country—by far.

As a practical matter, participants would present a card at their neighborhood pharmacy that entitles them to the discounted prices. The pharmacy would bill the state Medicaid program for the amount of the discount, and the state would reimburse the pharmacy out of its quarterly drug manufacturer rebates. No new state negotiation would be required because states already negotiate Medicaid drug prices. No new government bureaucracy needs to be created because all transactions would operate through rules and procedures already running in the Medicaid system.

There is absolutely no cost to the federal government. There are very small administrative costs for a state to implement the program, however, the legislation allows states to retain some of the extra rebated funds to cover such costs. So states need not spend any of their funds either.

If implemented, about 50 million Americans would benefit. Of the 47 million uninsured Americans, about 38 million are under 300 percent of poverty. An additional 7 million Americans under 300 percent of poverty have health insurance that doesn’t include prescription drugs. The program would also assist around 7 million seniors: 4 million who don’t participate in Medicare Part D and 3 million who participate in Part D but fall into the “doughnut hole.”

Won’t PhRMA oppose this bill? Of course they will, because the drug companies like their unfair, inflated prices. That doesn’t mean the legislation will be blocked, however, because everyone else in America wins under the measure. Fifty million Americans benefit by getting fair instead of unfair drug prices. State and local governments, insurers, and the insured benefit because they won’t have to pay for uncompensated care (at emergency rooms and the like) caused by people not taking prescriptions because they can’t afford them—it’s much cheaper for people to control their blood pressure with drugs, for example, than to deal with their heart attacks and strokes. Doctors benefit because they are able to assist patients who otherwise can’t afford medicine. Pharmacies benefit because they’ll have increased sales, especially pharmacies near the Canadian or Mexican borders.

And here’s the funny thing: the drug companies would benefit too. Because of the nature of the business, the marginal cost of manufacturing additional pills is next to nothing—so increased sales represent almost pure profit. A Merrill Lynch analysis (pre-Medicare Part D) estimated that a 40 percent drug price discount would increase sales volume to program beneficiaries by 45 percent. Accordingly, overall drug revenues would likely drop only 3.3 percent. A later analysis by Alan Sager PhD, Professor of Health Services at Boston University School of Public Health, found that Merrill Lynch used conservative estimates and that sales volume would likely be even higher. At worst, the drug manufacturers will break even. At best, they will add tens of millions of customers eager for new products.

Why not “reimportation” instead? The purpose of this measure is identical to the purpose of reimportation: to give Americans access to fair, negotiated prices similar to Canadian prices. This legislation, however, has two advantages over reimportation. First, it eliminates all arguments about drug safety—Americans would buy American drugs. Second, it eliminates arguments about the availability of fairly-priced drugs—there would be no question about limited supplies that could be reimported or the logistics of getting such drugs into the hands of Americans.

Sounds too good to be true? The truth is, this program has already been tried and it’s already proven itself. For 18 months in 2001 and 2002, this program, then called “Healthy Maine,” was the most successful drug discount program in America, providing discounts that were double the size of any other program. It was based on a section 1115 Medicaid waiver granted by the Clinton Administration covering every family earning under 300 percent of the federal poverty level. Healthy Maine went into effect on June 1, 2001 and provided discounts of about 30% off retail prices for 110,000 Maine residents—approximately 2/3 of all residents who lacked prescription drug coverage, both seniors and non-seniors.

Because Healthy Maine was officially a part of the Medicaid program, all drug manufacturers paid Medicaid-mandated rebates for all FDA-approved drugs. The state used the rebate funds to lower participants’ drug prices at pharmacies. While Maine citizens enjoyed 30 percent discounts in 2001-02, the savings would be substantially greater today. At the time, Maine did not negotiate supplemental Medicaid rebates from drug manufacturers, as almost all states do today.

On December 24, 2002 the U.S. Court of Appeals for the District of Columbia ruled that the Healthy Maine program was not legal because one detail—a 2 percent financial contribution by the state—was not mentioned in the Clinton Administration’s Medicaid waiver. The court’s ruling meant that, in order to keep Healthy Maine running, the Bush Administration would have to sign a separate Medicaid waiver. Bush officials (naturally) refused and the program ended.

It’s time to give this model a new life.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future