Big, Small Plans Split On Medicare Drug Price Negotiation

3 min
October 13, 2021

By John Wilkerson

October 13, 2021

Small insurance companies are more likely than big insurers to support letting Medicare negotiate prices for the most expensive drugs in part because doing so would help smaller insurers compete on premiums with larger insurers, sources familiar with the industry say. They say the split is demonstrated by the difference in positions between AHIP, which is influenced by large insurers and hasn’t taken a position on the policy, and the Alliance of Community Health Plans, which represents nonprofit plans and says Medicare should negotiate prices of expensive drugs without competition.

Insurers benefit from the high prices in the current system because their profits are percentage-based, so as costs go up, so do their profits, according to Sean Dickson, West Health director of Health Policy. The medical loss ratio is an example. Depending on the market, the law requires insurers to spend 80% to 85% of the premiums they collect on medical expenses. Pharmacy benefit managers also use percentage-based fees, so even when they give all of the rebates that they negotiate to the plans they represent, their profits are boosted by high drug prices.

However, large insurance companies have more to lose from Medicare drug price negotiation than small insurers, Dickson said. Large insurers negotiate bigger rebates than small insurers because large insurers buy more drugs and in some cases they’re even part of the same company as the PBMs negotiating those rebates. The three PBMs that process more than 75% of prescription claims are owned by large insurance companies or are part of the same companies, according to research by Drug Channels. Plans use rebates to lower premiums, and most customers buy insurance with the lowest premium, Dickson said. If Medicare were to negotiate lower drug prices, all insurers would get those prices, which would take away the competitive advantage that large insurers have over small insurers.

The Alliance of Community Health Plans, which represents nonprofit health plans, is lobbying to give Medicare authority to negotiate prices for the most expensive prescription drugs that lack competition, and the group favors setting ceiling prices at 120 percent of the average international market price. ACHP is among the lobby groups urging Congress to give Medicare prices to the commercial market.

If Medicare sets a ceiling price, insurers can use value-based payment arrangements to lower costs from there, ACHP Director of Public Policy Michael Bagel said. Nonprofit health plans also support capping Medicare beneficiaries’ annual drug costs and other design changes to the program, as long as that new design is coupled with Medicare negotiation, price-inflation caps and other measures to control drug prices.

“In a Part D redesign, ACHP strongly advocates that manufacturers have significant liability throughout the benefit, especially in the catastrophic phase,” Bagel said. “We recognize that to achieve savings for taxpayers the government is seeking to lower its liability throughout the benefit and appreciate that as a result that health plans may have increased liability.”

ACHP also backs a policy to make drug companies pay back Medicare Parts B and D when they raise prices faster than inflation. It wants the law to encourage pharmacy benefit managers to use a fee-based rebate system, and ACHP believes doctors should be paid more to administer biosimilars and the Federal Trade Commission should be given the power to stop drug companies from blocking biosimilar competition.

America’s Health Insurance Plans hasn’t taken a position on Medicare drug price negotiation and says it prefers policies that promote “market competition.”

“We continue to believe that real market competition through robust generics and biosimilars are the best approach to reduce drug prices and costs, but will evaluate alternative policies where competition does not exist to help Americans achieve more affordable prescription drugs,” an AHIP spokesperson said.



Sean Dickson
Director, Health Policy