The major reason for the disparity in pricing is that the United States lacks any sort of central or universal healthcare system or agency that regulates across the board cost. In contrast, negotiations of drug prices between governments and pharmaceutical companies are routine in Canada, most European nations, and most countries in the Middle East and Far East. They have centralized authorities to negotiate more favorable prices with manufacturers, and some also have drug formularies and advisory boards that put restrictions on the use of new and expensive medications.
"In the US, we are covered under a fragmented system, where there really aren't enough numbers to negotiate effectively," said Leigh Purvis, director of health research at the Public Policy Institute at AARP (formerly known as the American Association for Retired Persons), a large membership organization for people 50 years and older. "We have different health insurers and they don't represent enough people to actively and successfully negotiate prices in the same way that other countries do."
"Countries like the UK and Germany are also willing to take a much harder line on the drugs and compare them with what is already on the market," she said. "In the US, once it's approved, that's pretty much it."
Price negotiations take place on an individual level in the United States, with each private insurance company negotiating with each drug company for the price of each product. Pharmacy benefits managers, a third-party administrator of prescription drug programs primarily responsible for processing and paying prescription drug claims, will also take part in developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers. Dozens of plans are available in every state, and insurance costs and plans can vary significantly from state to state. They charge different premiums and copayments, and formularies may favor different drugs, which leads to variations in pricing and out-of-pocket costs to patients.
The Centers for Medicare and Medicaid Services (CMS) is the single largest payer for healthcare in the United States, covering nearly 90 million Americans through Medicare, Medicaid, and the State Children's Health Insurance Program, which is more than a quarter of the entire American population. However, by law, the federal government cannot negotiate for Medicare drug prices or obtain any sort of volume discounts. The 2003 Medicare Modernization Act explicitly prohibits the federal government from negotiating drug prices or establishing a list of preferred drugs.
The rationale for this move was that the market would lower prices and that each of the private prescription drug plans, in competition to attract more Medicare beneficiaries, would negotiate with prescription manufacturers to reduce costs. Whether or not that has come to pass is open to debate. Currently, Part D drug prices are determined through a negotiation between the private drug plan that administers the benefit and the drug manufacturer.
"We weren't supportive of that part of the legislation when it was enacted, but AARP did support the overall Medicare Modernization Act, which established the Part D benefit," said K.J. Hertz, senior legislative representative for government affairs at AARP. "We decided that the greater good was getting a prescription drug program under the Medicare program. What we've tried to do now is to get the message out there that we need to improve on that."
The organization has strongly advocated for giving the secretary of the Department of Health and Human Services (HHS) the ability to "negotiate on behalf of Medicare's 50 million plus beneficiaries and use that for potential leverage in getting prices for the drugs that seniors take in this country," Hertz told Medscape Medical News. "There has been resistance to that in Congress ever since the Part D program was initiated but, nonetheless, we keep fighting to get that message out there."
However, Medicaid, the program for low-income people that is administered by the CMS and the Department of Veterans Affairs (VA), is able to negotiate with drug companies for lower prices. In fact, under federal law, drug makers must provide a discount or rebate equal to at least 15% of the average manufacturer price for most brand-name drugs covered by Medicaid. Federal law also guarantees discounts for the Department of Veterans Affairs, which can negotiate with drug makers to secure discounts on top of those guaranteed by law. Generally, they are able to negotiate prices that are 25% to 50% lower than Medicare.
In fact, many critics of the non-negotiation clause in Medicare point to the VA prices to show that direct negotiation by the federal government and price control statutes can result in lower prices and greater savings. A report by Families USA, which compared VA prices with those in Part D of Medicare, found a median price difference of 58%, suggesting that market forces are not bringing prices down, as was hoped.