Clinton
and Trump are both wrong about Medicare’s ability to negotiate drug
prices
AUGUST
12, 2016
Hillary
Clinton and Donald trump
agree
that Medicare bureaucrats should be unleashed to negotiate lower
prices with drug companies, and predict billions of dollars in
savings as a result. In this political era when any common ground
between these two adversaries should be venerated, it is a shame that
we must point out that they are both wrong.
Unlike
the traditional Medicare system, which sets reimbursement rates for
thousands of procedures and services, the Medicare drug benefit
program (Part D) uses private companies to manage the needs of its 39
million enrollees. The largest health plans in the country are
participating in Part D and contract with one of four dominant
pharmacy
benefit
managers
to negotiate prices with drug companies.
These
benefit managers do the same job for employers. For example, Caremark
administers drug benefits for nearly 65 million Americans, including
millions of Medicare beneficiaries. Express Scripts, the largest such
company, negotiates drugs prices for more than 85 million members.
Using
their considerable bargaining heft, the pharmacy benefit managers
have already obtained good deals for the vast majority of drugs on
the market. It seems unlikely that Medicare officials can do any
better on their own. Who would you rather have bargaining for you, a
private business executive representing 65 million to 85 million
members, or a government bureaucrat representing roughly half as
many? Total Medicare drug benefit costs are well below projections, a
rarity for any government program. Let’s not mess this up.
So
why do people believe drug costs are out of control and need
government intervention? Because for
some new highly
effective drugs and some older ones that small numbers of patients
depend on. For example, Express Scripts reported this spring that
patented specialty drugs,
including many cancer therapies, which are taken by only 1 to 2
percent of Americans now account for 37.7 percent of medicine costs
for its clients. This
is monopoly power at work. The pharmacy benefits managers can
effectively negotiate only when several drugs are available to treat
the same medical condition. The drug company can dictate terms when
it has the best, or only, therapy on the market.When
Clinton and Trump talk about Medicare exercising its clout to drive
down prices, they are primarily targeting cancer and other specialty
drugs. But Medicare can’t negotiate any better than pharmacy
benefits managers with drug companies holding aces. Congress could
enact legislation imposing federal price controls, dictating what a
company can charge. But that has its own set of negative effects,
including reducing incentives for developing new drugs and creating a
new pricing bureaucracy subject to lobbying by patient advocacy
groups and manufacturers. As
we write in the Journal
of Policy Analysis and Management,
better options exist. Medicare can encourage greater use of
contracts,
in which insurers
and government payers agree to buy quantities of drugs but receive
rebates if the drug does not hit quality targets such as lowering
average cholesterol levels by a certain percentage. In cases of
curative medicines (as opposed to chronic ones such as high blood
pressure drugs), Medicare could pay a premium to a drug company to
secure a license, enabling much wider distribution and quickly
realizing the health benefits while ensuring incentives for
additional drug development.The FDA could enhance competition in
specialty medicines by approving more biosimilar
drugs.
The agency has yet to issue clear guidelines on what clinical testing
is required by biosimilar manufacturers. The Federal Trade Commission
could require manufacturers to justify short-term price increases of
drugs that have long been on the market but now face little
competition. It could also examine drug company mergers or takeovers
to ensure that they result in operating efficiencies that lead to
reduction in prices, not
price gouging.These approaches are not a campaign sound bite.
Instead, the candidates should end their calls for Medicare to
negotiate drug prices. It is a distraction and a non-starter for
reducing the cost of medicines.
Geoffrey
F. Joyce, PhD, is director of health policy at the Leonard D.
Schaeffer Center for Health Policy & Economics and professor at
the School of Pharmacy at the University of Southern California.
Neeraj Sood, PhD, is director of research at the Schaeffer Center and
professor of public policy the Sol Price School of Public Policy at
the University of Southern California. A longer
version of
this article appeared in the Journal of Policy Analysis and
Management.