An economist friend emailed me last night to ask me to sign a statement against the price controls on drugs that the Trump administration is proposing for Medicare.
I said no.
The reason is not that I am suddenly in favor of price controls. The reason is that what Trump is proposing is not price controls.
It’s simply the feds trying to get a better deal on Medicare. As I understand current law, if a drug is approved for use for Medicare beneficiaries, Medicare must pay whatever the drug company charges. Medicare has no legal power to negotiate a price. This doesn’t apply to Medicare Part D, as I understand it. The insurers involved in Part D are free to negotiate prices.
If the feds ran the DoD the same way as they do Medicare, they would have to pay for an aircraft carrier whatever the contractor wanted to charge.
Whatever is being proposed might be good or bad: I’m inclined to good. But whatever it is, it is not price controls.
READER COMMENTS
Shirley Svorny
Nov 12 2018 at 7:21pm
To negotiate you need leverage. The government would have to credibly threaten not to purchase a drug at a price it defined to be too high, limiting access to drugs to Medicare recipients.
David Henderson
Nov 12 2018 at 10:50pm
Exactly.
Alan Goldhammer
Nov 13 2018 at 8:54am
David, the VA medical system can negotiate prices and set up their own formulary.
RPLong
Nov 13 2018 at 8:59am
Yes, that is what “cost effectiveness research” and “evidence-based medicine” is all about. These practices tend to reduce the number of medicines available in the marketplace while also limiting their prices. Low prices are good, but reduced access to medicine is bad. I am not sure which is worse in the long run. As a guy with a chronic condition, my inclination is to prefer a world in which medicines are available, so long as you can raise the money to pay for them. One of my fears is that my preferred products disappear from the marketplace at any price, and I’m effectively coerced into the therapeutic choices of cost-effectiveness researchers.
Because Medicare is such a large purchaser of pharmaceuticals, we have reason to believe that they are a bit of a price-maker. If private drug plans opt to de-list medicines that Medicare’s formulary managers won’t pay for, then these medicines will gradually disappear from the marketplace. In some cases, good riddance to expensive meds. In other cases, we lose “orphan drugs” and drugs that do very good things for patients, but only at a very high price point.
Again, I’m not sure which world is preferable, but the risks of reduced access to medicine do worry me.
Mark Z
Nov 13 2018 at 1:25pm
This may be a naive question, but what mechanism keeps drug companies from simply charging medicare arbitrarily high prices? Do they just limit how much they ‘overcharge’ out of fear that if they go too far, they will be subject to actual price controls?
Alan Goldhammer
Nov 13 2018 at 3:24pm
@Mark Z – If you are talking about Medicare Part B drugs, you need to remember that these same drugs are sold to non-medicare patients and if they charged abnormally high prices, traditional insurance companies would have to dramatically raise premiums which would further outrage the public. We are already starting to see the pricing of some tailored gene therapy treatments at a cost of $300K and up per treatment.
michael pettengill
Nov 14 2018 at 5:40am
Part B pays for no drugs, with a few exceptions. Flu vaccines, and others tied to public health. Same for Part A. Drug needed for getting you out of the hospital, and preventing rebound for 60 days.
Supplemental insurance is the same, but includes more drugs that prevent more covered care. But pays nothing prevent stroke, heart attack, complications from diabetes.
My parents, et al, had big drug bills even when reasonably healthy in the 90s, and they were low income and got SSI, etc in addition to SS and Medicare.
And now I’m on Medicare, which covers more thanks to Obamacare, but still it’s Part D that pays for drugs if the premiums are high, or doesn’t pay for drug costs but only patent rent extraction for selected drug companies if the premiums are lower.
The way to lower drug costs would be for NIH to buy out patents and pay for all drug safety and baseline dose and treatment, then contract out drug manufacture, like it does for flu vaccine, with minimum volume buys.
Vivian Darkbloom
Nov 13 2018 at 3:34am
As a technical matter, I don’t think that currently Medicare “purchases drugs” directly. Rather, under Part B, they reimburse the cost of drugs provided by health care providers based on a formula that uses a percent of the average domestic price in the US plus an overhead margin.
If the proposal is accurately described by the NYT, Medicare would not even have the right to “negotiate” the cost they ultimately bear. Rather, the prices to be borne would be based on a different formula than is currently the case–that is, the proposal would use an international index rather than solely a domestic one. Likely, this would result in lower prices borne by Medicare, as Medicare currently reimburses a higher rate for most drugs than most foreign purchasers pay, including foreign governments (which do negotiate). Is this a price “control”? I don’t think so any more than the current system is—the price would be dictated by the prices drug companies negotiate with other, “third” parties. However, it would generally be the international market price. Drug companies still would have significant control over the prices they charge, including what ends up being covered by Medicare. To the extent there is a cap on what is reimbursed by Medicare, that is nothing new and in any event is not arbitrary.
Democrats, however, apparently favor rates based on direct negotiation. This reminds me of the history of Medicare Part D. Bush II introduced (and adopted) a plan that was designed to head off a much more radical proposal then favored by Democrats, notably Hillary Clinton.
Predictably, drug companies are arguing that the Trump proposal goes too far (falsely claiming it is a “price control”). Democrats oppose it because it doesn’t go far enough.
https://www.nytimes.com/2018/10/25/us/politics/medicare-prescription-drug-costs-trump.html
Alan Goldhammer
Nov 13 2018 at 8:53am
Vivian Darkbloom writes, “As a technical matter, I don’t think that currently Medicare “purchases drugs” directly. Rather, under Part B, they reimburse the cost of drugs provided by health care providers based on a formula that uses a percent of the average domestic price in the US plus an overhead margin.”
This is correct and the overhead margin is 6%. However, it’s important to note that the ASP (Average Sales Price) is pretty much set by the manufacturer’s original pricing decision. Part B drugs are those administered by healthcare providers while Part D are those administered by the patient. In both cases, specialty biologics are the main price driver in both categories. Part D subscribers need to be very careful in selecting plans as most of the lower cost plans do not cover most of the biologics (the heavily advertised drugs, Humira and Enbrel are the best examples) and patients who might need these drugs would be on the hook for tens of thousands of dollars until they change their plan at the next open enrollment. Part D also controls costs by establishing formularies and may mandate use of less expensive therapeutic treatments before authorizing a biologic.
Austin Frakt has a good article in today’s NY Times on drug cost price increases. It remains to be seen whether the recent legislation allowing for ‘generic’ biologics will result in any cost decrease. A number of large pharma companies are poised to enter these markets as patents expire.
seppo
Nov 13 2018 at 7:08am
In Europe national insurers (at least in nordic countries, UK, Spain, etc.) don’t have “infinite” budgets, are required by law to cover everybody and are not forced to cover all drugs that are available to them, regardless of the fact if EU’s EMA (European Medicines Agency) has approved them or not.
Therefore there is some discrepancy on what each nations system happens to cover. Not too surprisingly my travels across the continent show some little anecdotal emphasis on local drugs being promoted more, ie. German system pushes Bayern products a bit more than UK pushes GSK, but the main effect is that national insurers usually do at least some kind of cost-benefit analysis on each drug and treatment forcing drug companies to compete a bit against each other.
If they estimate a new but more expensive cancer drug to give x more life-months for 100k compared to already accepted alternatives, they compare it with what else can they get with the budget they have and try to strike deals with drug companies.
This leads with new colon cancer drugs in effect competing against new skin cancer treatments, which is kind of weird. But if you set goals on some population level health statistics, then this is what happens when you limit resources and let boards of medical professionals try to work it out to the best of their knowledge.
Perfect? Probably not, but at least sounds better than the current rules?
I don’t know how drug availability selection is handled in more private insurance based systems of Switzerland, France, Germany etc.
michael pettengill
Nov 14 2018 at 5:48am
Traditionally, drugs are out of pocket under universal coverage programs, with supplemental private insurance possibly paying the 20% copay and possibly drugs.
In Canada, most people pay for drugs out of pocket. Setting drug prices by government keeps these out of pocket costs low enough to avoid voters forcing drugs get included in the universal coverage.
RPLong
Nov 14 2018 at 8:28am
It’s worth noting that Canada’s decision to set drug prices is a double-edged sword. Brand products tend to be cheaper than the international average, while generic products are actually much more expensive.
James Keil
Nov 13 2018 at 9:16pm
great articles David…Very informational and thought provoking.
will Trumps plan on drug prices create shortages. If no, why not.
Regards
James Keil
Joe
Nov 16 2018 at 10:47am
if they set the price below a market price or above a market price why are we okay with that. The better approach is to allow Medicare to use its size and negotiate a price they are willing to pay for those resources.
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