When Americans talk about drug prices, the conversation is dominated by the eye-popping sticker prices of certain new drugs. We’re all aware of how sky-high prices can make it hard for some patients to afford the drugs they need. Yet few appreciate how patients also lose access to treatments when prices are too low.
The federal government’s attempts to keep prices low have created a chain of unintended consequences. Start with the “best price” law of 1990, which mandated that manufacturers offer drugs to state Medicaid programs at the lowest price available to any other buyer.
The unintended—but predictable—consequence was to hurt many small clinics and hospitals. Drug companies often gave discounts to clinics and hospitals that treated a large number of low-income and uninsured patients, but the best-price law put them in a dilemma. They couldn’t keep offering those low prices unless they did so for all of Medicaid. So manufacturers stopped the discounts, causing prices to increase by more than 30% at some hospitals and clinics.
These are the opening three paragraphs of David R. Henderson and Charles L. Hooper, “Sometimes Drug Prices Are Too Low,” Wall Street Journal, November 1, 2019.
It’s based on a longer report that Charley and I wrote for the Goodman Institute on Public Policy (forthcoming.)
Under my contract with the Journal, I can post the whole thing on December 1 this year, and I’ll do so.
READER COMMENTS
Craig
Nov 2 2019 at 9:34am
MFN clauses are ubiquitous in American business. It’s how big buyers buy virtually anything important to them. CVS has such clauses as does Walgreen. Amazon and other big box retailers do likewise because at the end of the day you can’t be in business and ha e your important suppliers selling to your competitors for less. I don’t see why state Medicaid agencies wouldn’t act similarly. If you don’t want to sell to Medicaid programs, don’t but if you do they’re going to tell you the price they are willing to pay and they will, just like any other billion dollar business in the US, insist on an MFN clause which in this case is insisted on by statute, the best price law of 1990.
Christophe Biocca
Nov 2 2019 at 1:23pm
Except here the MFN clause isn’t something state medicaid programs insist on, it’s something the federal government imposed on transactions between said state programs and the manufacturers.
And state medicaid programs care about the absolute price they’re paying, way more than whether someone else is getting a better deal somewhere. After all, losing customers (to the mentioned low-income-client clinics) actually makes Medicaid lose less money. This isn’t a business that is hurt by being undercut by competitors, quite the opposite.
Craig
Nov 2 2019 at 1:54pm
Federal government matches though so the distinction doesn’t really matter. Indeed they don’t need to worry about being undercut by, say, Walgreens or Eckerd, still if you’re a billion dollar plus player, frankly you should be insisting on MFN clauses. The government absolutely should be emulating CVS here. That’s how people who KNOW how to buy prescription drugs actually do it.
Jon Murphy
Nov 2 2019 at 6:37pm
The corporate agreement with, say, CVS is not quite the same as the Best Prices Act. CVS wants the lowest price possible, yes, but they’re not competing with hospitals as they are with Walgreens. So, if a drug company gives a special discount to a clinic, CVS isn’t covered by that.
Medicaid, however, is. They get the lowest price regardless of who pays it. So, charity cases would affect the price Medicaid pay, thus incentivizing the companies to not sell the drugs to the clinics at a charity price.
Superficially, the corporate agreement and the government agreement are similar. But, as they say, the devil is in the details.
Craig
Nov 3 2019 at 10:15am
“CVS wants the lowest price possible, yes, but they’re not competing with hospitals as they are with Walgreens. So, if a drug company gives a special discount to a clinic, CVS isn’t covered by that.”
That’s not true. CVS’ standard MFN clause contains ‘regardless of class of trade’ and ‘any other customer.’ While CVS more directly competes with Walgreens, the issue of paying a lower price is still sufficient not to want to leave that kind of money on the table. If a mfg is willing to charge a hospital less, CVS position is that’s money they shouldn’t have to spend on it. This is a company with $194bn in gross sales and only a 3% margin (they sell other things of course). They must control COGS.
Jon Murphy
Nov 3 2019 at 11:15am
Of course, but again it’s not quite the same agreement.
Craig
Nov 3 2019 at 11:37am
In one case if you sell it to anyone, no matter who, less than you sell it to Medicaid for, you will be liable to Medicaid for the difference
In the other case if you sell it to anyone, no matter who, less than you sell it to CVS for, you will be liable to CVS for the difference.
So what’s the difference that makes a substantive difference exactly?
Charley Hooper
Nov 4 2019 at 1:34pm
It’s complicated in the pharmaceutical industry. CVS and Walgreens might have some sort of MFN contracts, but they aren’t the end purchaser. The final purchaser is the one who actuals pays—the payer. That can be the patient, sometimes, but it is often the pharmacy benefit manager (PBM), hospital, or health insurance company (such as Humana). It is the PBM, hospital (less frequently), and insurance company that the drug companies sign deals with. It is these best prices that Medicaid gets.
Why do the drug companies sign these deals? If a product is on third tier in a formula or has certain restrictions, the drug company might offer a 15% rebate to have that product moved to second tier and have the restrictions dropped.
This means nothing to CVS and Walgreens. They don’t ultimately pay for drugs, they get paid for dispensing drugs.
Thaomas
Nov 2 2019 at 10:25am
What is the policy implication? Medicaid should alter its purchasing policy? Abolish Medicaid? What?
Craig
Nov 2 2019 at 1:59pm
Not sure it would even have any effect. I mean, even if Medicaid could be charged more, the other big players are still going to I sister on receiving the lowest price and they buy more prescription drugs than Medicaid.
Thaomas
Nov 3 2019 at 9:46am
This is just an instance of a long-standing grouse I have with many issues raised by Libertarians. They point to a cost or ill effect of a policy decision made by a public sector entity (often with the implication that the decision makers were culpably ignorant of the cost of ill effect) without looking at the costs AND benefits of the decision. This leave the appearance of making a crypt0-proposal to undo the decision in some ill defined way without cost benefit analysis of THAT decision.
Jon Murphy
Nov 3 2019 at 11:17am
Again, you’re making a mistake: it’s more like the Hippocratic Oath: first, do no harm. If proposed policies are going to do harm, then they should not be advanced. Maintaining the status quo is always an option.
Craig
Nov 3 2019 at 11:50am
“The unintended—but predictable—consequence was to hurt many small clinics and hospitals. Drug companies often gave discounts to clinics and hospitals that treated a large number of low-income and uninsured patients, but the best-price law put them in a dilemma. They couldn’t keep offering those low prices unless they did so for all of Medicaid. So manufacturers stopped the discounts, causing prices to increase by more than 30% at some hospitals and clinics.”
Where are you getting this from because 42 CFR 447.508 excludes not profits and 501c3 entities and the most common form of hospital IS not for profit. They’re specifically excluded from the best price law…..
Craig
Nov 3 2019 at 11:55am
See also:
https://www.govregs.com/regulations/expand/title42_chapterIV_part447_subpartI_section447.508
Hospitals, clinics exempt…
Charley Hooper
Nov 4 2019 at 1:54pm
I’m not able to debate your claim, but the history and motivation for the Medicare 34oB program are clear:
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