With divided government on the horizon yet again, the President and leaders from both parties wasted no time after the midterms making the usual overtures for bipartisan cooperation. One surprising area where they share common ground: fighting high drug prices.
To be sure, the high cost of drugs is a serious problem. Countless patients struggle to pay out of pocket for their vital medicines. But if Republicans and Democrats work together to come after drug companies on this issue, that will be bad news for American patients. A government scheme to fix or control drug prices could seriously hamper future medical innovation. It would also distract policymakers from making truly necessary reforms to the way we pay for drugs.
“If both parties work together to come after drug companies, that will be bad news for patients.”
Despite what Congress may do, the Trump administration is already taking action on drug pricing. The President has tasked Health and Human Services Secretary Alex Azar with cutting drug prices nationwide.
Under Azar, HHS released a blueprint in May to lower drug prices, which is now being put into effect. In the past month, the Trump administration rolled out a regulation requiring drug companies to put the list price of their drugs in television commercials, and proposed a rule that would change the way physicians would be reimbursed for drugs under Medicare Part B.
The Trump administration is following all the wrong instincts in its goal to lower drug prices. More worrisome, Secretary Azar is ignoring what he knows to be the real sources of the drug pricing problem.
“The administration is following all the wrong instincts in its goal to lower drug prices.”
Medicare Part B covers drugs administered in doctors’ offices and outpatient hospital facilities – injectable drugs that treat cancer, rheumatoid arthritis, and multiple sclerosis, for instance. But it does not cover prescription drugs. Currently, Part B reimburses providers the average wholesale price of the drug, plus a 6 percent payment (known as “AWP+6”). Since the six percent add-on increases with drug prices, this reimbursement model has encouraged some providers to choose costlier drugs. Under the proposed rule, reimbursement would be severed from AWP+6 and instead tied to an International Pricing Index (IPI) comprised of sixteen countries, including France, Germany, and the United Kingdom.
Put simply, under the new regulation, instead of paying the average domestic price for drugs, Part B would pay a rate calculated in reference to the lower prices paid by countries in the IPI. Theoretically, patient premiums would decrease along with Part B expenditures. And of course, the less Part B pays out, the less pharmaceutical companies take in.
The pharmaceutical industry has vociferously opposed the Trump administration’s regulation. It’s easy to dismiss companies like Gilead and Pfizer as greedy profit-mongers, but the reality is a bit more complicated. It costs about $2.7 billion to bring a new drug to market in the United States. This number includes the staggering amount of drugs – 90 percent – that are tested in humans but never make it to market. In order to stay afloat and have the resources to fund future research and development, companies need to recoup their multi-billion dollar investment – and they can only rely on one drug out of every ten they develop to do so.
This problem is compounded by the fact that most foreign countries – including those included in the proposed IPI – have single-payer health systems. This means that the government is the sole buyer of drugs, and American pharmaceutical companies have to accept the prices they set. One of the reasons drug prices are high in America is because companies charge more here to offset the losses they incur abroad.
The idea behind the rule is that by forcing pharmaceutical companies to charge less at home, they will be forced to raise their prices abroad. While getting foreign countries to pay their “fair share” of drugs is an admirable goal, it won’t be accomplished with this rule, since nothing about this rule will twist the arm of foreign governments. If anything, by tying our government payments to theirs, we are tacitly endorsing their single-payer shakedown. Ultimately, however, the biggest hit will be pharmaceutical revenues and downstream R&D.
Unfortunately, requiring drug companies to post the list price of their drugs in television commercials won’t help much either, although for different reasons. The main issue here is that practically no consumer actually pays the list price, rendering it essentially meaningless. Thanks to insurance, consumers have rarely been exposed to these prices – though, with the increasing popularity of high-deductible health plans, that is beginning to change.
“Requiring companies to post drug prices in TV commercials won’t help much either, since practically no consumer actually pays the list price.”
If the Trump administration really wanted to make progress on drug prices, it would address the countless outdated and ineffective regulations that keep drug prices high. There are almost too many to count. The FDA’s long, expensive approval process keeps competitor drugs from reaching the market and grants de facto monopolies to a handful of drugs. Insurance regulations count prescription drug spending towards a deductible, leaving patients covered by high-deductible plans to pay the full price for a drug out of pocket, often abandoning their prescription altogether. Finally, an intricate web of rules and statutes prevent physicians, insurers, and drug companies from reaching value-based agreements, in which a patient only pays for a drug if it works, in proportion to how well it works, or over a number of years, relative to other medical expenses. Each of these reforms is doable, and any of them would have been a better place for the Trump administration to start.
“A much better place to start in addressing drug prices would be the countless outdated and ineffective regulations that keep them high.”
A better model for how to proceed on drug prices comes via the Trump administration’s own FDA. Under Commissioner Scott Gottlieb, the FDA has slashed regulatory barriers to new and generic drug development, allowing the FDA to approve a record number of new drugs in FY18, beating the record they set the previous year.
As one astute observer put it: “Today it won't be government that solves the cost-value gap created by our outmoded payment system. Rather, the solutions lie [within] the healthcare industry… government can help sometimes at key junctures, mainly by removing hurdles.”
That was Alex Azar, speaking at a Manhattan Institute event in November 2016. As the Trump administration heads into its third year, let’s hope Secretary Azar remembers the position he once held: The key to lowering drug prices is getting government hurdles out of the way.
Tim Rice is deputy director of health policy at the Manhattan Institute. Follow him on Twitter here.
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