Two particularly pernicious ideas, both of which have kicked around for years, have resurfaced lately as antidotes to growing concern about health-care spending. We discussed the first – importing medicines from abroad – in the last newsletter. Drug imports may sound like a decent idea, but a closer look finds that the practice would be unsafe, would deny American access to many of the best medicines, and would save little or no money anyway.
The second idea was summed up last month by National Public Radio:
For years, congressional Democrats have tried to pass legislation to allow Medicare to negotiate prescription drug prices for millions of beneficiaries. Now, they believe they have a not-so-secret weapon: President Donald J. Trump.
Rep. Elijah Cummings (D-Md) met with Trump and said he was “enthusiastic” about the concept, which the President also raised in his campaign last year.
Let’s dive deeper into the issue.
The Mechanics of Medicare Part D
Currently, about 40 million Americans are covered by Part D of Medicare, a benefit launched in 2006 by the George W. Bush Administration. Under Part D, retirees choose a Prescription Drug Plan (PDP) as their insurer. PDPs work with Pharmaceutical Benefit Managers (PBMs) to establish a “formulary” of listed drugs, based on negotiations with drug manufacturers. The federal Centers for Medicare and Medicaid Services approves each plan (there are now more than 700 of them).
Part D was structured to use competition as a discipline to hold prices down.Here is a good video on YouTube, from the group Medicare Today, that explains. That approach seems to have worked very well.
As a report by the Government Accountability Office put it:
Through their ability to negotiate prices with drug manufacturers and pharmacies. To generate these savings, sponsors often contract with pharmacy benefit managers (PBMs) to negotiate rebates with drug manufacturers, discounts with retail pharmacies, and other price concessions on behalf of the sponsor…
The annual report of the Medicare Trustees states that “many brand-name prescription drugs carry substantial rebates,” often as much as 20-30%, and that on average, across all program spending, rebate levels have increased every year, meeting or exceeding projections.
The average monthly beneficiary premium for Part D coverage is estimated at $34 in 2017, a figure that has been relatively stable since 2011. This year’s premium is substantially lower than the original projection of $51. According to Congressional Budget Office (CBO) data, total Part D spending is 45%, or $349 billion, below initial forecasts.
‘Interference’ Would Disrupt a System That Works
The law that established Part D has a “non-interference clause,” which states that the government “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”
Medicare Part D was founded on the premise that competition and choice would manage costs and increase patient satisfaction. It’s been a success. Premium growth has been low, the plans are negotiating discounts of more than one-third for branded drugs, and seniors like the program (nine in ten say they are satisfied).
According to testimony by the CBO’s director, “granting the Secretary of HHS additional authority to negotiate for lower drug prices would have little, if any, effect on prices for the same reason that my predecessors have explained, which is that...private drug plans are already negotiating drug prices...”
In short, Medicare Part D shows that a market-based system can keep costs down while still providing access. Contrast that with the idea of a government-run program that sacrifices access to drive costs down.
Government Formularies Mean Restricted Access to Drugs
Cummings and others in Congress want the government to establish its own formulary, because, according to a fact sheet on the proposal, the Secretary of HHS can “leverage the purchasing power of the government on behalf of Part D plans.”
Trump himself apparently likes this idea, at least in general. He said on the campaign trail last year: "When it comes time to negotiate the cost of drugs, we are going to negotiate like crazy."
Many Americans, however, are opposed in principle to the government using what economists call its “monopsony” – or single-buyer – power in private markets. Government negotiation is a synonym for price controls, and price controls inevitably lead to shortages.
“The negotiating lever” that would be used by government “to lower drug prices,” according to the CBO, “is the threat of not allowing that drug to be prescribed or putting limitations on its being prescribed.” In other words, to negotiate lower prices, the government would have to impose access restrictions.
So the formularies available to Medicare recipients would be limited. Such restrictions already exist in the VA National Formulary, which the U.S. Department of Veterans Affairs runs, and they are abundant throughout countries with state-managed health plans.
Cancer Patients, Beware
We also see this phenomenon clearly in other countries around the world that have single-payer systems. A recent study looked at the accessibility of 45 cancer drugs that had been recently approved and available in the US. Only 58% of the drugs were available in the UK, 42% in France, 29% in Canada and 24% in Australia.
Several studies indicate patients face major delays in gaining access to new drugs, especially for cancer. According to a recent report by ECCO, the European cancer organization, “Cancer patients need speedy access to new drugs and fair prices for old ones, but in many cases, they are getting neither, according to research.”
This lack of access has significant and direct impact on patient care. Cancer patients have better outcomes in the United States than in other developed countries. For example, five-year survival rates for breast cancer are 89% in the U.S. and 81% in the U.K.; for colorectal cancer, 65% in the U.S. and 54% in the U.K.
Competition Keeps Price Increases in Check
In the case of Medicare, the U.S. government would, in fact, be less powerful as a price influencer than private PBMs. Let’s assume that the government negotiates on behalf of all 40 million Medicare beneficiaries. That’s a lot, but private PBMs, since they also cover other Americans in business or individual plans, negotiate on behalf of many more. For example, Express Scripts, at last count, covered 83 million; CVS Health, the second-largest PBM, covers 65 million.
We can see the results in drug costs. Express Scripts, as we noted in a previous newsletter, managed to keep the average increase of spending on drugs used by its members down to 3.8%. That includes increased use of medicines; for unit prices alone, the increase was just 2.5%. The average unit-price increase for members of CVS Caremark was just 1.2%; for another large PBM, Prime Therapeutics, it was only 0.6%.
Those figures would hardly seem the basis of unprecedented government intervention in pricing Medicare drugs.
In fact, as Congress and the President consider health-care reform, they should focus on what is broken, not what is working well. Medicare Part D is a shining example of the latter.
Focus on Where the Costs Are
As we said in the last newsletter, there is no silver bullet when it comes to health-care costs. But a smart strategy would begin with a focus on the elements of the system where spending is highest. Only about one-seventh of the nation’s health bill goes to prescription drugs (and only about half of THAT goes to brand-name medicines) while one-third goes to hospitals and one-fifth to physicians and other professionals.
Here’s a graphic that puts in perspective U.S. spending on branded drugs, as opposed to generics. The pie chart at left also shows that more than one-quarter of drug spending goes to middlemen. The bar chart at right shows total health spending in 2015 and the small proportion devoted to drugs.
Canada, which spends about one-third less of its GDP than the U.S. on health care overall, spends a higher proportion of total health costs on prescription drugs: 17.2% vs. 12.3%. That’s true throughout Europe as well. Perhaps the problem is under-spending on drugs, but the opposite – since drugs, after all, keep patients and their insurers from having to spend money on the really expensive parts of the system.
The Best Way to Lower Costs: Increase Supply
As for drugs themselves, the best policies are those that lower costs by increasing supply. We need to smooth out the bumps in the drug-approval system in order to get more medicines to market. Trump and Gottlieb are both pledged to doing just that. In addition, we need to tackle the deficiencies of the PBM system. PBMs do a great job negotiating prices, but consumers are not always the beneficiaries. We need more transparency. As Wayne Weingarten of the Pacific Research Institute wrote April 4 in Forbes:
PBMs’ earnings are enhanced when manufacturers charge high list prices, but then pay large rebates and discounts to lower the actual transaction prices, creating a strong financial incentive for PBMs to support the current opaque pricing system.
We will discuss PBMs in a subsequent letter. For now, it’s clear that drug importation and negotiation are especially poor bets. Unfortunately, it’s a lesson we seem to have to learn again and again
Two ideas regarding drug pricing -- both kicked around for years – resurfaced in the 2016 campaign and seem to be viewed with favor by President Donald Trump. We’ll look at one idea, drug importation, in this newsletter and the other, government negotiation of prices, in the next.
Many medicines approved in the United States are sold at lower prices outside the U.S. because, in most cases, governments in other countries set those prices and restrict access to medicines to control costs. Advocates of importation want the U.S. to change its laws and allow pharmaceuticals to flow into this country from foreign countries. But getting medicines from other countries is a risk to safety, would likely result in less access to life-saving drugs, and would produce little or no savings anyway.
Sanders Bill Would Allow Drugs From Canada
The current template is a bill introduced by Sen. Bernie Sanders (I-VT) and several Democratic Senators. It would allow drug imports from Canada. Currently, the federal Food, Drug and Cosmetic Act “prohibits the interstate shipment (which includes importation) of unapproved new drugs,” according to an explanation on the FDA website (parentheses in original). Because the FDA does not approve drugs that are sold in foreign countries, importing those drugs is forbidden even if they were originally manufactured in the United States.
The FDA finds good reasons for the law:
[M]any drugs sold in foreign countries/areas as "foreign versions" of approved prescription drugs sold in the United States are often of unknown quality with inadequate directions for use and may pose a risk to the patient's health. FDA approves a drug on the basis of scientific data proving it to be safe and effective…. Since FDA cannot assure the consumer that the drug purchased in the foreign country/area would be the same product his or her physician's prescription is written for, we recommend the product covered by the prescription be acquired in the United States.
Counterfeit, adulterated or otherwise bogus medicines coming into the U.S. are already a big problem, and things would get worse with more drugs flowing here from abroad. A Newsweek headline in 2015 stated: “The Fake Drug Industry Is Exploding.” One common practice is manufacturing counterfeit drugs unsupervised in a country like China and then shipping them to a more respectable source like Denmark or Canada, from which they are sent to the United States – a transaction that could become legal if drug importation rules change. An FDA official testified in 2007, “Of the drugs being promoted as ‘Canadian,’ 85 percent appeared to come from 27 countries around the globe.”
Importation is an idea that’s already been tried by states – and failed. Minnesota launched a website in 2004 to facilitate transactions between the state’s patients and Canadian pharmacies. But the experiment failed for lack of demand, having filled only 25,000 prescriptions in more than five years. According to American Medical News, a few other states, including Illinois and Kansas, also joined, simply ignoring the federal ban. But they too dropped the practice.
U.S. patients who currently use Canadian pharmacies are not buying drugs to manage their diabetes. A website like yourcanadianmeds.com instead promotes controlled substances like codeine, Xanax and Valium.
In fact, in a recently published article, the website touts the best way to buy controlled substances online:
However, there is a solution. Online shopping for pharmaceuticals is a great way to buy the desirable medication without extra effort. The key condition here is finding an approved, legit and high-end company offering high quality medications. Opting for controlled substances online, you will be asked to provide a prescription. But some online pharmacies sell certain drugs without a required prescription. If you have selected a dependable platform, you are likely to benefit from high quality of the drugs, fast purchasing process, easy payment, rapid delivery, convenience, confidentiality and other features.
FDA Commissioners Oppose Importation
Last month, the four most recently serving FDA commissioners – two appointed by President Obama and two by President George W. Bush – came out against legalizing drug importation. The four wrote that importation would ‘‘harm patients and consumers and compromise the carefully constructed system that guards the safety of our nation’s medical products.’’
President Trump’s nominee to head the Food & Drug Administration, Scott Gottlieb, also opposes importation, as do patient-advocacy groups, including the American Liver Foundation and the Colon Cancer Alliance. Some 170 such organizations signed onto a full-page ad in the Washington Times on March 28 to “oppose drug importation.”
It is far from certain that importation would reduce prices in the U.S., anyway. A CBO study in 2004, during a congressional session when a drug-import billpassed the House but died in the Senate, concluded that “permitting the importation of foreign-distributed drugs would produce at most a modest reduction in prescription drug spending.” Even if imports were allowed from “a broad set of industrialized countries,” the reduction would be about “$40 billion over 10 years, or about 1 percent. Permitting importation only from Canada would produce a negligible reduction in drug spending.”
An academic paper that thoroughly reviewed the noted that, in many cases, Americans pay less for drugs than Canadians: “A Canadian study of 27 top-selling generic prescription drugs concluded that three-fourths of those drugs cost less in the US, and Canadians could save millions by access to the US versions.”
The paper, “Drug Reimportation Practices in the United States, by Monali J. Bhosie and Rajesh Balkrishnan, was published in the Journal of Clinical Therapeutics and Risk Management in 2007, a time when importation was also in vogue as a health-care cost solution. It also stated, “A few US drug companies have already cut off drug supplies to the Canadian pharmacies that sell prescription drugs to US consumers. This has led to serious drug shortages at these pharmacies.”
The Bhosie-Balkrishan study confirmed a smaller study by the FDA itself, which looked at the seven top-selling generis in the United States. “For six of the seven drugs,” said the FDA report, “the U.S. generics were priced lower than the brand-name versions in Canada. Five of the seven U.S. generic drugs were also cheaper than the Canadian generics.” While both these studies go back a decade, the disparity prevails. In 2014, Canada’s Globe and Mailreported that a new study by the University of Ottawa and the Bruyere Research Institute found that Canadians are “spending much more than people in the…United States” for six drugs studied, including popular medications for cholesterol and high blood pressure.
Of course, some drugs are cheaper in Canada – or seem that way. Comparisons between U.S. and Canadian prices don’t account for the fact that the Canadian price, negotiated by the government, is the actual final net price, but the U.S. price is a list price that omits rebates and discounts to middlemen. Also remember that Canada is a small country, with about one-tenth the U.S. population and a lower income per-capita. If importation were legalized, the quantity of drugs in Canada could not come close to supplying the U.S. population.
“Obviously, manufacturers respond to these sorts of threats of importation by trying to raise prices in the countries that could become sources of export,” said Patricia Danzon, a professor emeritus at the Wharton School at the University of Pennsylvania, quoted in the Washington Post.
Consider the European Union, where cross-border sales occur regularly among member countries. This practice, called “parallel trade,” has not led to significantly reduced prices when drugs are purchased on low-cost EU markets (like Spain) and exported to high-cost markets (like Germany). Why? Because the parallel importers keep he spread as profit, thus introducing another inefficiency into the supply chain.
Gottlieb: Importation ‘Will Offer Consumers Little Relief’
Gottlieb, in a thoughtful piece in March 2016, was critical of Donald Trump’s campaign comments on importation. “The Trump plan–while perhaps good politics–will offer consumers little relief,” he wrote in Forbes. Gottlieb explained:
Given the rapid growth in the prevalence of sophisticated counterfeit drugs, no politician will approve a drug importation scheme without implementing a reasonable measure of regulatory oversight. There are simply too many channels for fake drugs to enter any importation scheme to forgo some meaningful controls.
Yet when importation of foreign drugs is done under a regulated scheme, it really wouldn't save money. I know. I worked on sketching an importation scheme for the FDA regulation of imported drugs when it looked like similar legislation would pass in 2004. That scheme would have added so much cost to the imported drugs; they wouldn’t be much cheaper than drugs sold inside our closed American system.
Drug importation would decrease safety, and it’s uncertain whether it would actually raise prices. Many observers believe that’s a bad trade-off, which is the reason the Senate rejected an importation measure on Jan. 11, with a dozen Democrats voting no.
No Silver Bullet, But…
The fact is, there is no silver bullet when it comes to health-care costs. But a smart strategy would begin with a focus on the elements of the system where spending is highest. Only about one-eighth of the nation’s health bill goes to prescription drugs (and only about half of THAT goes to brand-name medicines) while one-third goes to hospitals and one-fifth to physicians and other professionals.
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