Issue No. 50: Senate Plan for Medicare Price Controls Raises Ire, But Benefit Redesign Is Broadly Attractive
The Goal: Lower Out-of-Pocket Costs and Intensify Price Bargainin
The Senate Finance Committee on Thursday plans to take up a drug pricing bill, put together by the panel’s chairman, Sen. Chuck Grassley (R-Iowa), and ranking member, Sen. Ron Wyden (R-Ore).
The legislation would make two major changes: It would place an inflation cap on pharmaceutical prices, and it would redesign the benefit – that is, change who pays for what and at which stage. Those changes are poles apart. One imports European-style price controls; the other fits Part D’s original philosophy of price constraint through competition.
Sudden Attention for Inflation Cap
An inflation cap gained sudden attention a week ago, when, eager to make a deal with Speaker Nancy Pelosi (D-Calif), Treasury Secretary Steve Mnuchinproposed the idea as a way to reduce federal spending. An inflation cap had already been discussed in the Finance Committee, where it was advanced by Wyden. The concept Is laid out in Subtitle B – Part D - Section 128 of the Chairman’s Mark of the
This provision would establish a mandatory rebate if a pharmaceutical manufacturer increases their list price for certain covered Part D drugs above inflation…. Rebatable drugs would be defined as Part D-covered products that are brand drugs (and not a generic drug) or that are licensed as a biologic (and not a biosimilar).
According to Inside Health Policy, “Senate Finance Republicans have been skeptical about incorporating those rebates in Medicare Part D.” The article on July 19 by Rachel Cohrs and John Wilkerson continued, “The Trump administration, however, reportedly is open to the rebates, and sources say those rebates account for the brunt of the $115 billion in drug savings that the administration is proposing as part of a budget deal.”
In the end, the inflation cap was absent from the budget agreement that White House and congressional negotiators reached on Monday. (That deal still requires formal House and Senate approval and the President’s signature.) But the cap is front and center in the bill the Finance Committee is considering, and late Tuesday, the White House said it was backing the legislation.
Reports last week that the White House was willing to agree to an inflation cap immediately touched off a firestorm of protest from conservatives. Sally Pipes, president of the free-market Pacific Research Institute, wrote on Forbes.com July 19 that “the proposal would hurt vulnerable seniors and stifle medical innovation.” And former House Speaker Newt Gingrich tweeted, “Pelosi’s #Medicare price control plan” grows government, won’t reduce what seniors pay for drugs out of their own pockets, and “would just encourage manufacturers to have higher initial prices.”
On Monday, Grover Norquist’s Americans for Tax Reform led 17 conservative groups in signing a letter to the Finance Committee, stating, “We are concerned that this proposal institutes a new price control on Part D that will do nothing to directly help seniors and will instead create distortions that will undermine the free market and the success of Medicare Part D.”
A Solution Is Out There
One reason conservatives – and others as well – are so exercised about an inflation cap is that it runs counter to the strategy behind Part D, and, if implemented, the policy will likely trigger a host of unintended consequences. An obvious one is that pharmaceutical companies will, as Gingrich notes, have a bigger incentive to bring out new drugs at especially high prices since those prices will become the base for sub-inflationary increases. Another is that U.S. pharmaceutical employment will be jeopardized at a time when China is moving in the opposite direction, changing laws to attract more drug research and development.
Part D has, in general, worked exceptionally well. For example, using federal data, the Kaiser Family Foundation (KFF) found that Part D costs have risen slowly – an annual average of just 2.2% annually from 2010 to 2017, or just one-half of one percentage point faster than inflation overall.
Still, there are two problems with Part D currently. The first is the one we highlighted in issue No. 48 of our newsletter: When people get very sick and need innovative, specialty medicines, the structure of Part D requires them to pay large amounts out of pocket. The second is that insurers and manufacturers need to negotiate harder. A fairly easy solution to both problems is out there, but it has nothing to do with government price controls.
In fact, price controls could threaten the entire structure and even existence of Part D, a program that was opposed in 2003 by nearly all the Democrats in Congress, including Pelosi herself. A market-based federal program that is succeeding may constitute a threat to some politicians. So one of the best arguments for opposing inflation caps may simply be to defend Part D, and Medicare as a whole, from more extensive attacks.
The good news is that, in addition to the scheme for federally imposed price controls, the Finance Committee is also proposing, in
A Brief History of Part D
It’s hard to believe, but for 41 years Medicare, the federal health care program for seniors (as well as those under 65 with certain disabilities), had no comprehensive prescription drug benefit.
In December 2003, President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act. The vote was close. At the time, Americans over 65 were spending $2,322 a year on average, for their medicines. That’s the equivalent of $3,232 today.
Part D, launched on Jan. 1, 2006, allowed beneficiaries to choose a Prescription Drug Plan (PDP) as their insurer. PDPs, following rules administered by the Centers for Medicare and Medicaid Services (CMS), work with Pharmacy Benefit Managers (PBMs) to establish a “formulary” of listed drugs, based on negotiations with drug manufacturers. CMS approves each plan. There are now more than 900 of them, a 15% increase since 2018.
The base Part D premium is $33 a month, a figure that has barely budged since 2011 and is far lower than estimated when the program began. But there is a wide range of premiums – from $10 to $156. In addition, higher earners pay a surcharge of up to $77.
Part D was structured to use competition as a discipline to hold costs to beneficiaries down, and it has largely worked. Overall spending over the first eight years was $349 billion less than expected. Here is a good video on YouTube, from the group Medicare Today, that explains. A report by the Government Accountability Office stated that plan sponsors have held prices down…
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.
PBMs have enormous clout in negotiations because they are so large and can deploy the leverage of their entire medicine-using membership. There are 45 million Part D enrollees, but that figure is dwarfed by, for example, the PBMExpress Scripts, which alone has 83 million members who last year filled 1.4 billion prescriptions.
Private-Sector Negotiations Have Led to Price Declines
Express Scripts reported earlier this year that in 2018, the average price of a prescription for its members on Medicare plans fell by 1.4%; meanwhile utilization rose by 1.1%, so total costs fell by 0.3%.
The reason is competition. PBMs know how to play drug companies off against each other. According to a study released in June by Avalere, “less than 1% ($0.9 billion) of total Part D spending was for single-source brands that were the only product available in their therapeutic class.” Price reductions typically come in the form of rebates off the list price, and, according to the Altarum Institute, Part D plans score higher rebates on brand medicines than commercial plans.
PBMs and insurers already subject drug manufacturers to what are called “price protection penalties,” establishing a ceiling for increases by requiring rebates if prices rise beyond a certain amount. According to a study by Milliman, these rebates “have become more common and represent an increasingly large share of total rebates.”
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.” An inflation penalty instituted by the federal government would probably violate that clause unless new legislation is passed.
Medicare Part D was founded on the premise that competition and choice would manage costs and increase patient satisfaction – and that is what has happened. Premium growth has been low or non-existent, the plans are negotiating discounts of more than one-third for branded drugs (UnitedHealthcare, for example, paid $7.3 billion in prescription drug claims under Part D and received $4.1 billion in rebates), and seniors like the program (nine in ten say they are satisfied).
The Path to Real Reform for Part D
Part D, however, is not perfect. The current payment system is complicated and counter-productive. A Medicare beneficiary first pays the full costs of medicines up to a deductible, which in 2019 is a maximum of $415. Next comes the initial coverage phase, where the beneficiary is subject to coinsurance, paying 25% of the cost of the drug. That phase ends at $3,820 in total drug costs. In the next phase, the “donut hole” or “coverage gap,” the beneficiary pays 25% coinsurance for branded drugs and 37% for generics up to total costs of $8,100. Finally, the catastrophic phase begins, and beneficiaries face 5% coinsurance with no limit.
As a result, some Medicare beneficiaries have to pay huge out-of-pocket (OOP) costs. Nearly one in ten reached the catastrophic phase in 2017. Of those 3.6 million people, 2.6 million had costs buffered by low-income subsidies, but that left 1 million seniors exposed to unlimited drug costs. According to KFF, among those million seniors, average OOP spending for those with leukemia or lymphoma was $5,000; for those with multiple sclerosis, $4,900; with viral hepatitis, $4,300.
Simply capping catastrophic OOP spending by eliminating 5% coinsurance in the catastrophic phase would end the problem, as we showed last month, but many analysts believe that a more sophisticated change that accelerates incentives to hold down costs would be better.
Under the current system, insurance plans (that is, the pricing police) pay only 5% of costs in the donut hole and 15% in the catastrophic phase. Manufacturers pay 70% in the donut hole and nothing at all in the catastrophic phase.
According to Tara O’Neill Hayes of the American Action Forum (AAF): “Because insurer liability is very limited in the catastrophic phase, insurers have little incentive to keep beneficiaries out of that final phase.” A new alignment of responsibilities is necessary.
In August 2018, Hayes issued a Part D reform plan that received a good deal of attention. The Medicare Payment Advisory Commission, or MedPAC, a congressionally mandated agency, began addressing a similar redesign in 2016 and in April weighed in again with new research and on June 14 with itsannual report to Congress. Two weeks later, Hayes issued her own revised proposal, which some are calling AAF-Plus. Her approach and MedPAC’s are similar, and MedPAC summed it up this way:
In general, we expect [a redesign] would provide stronger incentives for plan sponsors to manage enrollees’ spending and potentially restrain manufacturers’ incentives to increase drug prices or launch new products at high prices.
Such a redesign, as the Senate Finance Committee proposed in its legislation, has broad support -- though some analysts will disagree with the proportions.
Under the committee’s plan, beneficiaries would start with the same deductible as now. The initial coverage phase and coverage gap would be conflated so that beneficiaries pay the same coinsurance across the spectrum. The Senate bill proposes 25% -- though previous plans proposed 20%.
Across this unified phase, the committee proposes a constant liability for plans of 75% to go with the 25% for beneficiaries. (Currently, in the initial coverage phase, plans have a liability of 75%; manufacturers, zero. In the coverage gap, manufacturers have a liability of 70%; plans, 5%.)
The big change would come in the catastrophic phase, where, under the Senate committee bill, the government liability would be reduced from the current 80% to 20%, and the plans’ liability would rise from 15% today to 60%. Manufacturers would be responsible for the final 20%, where currently they face zero liability. Under this plan, beneficiaries would be out of the picture altogether, with no liability for catastrophic costs. As of 2022, beneficiaries would pay no more out-of-pocket than $3,100.
Restructuring Addresses Problems Better Than Price Controls
This restructuring – and it is a proposal that can be tweaked in many ways -- addresses both of the current problems.
First, the OOP cap for non-low-income-subsidiary Part D beneficiaries would fall from unlimited today to a much lower figure. Hayes presents a table in her paper showing that with $40,000 in total drug costs, a beneficiary today faces OOP expenditures of $11,861. Even if they are healthy, seniors endure tremendous anxiety about getting sick and not being able to afford their medicines. The reimbursement structure would be limit OOP to $3,100, in addition to low-cost premiums. (Even $3,1000, though a major improvement over the current situation, would be a hardship for many Americans; previous proposals had limited OOP to $2,500.)
Second, as Hayes concludes, “Reforming the benefit structure…realigns the financial incentives of both the insurers and drug manufacturers” in a way that will put additional pressure on prices.
Under the committee bill, the plans – that is, the insurers and PBMs (often one and the same with recent mergers) -- will have substantial skin in the game when it comes to reimbursements for innovative specialty drugs. The plans will be on the hook not for just 15% of the tab in the catastrophic phrase, but for 60% (a previous proposal put the level at 75% with the government paying 20% and manufacturers, 5%). Even at 60%, the plans will undoubtedly ratchet up pressure on drug manufacturers, which themselves will have to reimburse for catastrophic costs from which they were immune for 13 years.
Unlike under the current design, both plans and manufacturers will have a big incentive to keep beneficiaries from going over the $3,100 out-of-pocket cap and reaching the catastrophic phase. Almost certainly, a redesign would increase the liability of drug manufacturers, but it is a solution which -- unlike artificial, government-imposed price controls – fits the philosophy and strategy that has guided Part D Medicare to its successes.
This piece that is missing in this restructuring is a resurrection of the plan to end hidden rebates to pharmacy benefit managers, which would have the effect of lowering not just prices at the pharmacy but the list prices on which Medicare coinsurance is calculated, thus cutting out-of-pocket costs to seniors. On July 11, President Trump suddenly killed this plan, which he has once so passionately advocated. Bringing it back would be another boon to Medicare beneficiaries – and to everyone who values transparency in pricing.
Hospitals and Drugs
In closing, we find it hard to resist noting the irony of an April paper on drug prices issued by the American Hospital Association (AHA). It called on Washington to “require mandatory, inflation-based rebates for Medicare drugs.”
Hospitals in this country have benefited from political protection and from consolidation. As the Center for American Progress reported on June 26, “Many hospitals are able to sustain profits and high prices because of their market power, which has grown as competition has dwindled and providers have consolidated through mergers and acquisitions.”
But hospitals are receiving closer scrutiny. After all, in 2017, Medicare hospital spending was nearly triple Medicare drug spending. As an article in Modern Healthcare concluded, “Hospital prices are the main driver of U.S. healthcare spending inflation, and that trend should direct any policy changes going forward.”
Still, however policy makers decide to address hospital costs, they would do well to remember why Part D works as well as it does: private-sector competition and minimal government intervention. An inflation cap imposed by Washington is the opposite approach.
Maryland last month became the first state to establish a board to set maximum prices for drugs purchased by state and local governments; shortly thereafter, Maine became the second.
According to a survey by the National Academy for State Health Policy(NASHP), attempts to establish price-review boards in two states (Illinois and Connecticut) failed, but in five others (Massachusetts, Minnesota, New Jersey, Oregon, and Missouri) legislation has been referred to relevant committees.
The structure of the review boards is similar in all these states, so let’s take a close look at one of them. Legislation passed the Maryland House of Delegates, 96-37, and the Senate, 38-8. Maryland’s governor, Larry Hogan, a Republican, declined either to veto or to sign the bill, so after a prescribed waiting period, it became law.
Maryland, like five of the other seven states where review boards have been up for consideration, is staunchly Democratic. Only one of its eight members of the U.S. House is Republican, and Hillary Clinton beat Donald Trump in 2016 by 60% to 34%.
Still, a state price control board is significant for any state. As Health Care for All, an advocacy group, put it, “The Prescription Drug Affordability Board will be the first government entity in the United States created to lower the cost of drugs.”
‘Damaging, Unintended Consequences
But there are problems. Big ones. Christine Hodgdon, a Baltimore resident who was diagnosed with both breast and thyroid cancer at age 34, wrote in the Annapolis Capital Gazette that, while a review board “may sound like good news for patients, [it] would have damaging, unintended consequences to innovation in Maryland, dimming the hope for potential breakthrough treatments without reducing the cost patients pay.”
Martin Rosendale, the CEO of the Maryland Tech Council, believes that the board will “have a negative impact on our local businesses.” With 41,000 Marylanders employed in high-paying biotech jobs, the state is sending a signal that biopharmaceutical companies are unwelcome – especially at time when far more is spent on other segments of the health care system, such as hospitals, that are immune to this kind of scrutiny and when Medicaid drug spending is flat (issues we explore below).
As Rosendale notes, “Price controls limit access to needed medicines. Capping prices or profits within the drug supply chain would restrict patients’ access to medicines and result in fewer new treatments.”
What Maryland and the other states are trying to do is import the model of government-as-payer – prevalent in such countries as Canada -- to the United States. A major means for government agencies in these countries to hold down prices is denying their citizens access to drugs – especially the most innovative and effective. A Wall Street Journal editorial last year pointed out that of 74 cancer drugs launched between 2011 and 2018, some 95% are available in the United States. “Compare that to 74% in the U.K., 49% in Japan, and 8% in Greece.”
In a paper earlier this year, Avik Roy, president of the Foundation for Research on Equal Opportunity, pointed out that “not all foreign countries have access problems to new medicines.” He produced a chart, based on data from the WHO European Observatory on Health Systems and Prices, that show that such nations as Germany and Denmark…
enjoy rapid and frequent access to innovative medicines, comparable to that of the United States. In Denmark for example, after a drug is approved by the European Medicines Agency (the European equivalent of the FDA), it takes an average of five months for that drug to reach patients. This is, in large part, due to the use of free pricing in these high-access countries.
Denmark does not regulate drug prices at all, Roy notes, and Germany allows free pricing for the first year after launch, “which has encouraged manufacturers to rapidly enter its large market.” By contrast, in Belgium and Italy, where prices are tightly regulated access takes an average of 15 months. With its price-control board, Maryland is moving in the direction of Belgium and Italy, with predictable results.
Limiting access to the best medicines has life-and-death consequences. Compare, for instance, survival rates for cancer in the U.S. and the U.K., where the National Institute for Clinical Excellence (NICE) serves as the kind of board that Maryland is setting up. According to the U.S. Centers for Disease Control (CDC), five-year survival rates for four out of five different kinds of cancers studied were higher in the U.S. than the U.K.: breast, colon, lung, and prostate. The only exception was childhood leukemia, where the U.S. rate was 87.7% and the U.K. rate was 89.1% For lung cancer, nearly twice as many Americans survived than U.K. residents.
If you have cancer, this study and others have shown, the best place to be is the United States. Price-control boards like the one Maryland is implementing could change that situation.
Rosendale make a final point. The law, he said,…
could also create a “gray” market of companies that buy and resell medicines to each other before one of them finally sells the drugs to a hospital or other health care facility. As the medicines are sold from one secondary distributor to another, the possibility of counterfeit medicines entering the legitimate medicine supply increases, thereby threatening patient safety.
How the Review Board Works
According to the text of the legislation, the first assignment of the five-person board -- whose members are appointed individually by the governor, the two legislative branches, and the attorney general – will be a study, to be completed by the end of next year, of the drug distribution and payment system and of what other states and countries are doing “to lower the list price of pharmaceuticals.” (Why list price and not the actual cost to the state and consumers is not explained.)
After that, the board will target branded drugs, including biological products, that are launched at a Wholesale Acquisition Cost (WAC) – that is, list price before discounts and rebates -- of $30,000 or more a year or that, after launch, are registering price increases of more than $3,000 a year. Also targeted will be generics with a WAC of $100 or more a month or that have increased in price by more than 200% in a year.
Finally, under the law, the board has an open-ended mandate to pursue “other prescription drug products that may create affordability for the state health care system and patients.”
After identifying its targets, the board next conducts a “cost review” to determine whether a drug will lead to an “affordability challenge” for Marylanders. The review can look at 10 factors (such as the WAC itself, rebates, the price of “therapeutic alternatives,” and restrictions to access), as well as “any other factors as determined by the board.” In all these matters, the board works with a 26-person “stakeholder council” that includes physicians, nurses, representatives of drug companies, advocates for seniors, and the like.
The board can also look at a drug manufacturer’s research and development costs, its direct-to-consumer advertising costs, plus virtually anything else it wants to consider. Then, starting Jan. 1, 2022, the board can set “upper limits” on drugs that are purchased for state-run hospitals, colleges, and prisons, state employee health plans, and Medicaid (the Maryland Medical Assistance Program, whose threshold income requirement for a family of four is $34,000 a year).
What Is the Right Price for a Drug?
Exactly how the board will come up with the correct maximum price for a drug is left vague in the law. A big question is why a group of political appointees has more pricing wisdom than the market-based real-life transactions that determine the net price of Medicaid drugs (in the first place.
Once the price does get set, drug manufacturers can appeal and then take the state to court. The constitutionality of the law is still an open question because it could be interpreted as an attempt to regulate interstate commerce, a federal responsibility. The Baltimore Sun, a supporter of the price-control board, said in an editorial,
This bill treats manufacturers no differently whether they’re in Maryland or Virginia or California. The question of whether this measure would survive a legal challenge is certainly legitimate, given that a federal court recently struck down Maryland’s attempt to limit generic drug price spikes.
The law may be more important for what it signifies than for what it will ultimately do. Politicians at both the state and federal level seem to what to dosomething about drug prices – even if those measures deter innovation and ultimately harm the health of their constituents.
Attacking Spread Pricing
A survey by the NASHP for that, as of July 7, “47 states had filed 269 bills to help control prescription drug costs.” Nearly half those bills were directed at pharmacy benefit managers (PBMs) – especially at a practice called “spread pricing,” a practice that has also caught the attention of the federal Centers for Medicare and Medicaid (CMS), which issued guidance in May to fight abuses. According to CMS:
Spread pricing occurs when health plans contract with pharmacy benefit managers (PBMs) to manage their prescription drug benefits, and PBMs keep a portion of the amount paid to them by the health plans for prescription drugs instead of passing the full payments on to pharmacies. Thus, there is a spread between the amount that the health plan pays the PBM and the amount that the PBM reimburses the pharmacy for a beneficiary’s prescription.
If spread pricing is not appropriately monitored and accounted for, a PBM can profit from charging health plans an excess amount above the amount paid to the pharmacy dispensing a drug, which increases Medicaid costs for taxpayers.
Spread pricing is a real problem, and one that can be addressed effectively. In 2018, Ohio moved all state contracts with PBMs off the spread model and onto a simple pass-through model after the state determined that PBMs were raking off 9% of Medicaid prescription costs. Kentucky reported that PBMs earned $123 million from spread pricing last year.
Medicaid Net Drug Spending Flat
Medicaid spending is a serious concern of all states. Although the federal government pays about three-fifths of the cost, the state’s share is typically one of the two overall budget items, along with education. Total Medicaid costs arerising at about 4% annually, but, according to a Kaiser Family Foundationreport on May 1, net spending on Medicaid pharmaceuticals after federal and state rebates has been flat for the three most recent years of data (2015-17) and, in fact, declined between 2016 and 2017.
States are not required to offer pharmaceutical coverage under Medicaid, but all of them do. (After all, medicines keep people out of hospitals and physicians’ offices, where total spending is five times that of drugs.) Medicaid provides reimbursement to pharmacies for what amounts to the national average price of the drug. To cover some of the cost, according to a KFF primer,
federal law requires manufacturers who want their drugs covered under Medicaid to rebate a portion of drug payments to the government, and in return, Medicaid must cover almost all FDA-approved drugs produced by those manufacturers.
Most states also negotiate for rebates. In 2017, federal and state rebates totaled 55% of total drug spending, up from 46% in 2014. Overall, net Medicaid spending on prescription drugs after rebates totaled $29 billion in the most recent year for data; that about 5% of total costs for Medicaid, a program that spends $119 billion on fee-for-service long-term care alone.
Drugs a Small Portion of Medicaid Costs Compared to
Long-Term Care, Hospitals
So the mystery is not merely how state boards are going to determine whether a drug costs too much but why the politicians who create the boards are so fixated on medicines rather than on much larger budget items, such as hospitals and long-term care.
One answer may be that ideological interest groups are also fixed on drugs. For example, a national group called Patients for Affordable Drugs Now played a key advocacy role in securing the Maryland price-setting board, including running television ads encouraging Governor Hogan to sign the bill. The group received $950,000 last year from the Action Now Initiative, which is funded by Laura and John Arnold, Houston-based philanthropists who made drug-price reduction a cause.
Another answer is simply that practically every elected official has at least one hospital providing employment in his or her district while pharmaceutical manufacturers are national and global companies. It may make political sense to overlook the sharply rising cost of hospital care – and even lavish benefits on hospitals. In an article earlier this year in National Affairs, Chris Pope wrote about what he called “hospital protectionism” by state and federal governments:
America's hospital industry is already one of the most politicized sectors of the nation's economy, and its shape and structure are the product of decades of deliberate legislative and regulatory actions.
Price-Setting Boards Can Damage Health
The real danger in creating state price-setting boards, however, is the damage they can do to America’s health. Pharmaceutical innovation has entered a kind of golden age, with more and more innovative drugs being developed for diseases that, in the past, ruined lives or put an early end to them.
The death rate from cardiovascular disease has dropped by two-thirds since the 1970s, in large measure because of cholesterol and blood-pressure medicines. HIV/AIDS was a death sentence before antiretroviral drugs were developed. In 2013, the Food & Drug Administration approved an actual cure for Hepatitis C, which kills more Americans than any other infectious disease. Last year, the FDA approved 59 new drugs, a record. These medicines treat such conditions as smallpox, melanoma, rheumatoid arthritis, cystic fibrosis, breast cancer, acute influenza, and many more. Cancer breakthroughs are multiplying.
Putting political limits on the cost of medicines – especially when these costs have been flat in recent years – could have significant negative consequences. Drug companies need to spend vast sums on research and development to bring drugs to market (the total cost per approved medicine is close to $3 billion); if the revenues fall, so will R&D, and so will the opportunities for Americans to benefit from innovation.
Frustration at the costs of medicines may be understandable, but the best way to limit pharmaceutical expenses is not top-down controls from governments but competition in the marketplace. The Trump Administration has already shown what can be achieved by easing the pathway for approval of generic drugs: an overall decline in the average price of medicines.
The Bureau of Labor Statistics (BLS) reports that prescription drug prices have fallen in eight of the past 14 months. Express Scripts, the pharmacy benefit manager (PBM) for 83 million Americans, reports that during 2018 the average cost per prescription for members of its commercial plans fell by 0.4%. For Medicare plans, the decline was 1.4%. CVS Caremark, another giant pharmacy benefit manager, says that last year, the prices of specialty drugs for its members rose just 1.7% and those non-specialty drugs fell 4.2%.
Much more can be done to intensify competition and to reduce the out-of-pocket costs of patients – for example, regulatory changes to improve the chances of getting biosimilar drugs to the marketplace. Political price controls are a blunt instrument, bound to do a lot of damage, intended or not.
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