Hillary Clinton and Donald Trump agree that Medicare bureaucrats should be unleashed to negotiate lower prices with drug companies, and predict billions of dollars in savings as a result. In this political era when any common ground between these two adversaries should be venerated, it is a shame that we must point out that they are both wrong.

Unlike the traditional Medicare system, which sets reimbursement rates for thousands of procedures and services, the Medicare drug benefit program (Part D) uses private companies to manage the needs of its 39 million enrollees. The largest health plans in the country are participating in Part D and contract with one of four dominant pharmacy benefit managers to negotiate prices with drug companies.

These benefit managers do the same job for employers. For example, CVS Caremark administers drug benefits for nearly 65 million Americans, including millions of Medicare beneficiaries. Express Scripts, the largest such company, negotiates drugs prices for more than 85 million members.

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Using their considerable bargaining heft, the pharmacy benefit managers have already obtained good deals for the vast majority of drugs on the market. It seems unlikely that Medicare officials can do any better on their own. Who would you rather have bargaining for you, a private business executive representing 65 million to 85 million members, or a government bureaucrat representing roughly half as many? Total Medicare drug benefit costs are well below projections, a rarity for any government program. Let’s not mess this up.

So why do people believe drug costs are out of control and need government intervention? Because prices are soaring for some new highly effective drugs and some older ones that small numbers of patients depend on. For example, Express Scripts reported this spring that patented specialty drugs, including many cancer therapies, which are taken by only 1 to 2 percent of Americans now account for 37.7 percent of medicine costs for its clients.

This is monopoly power at work. The pharmacy benefits managers can effectively negotiate only when several drugs are available to treat the same medical condition. The drug company can dictate terms when it has the best, or only, therapy on the market.

When Clinton and Trump talk about Medicare exercising its clout to drive down prices, they are primarily targeting cancer and other specialty drugs. But Medicare can’t negotiate any better than pharmacy benefits managers with drug companies holding aces. Congress could enact legislation imposing federal price controls, dictating what a company can charge. But that has its own set of negative effects, including reducing incentives for developing new drugs and creating a new pricing bureaucracy subject to lobbying by patient advocacy groups and manufacturers.

As we write in the Journal of Policy Analysis and Management, better options exist.

  • Medicare can encourage greater use of pay-for-performance contracts, in which insurers and government payers agree to buy quantities of drugs but receive rebates if the drug does not hit quality targets such as lowering average cholesterol levels by a certain percentage.
  • In cases of curative medicines (as opposed to chronic ones such as high blood pressure drugs), Medicare could pay a premium to a drug company to secure a license, enabling much wider distribution and quickly realizing the health benefits while ensuring incentives for additional drug development.
  • The FDA could enhance competition in specialty medicines by approving more biosimilar drugs. The agency has yet to issue clear guidelines on what clinical testing is required by biosimilar manufacturers.
  • The Federal Trade Commission could require manufacturers to justify short-term price increases of drugs that have long been on the market but now face little competition. It could also examine drug company mergers or takeovers to ensure that they result in operating efficiencies that lead to reduction in prices, not price gouging.

These approaches are not a campaign sound bite. Instead, the candidates should end their calls for Medicare to negotiate drug prices. It is a distraction and a non-starter for reducing the cost of medicines.

Geoffrey F. Joyce, PhD, is director of health policy at the Leonard D. Schaeffer Center for Health Policy & Economics and professor at the School of Pharmacy at the University of Southern California. Neeraj Sood, PhD, is director of research at the Schaeffer Center and professor of public policy the Sol Price School of Public Policy at the University of Southern California. A longer version of this article appeared in the Journal of Policy Analysis and Management.

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  • Lots of people complain about the Medicare Part D bill not allowing Medicare to negotiate drug prices, but in fact, medicare DOES NOT offer a Medicare part B plan by itself. if you want a part D plan you must purchase it from a private company (Humana, United Health Care, Blue Cross, Aetna etc…) and those companies not only negotiate with the Pharmas, but actually play hardball. They will definitely drop drugs from their formulary if the Pharmas negotiated price is too high.

    On the issue of U.S. paying more than European countries or Asian countries for the same thing, that is a more difficult one. Most countries in the world allow wholesale and retail distribution of Indian generics which hit the market about 5 years after the introduction of a new drug. This puts huge pressure on pharmas to play nice with their pricing, or be cut out of the market. We in the U.S. give the pharmas at least 10 more years of patent protection and suffer the consequences having to pay 3 times as much as others for U.S. developed drugs. How to fix this without destroying the incentive to develop newer and better drugs is a delicate trick. Or then again, it may require a Trump to say to the Europeans and Asian nations, “Either help fix this problem by normalizing your markets or face our economic backlash in other ways”…not an easy proposition.

  • Eliquis, xaralto.and prodsxa all are NOACs, thus competing with each other and are all prohibitively expensive and thus belie the thrust of this op-Ed!

  • Medicare Part D was enacted during the Bush administration specifically for the purpose of directing a fire hose of government money to drug companies, specifically forbidding negotiating for price breaks. It was corrupt than and it’s corrupt now.

  • All of the talk about the need for high prices to pay for R&D, ignores the fact that we Americans are subsidizing the R&D cost for the rest of the world, who have a more rational drug-pricing system than we do. Why should we provide both most of the innovative research, AND most of the money?

    If big pharma (whose paid shills wrote this article) doesn’t like the deal in (for example) India, then let them not sell there. But don’t stick us with the bill.

    This reminds me of the situation with the Internet and cell phones — we (mostly) invented them, yet somehow we get stuck with the highest bills and worst service for them. Something is wrong here.

  • The authors have some good points, but their first solution falls flat. Here, we have government working against itself. I fully agree that organizations should look to pay for performance (P4P) agreements to align value, but we have 25 year out-of-date government in the way, in the form of the Medicaid best price regulation, which has NO provisions or exceptions to accommodate P4P.

    Most manufacturers will not enter into P4P agreements until they can be assured that these agreements will not trigger best price. Under current law, all you have to do is sell one tablet at a low price in a P4P agreement (by not hitting clinical targets) and ALL of your Medicaid business (about 13% of drug sales on average) becomes priced at that level, now and forever.

  • Joyce & Sood pose the question, “Who would you rather have bargaining for you, a private business executive representing 65 million to 85 million members, or a government bureaucrat representing roughly half as many?” And what a job those private sector pharmacy benefit managers have been doing. According to CMS (a), total Medicare expenditures increased 5.5% in 2014, at the same time that prescription drug costs rose more than three times as high (16.9%). And whose interests are these business executives really bargaining for—consumers or their shareholders? Another relevant question might be why couldn’t government bureaucrats negotiate reasonable prices when they already do, just not for Medicare. According to a recent study (b), the Medicare program pays 73% more than Medicaid and 80% more than the VA for brand-name drugs.

    What Joyce and Sood ignore is that there is no reason why both parties cannot negotiate maximum prices. The government negotiates the most a drug can be worth. Then the regal CEOs can lower prices further—according to the authors, these businessman are eager to lower prices even more. But, as insurance, let’s have the government establish what the initial price must be. And then our holy businessman can go take their bites out as well, even though they haven’t shown any indication yet—despite Joyce and Sood’s almost religious conviction to the contrary—of worshipping at the private market’s altar.

    Fundamentally, Joyce and Sood fall back on the pharmaceutical industry’s well-worn arguments designed to frighten the American public—regulating drug prices would impede innovation and limit access to needed medications and that the government is incapable of changing and enforcing laws to ensure the necessary leverage for negotiating reasonable prices. This time the “campaign sound bite” does makes sense, regulating Medicare drug prices is long overdue.

    (a) http://bit.ly/2boqF4K
    (b) http://bit.ly/1RNg6Ew

    Peter S. Arno, PhD & Michael H. Davis, JD, LLM

  • William Johnson hits the nail squarely; most other countries effectively negotiate/set drug prices. Canada, Britain, even Germany with its comparatively drug manufacturer friendly policies, and most others pay significantly less for drugs than we do in the US. In the US, the Veteran’s Administration, a sort of national health system, pays significantly less than the big PBMs pay for drugs.

    Pharmaceuticals are truly a world wide market unlike any other. The analogy to automobiles, a vastly more complicated product, is misplaced.
    If Express Scripts has effectively used its bargaining power, why with its 85 million consumers does it negotiate much, much worse deals than Canada whose population is a fraction of Express Scripts customer base?

    • “In the US, the Veteran’s Administration, a sort of national health system, pays significantly less than the big PBMs pay for drugs.”

      OK, let’s put this trope to rest. Mr. Burdge (and nearly all politicians, Hillary and Donald included) apparently don’t understand that the reason the VA pays less is that it has a *significantly* restricted formulary. Far more restricted than the big PBMs. Many of those great new drugs you’ve heard of? Can’t get them from the VA. Approved drug on VA formulary doesn’t work for you? Good luck getting prior authorization through the VA bureaucracy to use an off-formulary “me-too” drug that might work for your particular genetic profile.

  • This editorial ignores that drugs in liquid form, administered to hospital patients through a tube in their arm, are covered by Medicare Part A and are considered different products by the drug company.
    This article does not explain why American drug companies charge American patients far, far more than they charge (for example) Europeans who buy the same drugs from them.
    American drug companies should be required by law to charge Americans their lowest worldwide prices, not their highest as at present.

    • That is impossible to do. You can’t price any product worldwide. There are different legal liabilities and regulations in different geographies. Automobiles in Canada have been said to be 15%-20% less in canada. You can’t go buy one there and bring it to the us because it doesn’t meet the same epa regulations. There are so many other reasons why what you propose will not work. Patent laws are another example. India only gives 1 or 2 years of exclusivity. If the US adopted that you would either see sky high drug costs for new drugs or no new drugs coming to market at all. The supply, demand and value proposition is what sets pricing. For example Hep C drugs are now a cure. It saves insurers and the patients many times more than what they cost. Not to mention they save lives. Im not saying that things can not be improved upon. Reducing the patent challenge lawsuits that start the day a drug is finally approves is one example.

    • If we do this fully expect the PharmaCos to stop researching all but the most potentially unique drugs. The only way that drug companies survive is thru the money they make in new drugs and R&D projects for unique drugs. The older drugs they drag in billions on but know that generics and biosimilars are soon to swamp them. If we require lowest prices which of course would be illegal to even imply as a price fixing scheme the companies will simply stop R&D and devote their resources into buying up all the generic companies to stop them from making similar drugs at lower prices. The author is right the way we currently have things set up with CVS and ExressScripts and Prime Therapeutics doing the negotiations is FAR better then getting our messed up Gov involved. The REAL issue is we finally have drugs to fight some very difficult diseases like Hep C and Cancer and we are experiencing shock value for the prices set up to treat them. After another decade or so when there are 30 different options for each disease the costs will be like Penicillin. Right now it is new technology and like all new tech it costs
      Dr D

  • ” prices are soaring for some new highly effective drugs and some older ones that small numbers of patients depend on. ”

    This argument ignores the soaring price of insulins (e.g. Humalog, Lantus, Levemir), which although old are required by millions of Americans with diabetes. PMBs have been ineffective at keeping costs similar to other countries.

    As a previous article in STAT noted, the price of insulin has tripled in recent years:
    https://www.statnews.com/pharmalot/2016/04/05/insulin-prices-skyrocketed-putting-drug-makers-defensive/

    You can also read more @T1International / t1international.com

    • Absolutely true about the rise in prices on insulin but no “agency” or entity is going to stop the price increases. The actual cost to patients is about the same since the current negotiation process is limiting the cost to patients in all but the few how are uninsured or Medicare “donut hole” types. In most of the expensive drug cases there is a rebate process that the patient can use to lower the pocket price. The key to keeping costs down is to incentivize PharmaCos thru offsetting R&D dollars in exchange for lowering those costs to the US population. If the Gov pays the PharmaCos to research various drugs in exchange for a guaranteed price lower then the rest of the world upon success we can lower the costs OR we could even share the profits if we negotiate that upfront. Right now we need to work WITH the PharmaCos and not see them as evil profiteers. If we partnered WITH them we could profit WITH them as well. We have the money as a nation we need to spend it properly! Dr D

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