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.
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.