The Senate Committee on Health, Education, Labor, and Pensions is holding a hearing Tuesday on how the drug delivery system affects what patients pay for prescriptions. With Republican plans for health care reform stalled, and scrutiny surrounding prescription drug costs intensifying, a White House in desperate need of a policy victory may soon sharpen its focus on drug pricing. Since working with Congress on health care is proving to be difficult, President Trump may decide to do it via the executive branch.
One of Donald Trump’s many campaign promises was “to work on bringing down the cost of medicine by having a fair and competitive bidding process.” While the intent to make prescription drugs more affordable for the American people is a noble one, promoting a system of government-negotiated drug prices is misguided.
When it comes to drug pricing, the executive branch has incredibly broad administrative power. A little-known agency called the Center for Medicare and Medicaid Innovation, tasked with testing new delivery models designed to lower costs and improve quality of care, is exempt from statutory requirements and protections relating to the Medicare program. In effect, the president has an agency at his disposal that has the power to rewrite law.
Under President Obama, the center developed a number of initiatives designed to move health care providers away from traditional volume-based reimbursement and toward value-based “alternative payment models” that reward better outcomes and reduce spending. Trump may be tempted to use his broad authority to direct the center to implement a competitive bidding process for prescription drugs that he claims is currently lacking in the Medicare program.
Declaring that the government should be granted the power to negotiate drug prices in Medicare Part D implies that the marketplace lacks competition and the government could come in and leverage better deals than those negotiated between plans and manufacturers. This just isn’t the case. Competition already exists. Prescription drug plans already engage in aggressive price negotiations backed by substantial market power.
When Obama proposed authorizing the secretary of Health and Human Services to negotiate for high-cost drugs and biologics in his budget for fiscal year 2017, his own actuary, the Office of Management and Budget, determined that this dramatic shift in policy would fail to generate any savings.
Rather than save taxpayer dollars, government negotiation would equate to government price fixing that would serve only to expand the federal bureaucracy and move us closer to a single-payer system, a result that would not be typically Republican. It would also cost economic value and jobs, a result that is not particularly “Trump-ian.”
If the goal is to make prescription drugs more affordable for Americans, then policymakers must acknowledge the forces distorting the marketplace and address supply-chain barriers that prohibit the industry from transitioning to a value-based reimbursement system.
High sticker prices grab headlines and paint drug makers as greedy businesses ripping off American consumers. In reality, prescription drug manufacturers receive less than half of the total amount spent on their prescription drugs. Eli Lilly has released data showing that its average discounts and rebates were 50 percent in 2016. While the company’s average list price increased 14 percent in 2016, the net price increased only 2.4 percent after accounting for discounts and rebates. Johnson & Johnson (JNJ) released similar data showing that its average discounts and rebates were 35 percent in 2016, totaling $11 billion.
So, who benefits from manufacturers’ discounts and rebates? And why are patients often stuck with so much of the tab?
More than one-third of the list price for brand-name medicines is rebated back to payers and pharmacy benefit managers, according to a recent study from the Berkeley Research Group. Pharmacy benefit managers say that the discounts and rebates extracted from manufacturers are passed on to plans, which use them to cut premiums. But these savvy middlemen neglect to mention that when a patient picks up a prescription at the pharmacy counter, the copay is tied to the original list price — a price that does not reflect the discounts and rebates paid to pharmacy benefit managers and insurers. Linking a patient’s payment to the higher, pre-discount list price means patient out-of-pocket costs rise as pharmacy benefit managers profit from the spread between the original list price and the discounted price.
Making matters worse, list prices have been artificially inflated in recent years as pharmacy benefit managers threaten to exclude drugs from their preferred drug lists, known as formularies, unless the manufacturer agrees to provide higher rebates. This dynamic provides incentives to inflate list prices to allow room for the steep discounts and rebates that pharmacy benefit managers enjoy.
One of the largest pharmacy benefit managers, CVS (CVS) Health, flexed its muscle by excluding 154 drugs from its 2017 formulary, which is up from 124 exclusions the year before. As the threat of formulary exclusion grows, so does the pressure to provide higher rebates.
These market distortions are ripe for legislative and regulatory reform. In addition to cutting out middlemen who are inflating prescription drug prices, policymakers should address the “anti-kickback” laws that hinder the industry’s ability to enter into value-based contracts. Value-based contracts have great potential to reduce costs as an insurer’s payment for a drug would be based on clinical and economic outcomes. But there is uncertainty about whether these arrangements would run afoul of the anti-kickback statute, which prohibits the exchange of anything of value to reward the referral of federal health care business. For these arrangements to gain popularity, legislative and regulatory clarity is required.
These changes would promote competition, provide incentives for development of innovative treatments, and lower costs for patients. That’s a policy victory worth winning.
Marc Samuels is the CEO and Lindsay Bealor Greenleaf is the director of ADVI, a health care consulting firm representing life science companies and health care provider organizations. The company has no direct relationships in companies that would benefit from changes in drug pricing.