You can’t pay for 21st century medicines with a 20th century payment system

Many Americans are angry and worried about the price of prescription drugs. Yet underneath the anecdotes and headlines, a deeper, more consequential issue is often ignored. A major transformation in the drug industry has occurred in recent years — and continues today. The science and economics of the pharmaceutical industry have fundamentally changed, but the way we pay for medicines has not.

We essentially have 21st-century drugs with a 20th-century payment system. It’s like using a 1999 road atlas in the era of Google Maps. There’s been a huge shift, and few policymakers understand its implications or what to do about it.

Here’s the 20th-century model: relatively simple drugs (think statins for lowering cholesterol) intended for broad populations that are easily copied as generics, which lower prices when they come to market. In contrast, the 21st-century model includes more complex drugs (think biologics like personalized therapies using the body’s own immune system to fight cancer) targeted for smaller populations (people with a specific genetic composition) that are harder to copy and often have higher costs compared to traditional drugs.

The cures these new drugs offer are often extraordinary. But with their development, policymakers face a fundamental question: Have the costs associated with developing these new lifesaving medicines outstripped our ability to pay for them?

Some policymakers think the solution is for the federal government to set prices far lower than drug companies now charge. But such government price-setting could be a major obstacle to discovering new cures for life-threatening diseases. So what do we do? I offer four proposals that could pave the way for a more modern payment system.

First, if more expensive medicines are the new normal, we should find a way to reduce out-of-pocket costs for patients. One place to start is Medicare. Today, there is no cap on seniors’ out-of-pocket spending in Medicare Part D unless they have low incomes. About 1 million seniors in 2016 found themselves in the catastrophic phase of the Part D benefit, where they got stuck paying an endless 5% of the cost of their drugs, some of which cost hundreds of thousands of dollars. As more expensive, personalized cures become available, patients should be financially protected and we should provide industry stakeholders with incentives to better control costs.

Second, a 21st-century payment model must modernize how we pay for drugs in the Medicare Part B program. Unlike medicines you pick up at your local pharmacy, many Part B therapies are administered via injection, usually in a doctor’s office or at the hospital. These are also some of the most expensive new drugs on the market today. However, due to some perverse incentives, doctors and hospitals get paid more when they use more expensive drugs.

Even stranger, Medicare typically pays a physician employed by a hospital more to administer the same drug than a physician in an independent practice. This affects how much a Medicare patient pays for the service, leading seniors to face higher out-of-pocket costs with little transparency or ability to plan. We need to change these obviously flawed incentives.

Third, a 21st-century payment system should speed the development and approval of biosimilars, which are effectively the generic version of biologics. Biosimilars can help increase competition and lower prices. But right now, there are only 20 biosimilars approved in the U.S. — with just a handful available on the market — while more than 50 have been approved in Europe.

Why so different? In the U.S., some biosimilars face legal barriers in coming to the market because of the originator biologics’ significant patent protections. Some providers and payers are not able to convert patients to biosimilars because of a lack of information about — or confidence in — the interchangeability of a biosimilar with its reference biologic. Finally, biosimilars don’t always have the same discount relative to their biologics as generics do to their branded drug. That’s because biosimilars have approval processes that cost nearly as much as biologics. These issues must be addressed in a reformed payment system.

Fourth, we need more creative payment models in general. For example, no homeowner is expected to pay for a house with one lump-sum payment or for a car that doesn’t start. Creative models to finance over time, reimbursing for results, and reinsurance options that help payers hedge against high upfront costs are all features we should consider in a 21st-century payment system.

Drug therapies have changed dramatically in recent years, but the way we pay for them has not. This new reality is harming patients and their families and straining our health system. And it will only get worse if we maintain an outdated payment system.

Devin Nunes represents California’s 22nd Congressional District in the U.S. House of Representatives and is the ranking member of the Subcommittee on Health of the House Ways and Means Committee.