We’ve been talking about lowering the high cost of prescription drugs lately. (Lowering Drug Costs) Now President Trump has weighed in with his plan to tackle this difficult, but important problem.
Avik Roy, writing for Forbes, says, “The Trump plan, if enacted, represents a sea change in pharmaceutical pricing policy, one that will have a significant effect on drug prices in the future.”
As usual, the mainstream media has already taken it upon themselves to attack anything coming out of this White House. One of their criticisms is that the new plan will achieve little, because it doesn’t ask Medicare to directly negotiate drug prices.
Roy says this is a bogus claim – because Medicare already negotiates drug prices. It has been doing so since the enactment of Part D in 2003. The Congressional Budget Office (CBO) said this in a 2014 report: “The competitive structure of Part D gives plan sponsors significant incentive to hold down spending. . . sponsors use three main approaches: They encourage the use of less-expensive brand-name drugs, they negotiate lower prices for brand-name drugs, and they encourage the use of generic drugs.”
The proof of this negotiation process is the track record of Part D spending which has come massively under budget, representing the most successful cost-control experiment in Medicare’s history. Figure 8 below depicts this history:
Roy gives us insights into the political history of Medicare Part D. When it was enacted in 2003, people on the left complained that it administered the program through private insurers and pharmacy benefit managers (PBMs). They wanted Part D to be a government-run, single-payer program, and have pushed for this change ever since. That’s what the media refers to when speaking of “direct” negotiation of drug prices. But even the non-partisan CBO has repeatedly evaluated this idea and concluded that the effect would be “limited” and “modest” because Part D plans already negotiate on Medicare’s behalf.
The Trump Plan
The Trump plan, called American Patients First has two categories of reform:
- Unilateral changes the administration can do
- Congressional changes that are needed
Here are the Trump proposals:
- Limiting the growth of Medicare payments for drugs in the doctors’ office to consumer inflation (CPI) – Roy says this will save billions over time by limiting the ability of drug companies to raise prices on old drugs.
- Shifting drugs out of Part B to Part D – to subject more drugs to negotiation.
- Rolling back mandates that force Medicare to keep costly drugs on its formularies – regardless of their value.
- Reforming the FDA’s internal procedures – in order to reduce artificial barriers to generic competition.
- Promoting the use of biosimilars – and reducing barriers to their take-up.
- Preventing branded drug manufacturers from gaming FDA risk management strategies and 180-day generic launch rules – to forestall generic competition.
- Providing avenues for Medicare to bulk-purchase costly drugs – so as to limit the pricing power of monopolies.
- Requiring drug rebates negotiated by PBMs to be passed directly on to the patients – instead of being used to reduce premiums for all policyholders. This should incentivize more and wider use of rebates, because price-sensitive consumers will benefit from lower prices on the drugs they use.
- Requiring drug companies to disclose list prices – in their drug ads on television, just as they do for side effects and risks. This will lower prices since drug companies will risk a PR blowback if prices are too high.
These proposals are a great start, but more could be done. We’ll talk about that in my next post in Part II.