President Trump is thinking outside the box. He has just proposed a radical new plan intended to lower Medicare drug prices.
Avik Roy, writing in Forbes, describes the Trump administration plan just revealed to substantially reduce the price of certain costly drugs administered under Medicare, by linking what Medicare pays for these drugs to what other industrialized countries pay. Roy calls this “a stunning move that could entirely reshape the way the pharmaceutical and biotechnology industries think about their business model.”
It is no secret that Americans pay more for their drugs than do other countries. This has always been sold to the American people as a “necessary evil” so that pharmaceutical companies can develop new drugs. Here is what President Trump said in remarks made to the press:
“For decades, other countries have rigged the system so that American patients are charged much more – and in some cases, much, much more – for the exact same drug. In other words, Americans pay more, so that other countries pay less.”
Roy explains how we got to this point. Beginning in the 1990s, the pharmaceutical industry poured most of its resources into developing “blockbuster” drugs that addressed large public health problems, like high blood pressure and high cholesterol. Most famously, Pfizer developed Lipitor, a cholesterol-lowering drug that went on to become the best-selling drug of all time with global revenues exceeding $20 billion per year before its patent expired.
However, in the 2000s, a new strategy evolved where pharmaceutical giants like Roche, a Swiss company, and its U.S. subsidiary, Genentech, focused on so-called “orphan” or rare diseases. These diseases affected fewer than 250,000 Americans, but less competition and lower R&D expenditures made them more lucrative. The clinical trials phase of development was cheaper and shorter and higher prices with lower costs made for higher profits.
Fuel for Higher Medicare Part B Drug Prices
Medicare Part B for seniors covers drugs administered in a doctor’s office, such as those requiring an intravenous infusion. Once the drug is approved by the FDA, the drug company can charge whatever they want and Medicare pays for it. This is not a market-driven price but rather a private industry price control.
Roy explains how drug companies benefit: “This quirk in U.S. policy has fueled development of drugs that hit the sweet spot of Medicare Part B: drugs that are administered in a doctors’ office (not those you buy at your pharmacy), and drugs that treat diseases of old age (because Medicare is for people over 65). That sweet spot coincides with where we are increasingly spending more on prescription drugs: cancer, inflammatory arthritis, and the like.”
In addition, the Medicare Modernization Act of 2003 awarded doctors a 6% commission on drug infusions that is tied to the average selling price of a drug. This incentivizes physicians to steer patients to costlier drugs, because the physician gets a higher commission.
The Trump Proposal
The Trump proposal addresses the problems of Medicare Part B in two ways:
- Eliminate the 6% doctor commission – replace it with a fixed fee. This removes the incentive to steer patients to more expensive drugs.
- Link Medicare Part B prices to an International Pricing Index – This will be based on sixteen countries chosen because they found it relatively easy to acquire pricing data from these countries.
The program would be piloted under the Center for Medicare & Medicaid Innovation, an agency created by the Affordable Care Act to investigate ways to make the Medicare and Medicaid programs more cost-effective. The pilot would cover half of the U.S. population, and the administration estimates that the plan could reduce Medicare Part B spending by $17 Billion over the next five years.
The savings is not just for the government. Since seniors on Medicare are required to pay for a share of their Medicare Part B drug costs, lower Medicare drug prices would translate into significant savings for seniors receiving infused medications.
Of course, the pharmaceutical industry will fight back. Look for them to spread fear that this will eliminate new research for improved medicines. But be thankful that Trump is willing to take on this fight. His predecessors certainly never did.