Opinion: Biden wants to cut drug prices — 5 ways to do it, and none are perfect
What could be more obvious than allowing the biggest buyer of pharmaceuticals – Medicare – to negotiate the prices it pays, as President Biden advocated in his State of the Union address? And while we’re at it, let’s just limit the cost of insulin to $35 per month.
But the problem is in the details, not the goal. Of course, it would be great to have lower drug costs. The question is how effective any approach would be and what the cost would be to the federal government and individuals. The more effective the option is at reducing drug prices, the more government bureaucracy will be – a hard sell to many Americans?
There are five ways the United States can fight excessive drug costs: public humiliation, competition among buyers, negotiation with drug manufacturers, watching the prices others pay, or overt control. prices. The administrative costs of each differ from nothing to an expensive bureaucracy.
The cheap approach
The first classic way to deal with profits in pharmaceuticals in the United States is public humiliation to embarrass executives and Wall Street in order to lower prices. Do you remember Martin Shkreli?
The problem with this is that easy short-term profits are no match for a little bad publicity, especially when buyers have no alternative. As long as we confer monopoly status via patents, this problem will persist.
Learn about Medicare Part D drug plans
The second path is the path we chose when establishing Medicare Part D drug plans. Private insurers were drawn into a new market where they needed to provide coverage to policyholders at a predictable monthly rate, but with significant cost sharing.
Insurers, competing for these new customers, have forced drug companies to negotiate in managing which covered drugs are preferred over others. It was surprisingly effective; costs for seniors have been reduced by more than 18% while others have seen their costs drop by almost 4%.
But reliance on private markets for health insurance is controversial, although it has clearly improved access and cost in this case.
The health insurance option
The third way, apparently favored by President Biden, is to have Medicare negotiate with the pharmaceutical companies. A large portion of Medicare beneficiaries who enroll in private sector Medicare Advantage plans already experience this. Private insurers use Pharmacy Benefit Management (PBM) companies to obtain rebates from manufacturers with varying degrees of success.
Biden’s idea is to use the government’s purchasing power for the rest of Medicare enrollees, like the Veterans Administration is doing to get even more. It’s an option that other presidents have suggested, but it’s always been blocked by big pharma who have successfully lobbied politicians.
The concern is that direct negotiations could limit current access to all approved drugs to favor manufacturers who have offered better terms. On the other hand, capturing all rebates for government and Medicare enrollees could save an amount similar to the 40% of average wholesale prices made by the VA rather than the much smaller rebates passed on by PBMs.
The copier approach
The fourth is to piggyback on the ability of others to get good rates. This outsourcing of pricing could be [a] copy the prices that other buyers get (like the VA or another country’s healthcare system, like the UK), [b] setting maximum price increases for existing drugs, or [c] limit the higher price of a new drug compared to similar drugs. These are all age-old ways for a weaker buyer to follow in the footsteps of someone with more influence in the market.
While this may overcome political and legal hurdles, it seems an odd approach to take for the world’s largest buyer. In addition, others may set price limits too low to allow for the new drug developments we expect.
And finally, there’s the emotional image Biden paints of a boy and his father with type 1 diabetes needing insulin that’s 30 times the cost to make it. His solution is to cap prices at only 3.5 times that cost. This apparently means imposing selective price controls on essential medicines where neither public humiliation nor competition works. This suggests selecting the most egregious cases where lobbyists will not be able to argue that price controls will stifle innovation or access.
But why stop at insulin? The obvious extension is to go beyond partial solutions to actual price controls on all medicines like the UK and other countries. However, that would require a huge U.S. policy reversal.
The big picture here is the trade-off between patent protection and pricing. Why should a monopolist – Big Pharma, in this case – ever negotiate if it can set prices unilaterally and there is no other source?
All of this is the legacy of our historic trust in the healthcare system to always put our interests as patients first. While everyone wants to believe that their doctor and hospital still hold to this ethic, insurers are less trusted, let alone greedy pharmaceutical companies. Drug pricing will therefore remain the easiest way to combat the rising cost of health care.
JB Silvers is a professor of healthcare finance at Case Western Reserve University, a member of the hospital’s board of trustees, and former CEO of the health insurer and board member of what is now the Medicare Payment Advisory Commission that advises the Congress.