What could be more obvious than allowing the biggest purchaser of pharmaceuticals—Medicare—to negotiate the prices they pay, as President Biden advocated in his State of the Union speech? And while we are at it, let’s just cap the cost of insulin at $35 per month.
But the problem is in the details, not the objective. Of course, it would be great to have lower drug costs. The question is how effective any approach would be and what the cost is to the federal government and individuals. The more effective the option is at reducing drug prices, the bigger the government bureaucracy that will be needed – a tough sell to many Americans?
There are five ways the U.S. could fight excessive drug costs: public humiliation, competition among purchasers, negotiation with drug manufacturers, shadow the pricing that others pay, or overt price controls. The administrative costs of each differ from nothing to an expensive bureaucracy.
The cheap approach
The first classic way to deal with profiteering in pharmaceuticals in the U.S. is public humiliation to embarrass executives and Wall Street into lower pricing. Remember Martin Shkreli?
The problem with this is that easy short-term profits are no match for a little bad publicity, especially when purchasers have no alternative. As long as we bestow monopoly status via patents, this problem will persist.
Learning from Medicare Part D drug plans
The second way is the path we chose when establishing Medicare Part D drug plans. Private insurers were enticed into a new market where they had to provide coverage for enrollees at a predictable monthly rate albeit with significant cost sharing.
Insurers, competing for these new customers, forced pharmaceutical firms to negotiate by managing which covered drugs are favored over others. This was surprisingly effective; costs for the elderly were lowered by over 18% while others saw costs fall by almost 4%.
But the reliance on private markets for Medicare is controversial, although it clearly improved access and cost in this case.
The Medicare option
The third way, apparently favored by President Biden, is to have Medicare negotiate with drug companies. A large portion of Medicare beneficiaries who sign up for private-sector Medicare Advantage plans already experience this. Private insurers use pharmacy benefit management (PBM) firms to capture discounts from manufacturers with varying degrees of success.
Biden’s idea is to use the government’s purchasing power for the remainder of Medicare enrollees, like the Veterans Administration does to get even more. This is an option that other presidents have suggested, but it has always been blocked by Big Pharma successfully lobbying politicians.
The concern is that direct negotiations might limit current access to all approved drugs to favor those manufacturers who offered better terms. On the other hand, grabbing all the discounts for the government and Medicare enrollees could save an amount similar to the 40% of average wholesale prices realized by the VA rather than the much smaller discounts passed on by the PBMs.
The copycat approach
The fourth is to piggyback on others ability to get good rates. This outsourcing of pricing might be [a] copying prices that other purchasers obtain (such as the VA or another country’s health system, such as the U.K.), [b] setting maximum price increases on existing drugs, or [c] restricting how much higher a new drug can be priced relative to similar ones. All are time-honored ways for a weaker purchaser to ride the coattails of someone with more market clout.
Although this might overcome political and legal barriers, it seems a strange approach for the world’s largest buyer to use. Furthermore, others may set price limits too low to allow the new drug developments that we have come to expect.
And finally, there is the emotional picture that Biden paints of a boy and his father with Type 1 diabetes needing insulin that is priced at 30 times its manufacturing cost. His solution is capping prices at only 3 ½ times this cost. What this means apparently is imposing selective price controls on essential drugs where neither public humiliation nor competition work. This suggests picking off the most egregious cases where lobbyists won’t be able to argue that price controls will stifle innovation or access.
But why stop at insulin? The obvious extension is to move all the way past partial solutions to actual price controls on all drugs like the U.K. and other countries. However, this would require a huge reversal of U.S. policy.
The bigger 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 alternative source?
All of this is the legacy of our historic trust in the health system to always keep our interests as patients ahead of everything else. While everyone wants to believe that their doctor and hospital still holds to these ethics, there is less trust in insurers, and even less in greedy drug companies. So drug pricing will remain the easiest place to tackle the rising cost of healthcare.
J.B. Silvers is a professor of health finance at Case Western Reserve University, a hospital board member, and a former health insurer CEO and board member on what is now the Medicare Payment Advisory Commission advising Congress.