Health 202:
Here’s why it’s a nightmare to lower U.S. drug prices
Whatever President Donald Trump suggests next week to lower U.S. drug costs, don’t forget this cold, hard fact: It’s extremely difficult to make sweeping reforms to a health-care system as piecemeal as ours.
If you’re employed, you might have coverage through your job. If you’re a senior, some version of Medicare. If you’re a low-income American, you may qualify for Medicaid. If no insurance is available to you, you’ve probably bought subsidized, private coverage through the state-based Affordable Care Act marketplaces. Or, maybe you’re simply uninsured.
Health insurance typically isn’t such a patchwork system in other countries with wealth comparable to the United States. In Canada, Australia and many European nations, the government plays a far greater role in delivering coverage keeping people’s out-of-pocket costs low — and putting a damper along the supply chain on how much private industry can pocket from medications.
It’s true that spending on pharmaceutical products has been rising just about everywhere in the past three decades, as specialty medicines for complex or rare, chronic conditions such as cancer, rheumatoid arthritis and HIV have become more widely available. But in the United States, average spending on prescription drugs exceeds $1,000 per person per year — a hefty figure compared to, say, the United Kingdom, where it’s $497, or even Switzerland, where it’s $783.
It’s a situation garnering increasing attention from liberals and conservatives alike. Policymakers from Sen. Bernie Sanders, I-Vt., to Trump to his top health chief Alex Azar have been sounding the alarm that the government and individuals are paying far too much for prescription medicines.
Speaking at the World Health Care Congress, Azar said action on drug costs is “desperately needed.” He listed several problems he said “plague drug markets” — including high list prices, the government’s lack of negotiating tools, rising out-of-pocket costs for consumers and other countries “freeriding” off the investments of U.S. companies in developing drugs.
Trump proposed a smorgasbord of policies in his 2019 budget aimed at tweaking prices downward. But Azar hinted the president may suggest bolder reforms in his speech next week, although he didn’t provide specifics.
“HHS is currently working with the president on a comprehensive strategy to solve these problems,” Azar said. “We’ll be building on the proposals in the president’s budget, but he wants to go further.”
Books could be — and have been — written on why drug costs are so high in the United States. The prescription drug industry is perhaps the most complicated ecosystem I’ve tried to understand, driven by all sorts of pricing pressures along the supply pipeline. But it’s possible to boil down a few key differences between the United States and other developed countries.
1. The U.S. government has less leverage over how much drugmakers are paid.
The most significant avenue available for the government to influence drug prices is through Medicare’s prescription drug program, which covers about 42 million elderly and disabled Americans. Prices for medicines offered in these Medicare “Part D” plans are negotiated between pharmaceutical companies and the private insurers who bid for the right to sell the program’s plans.
In the past, Trump has joined in calls from Democrats to allow the government to directly negotiate prices with the drugmakers, thereby pushing down prices. It’s unlikely — although possible — the president will call for Congress to make such a change in his address planned for next Tuesday.
But there’s a plethora of ways other countries attempt to rein in drug prices — such as by capping how much government plans will pay for them, regulating how much the industry can charge private insurers or limiting markups along the supply chain.
England’s National Health Service, which is the country’s main buyer of drugs, sets payments based on a government evaluation of the drugs’ cost-effectiveness. Germany’s sickness funds, which are its version of a public-health insurance system, also apply a value assessment to medications to determine reimbursement levels.
These price levers are harder for the U.S. government to come by because of the point outlined earlier: Our health insurance system is a lot more fragmented. Only about one-third of Americans are on some form of government-sponsored insurance. And the U.S. government has traditionally played a much smaller role in regulating private industry overall.
“[Other countries] have policies in place that are more centralized in the pricing of their drugs,” said Shawn Bishop, a vice president at the Commonwealth Fund. “They have policies in place that directly link the price of the drug to the value of the drug — we don’t have anything like that.”
2. There’s less regulation along the supply chain.
Paying for drugs isn’t a simple matter of what the manufacturer charges. As companies sell their medicines to pharmacies, which in turn bill private or government insurance plans, pharmacy benefit managers (known as PBMs) act as middlemen to negotiate which drugs are covered and how generously.
The system is further convoluted by increasingly common rebates that drug companies pay to PBMs. Critics charge these rebates incentivize PBMs to favor higher-cost drugs or charge insurers more than they’re charging the pharmacy — and pocketing the difference.
Translated, it’s a lot harder to find the list price of drugs, there is a huge imbalance in what different payers are charged and plenty of room for all the involved parties to try to get a bigger piece of the pie via markups and transaction costs.
In most other wealthy countries, the government puts a lot more limits on prices along the supply chain, said Anna Kaltenboeck, program director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center.
“I don’t see Express Scripts operating in Germany, for example,” said Kaltenboeck, referring to the country’s largest PBM.
3. Drug companies use coupons to lower prices for consumers while they raise their medications’ list prices.
There’s another practice growing increasingly popular in the United States. Drug companies are offering coupons to customers to incentivize them to buy brand-name drugs rather than generics. While these coupons lower consumers’ out-of-pocket costs, they ensure their insurance plans pay for more expensive drugs. By 2016, one in five brand-name drugs in commercial insurance plans used a co-pay assistance coupon.
This practice isn’t found in other developed countries, where patients’ out-of-pocket costs tend to be fixed and much lower, Kaltenboeck told me. “It allows manufacturers to increase prices and maintain very high prices.”