The downside of Medicare drug price negotiations

Sometimes in Washington, lawmakers lose sight of the forest for the trees.

That’s exactly what’s happening right now. Well-intentioned legislators are trying to make health care more affordable by slashing prescription drug costs in the upcoming, filibuster-proof budget reconciliation bill.

Virtually every American would agree that health care is exceedingly, and often needlessly, expensive. We spend far more, per capita, on everything from medicines to medical devices to surgeries than other countries. Reforms are desperately needed.

But lawmakers’ proposed changes — most significantly, a proposal to repeal Medicare’s “non-interference” clause and let the federal government negotiate drug prices directly with pharmaceutical companies — would be ineffective, even counter-productive, in lowering health care spending.

By myopically focusing on prescription drug prices, lawmakers are missing the real drivers of health care costs — hospitals, doctor’s offices and, to a lesser extent, insurers. Retail prescription drugs have accounted for about 10% of overall health care spending for decades. And in recent years, drug prices have actually decreased — though the exact magnitude of the decline differs, depending on how the calculations are run.

One study from the Drug Channels Institute estimates that brand-name drug prices dropped 2.6% in 2018, 2.3% in 2019 and 2.2% in 2020, after accounting for rebates.

The Centers for Medicare and Medicaid Services estimates a smaller drop — 1% in 2018 and 0.4% in 2019 — but a drop nonetheless. A CMS review of

2020 isn’t yet available, but there’s no reason to think it won’t also show a decline in drug prices.

Compare that to hospitals, which account for over 30% of total health care spending and have repeatedly hiked prices, year after year. Hospitals increased their net prices 2.4% in 2018 and 2% in 2019, according to CMS.

All told, Americans — and their insurers — spent $1.2 trillion on hospitals in 2019, compared to $370 billion on retail prescription drugs.

Doctors aren’t blameless either.

According to CMS, physicians and clinical services make up 20% of all health care spending — to the tune of $772 billion in 2019. Physicians raised their prices by 0.8% in both 2018 and 2019.

Americans also spend an unusually large amount on administrative costs — which largely result from the fractured nature of our health insurance system. Americans spend about twice as much as other advanced countries, per capita, on overall health care. But we spend four times as much on administrative costs. About 8% of all national health care spending goes toward government administrators and private insurers that don’t manufacture a single medical device or medicine, or diagnose and treat a single patient.

Simply put, even massive reductions in drug prices would barely dent overall health care spending. And those reductions wouldn’t be without tradeoffs.

Health policy experts have long noted that the only way the federal government could meaningfully “negotiate” lower prices would be to exclude certain cutting-edge medicines from Medicare coverage. Other developed countries already engage in this rationing.

While Americans had access to 89% of new medications introduced around the world from 2011 to 2018, Canadians had access to just 44%, Germans

62% and Britons 60%. That rationing explains why Americans generally have much better survival rates for cancer and other serious diseases.

Black Americans are more likely to live with a host of chronic diseases, from diabetes to many forms of cancer. Medicines used to treat chronic conditions, like insulin and antiarrhythmics, are already some of the most frequently excluded on formularies. In total, nearly

1,000 medicines have been omitted from these formularies within the past decade, according to a September 2020 analysis.

Some folks would even incur higher overall health care bills since they’d lose access to the medicines that keep them healthy and out of the hospital.

Lawmakers’ zeal for lowering health care costs is commendable, but they’re focusing on the wrong target. If Congress really wants to rein in spending and make health care more affordable, it’ll need to tackle the hospital MRI scans that cost thousands of dollars and the routine surgeries that spawn $30,000 bills.

Trying to trim retail drug costs won’t meaningfully move the needle. It’ll just reduce patients’ access to lifesaving therapies.