Trump had it right first time on prescription drug price reform

It’s been a rough summer for Americans with chronic diseases. Last month, the Trump administration scrapped a proposal that would have reformed the prescription drug supply chain and saved patients billions of dollars. Now the administration is trying to impose price controls on drugs administered through Medicare.

The president had it right the first time. Price controls would cripple medical innovation, ultimately harming patients. It’d be far smarter for the administration to reform the opaque supply chain and cut patients’ out-of-pocket costs.

The shelved reform would have targeted Medicare’s Part D prescription drug benefit, which covers over 44 million seniors and people with disabilities.

Though subsidized by the federal government, Part D plans are administered by private insurers, who sell a variety of plans to beneficiaries. Each plan features different monthly premiums, covers different drugs, and requires different copays and coinsurance at the pharmacy. Medicare beneficiaries can choose the plan that works best for them.

Insurers hire “pharmacy benefit managers” to help design and administer Part D plans. PBMs negotiate with drug companies to decide which medications each plan will cover, and how much patients will pay.

PBMs have a lot of negotiating power. And they use it to extract discounts from manufacturers, who want their drugs covered by Part D plans. In 2018, pharmaceutical companies offered $166 billion in discounts and rebates on their drugs.

PBMs keep a portion of these rebates as profit and pass the rest to insurers, who then reduce premiums by a few dollars every month for all beneficiaries. That does little to help the subset of patients who rely on multiple drugs. They still owe copays or coinsurance — a percentage of a drug’s total price — based on their drugs’ pre-discounted “list” prices.

President Trump came close to fixing this system. His proposal would have forced insurers and PBMs to use their discounts and rebates to lower patients’ out-of-pocket costs. By one estimate, this would have saved Medicare Part D patients as much as $59.5 billion between 2020 and 2029.

Now that the administration has withdrawn the proposal, patients may never see those savings. Worse, the administration’s plan to impose Medicare price controls could actively harm patients by impeding future drug innovation.

The proposal is meant to reduce spending in Medicare Part B, which covers drugs administered in doctors’ offices and hospitals.

The plan would tie the prices that Medicare pays for these drugs to the cheaper prices paid in other developed countries. Drugs are cheaper abroad because many countries use price controls. If manufacturers don’t agree to heavily discount their products, government health insurers refuse to cover them. The United Kingdom’s National Institute for Health and Care Excellence routinely denies patients access to drugs it deems too expensive. Americans don’t have this problem. They can access new cancer drugs about two years earlier than patients in Germany and the United Kingdom, on average.

If the government begins setting drug prices, American patients could face the same barriers to treatment as their European counterparts. Over time, this policy would undermine research into new drugs. Pharmaceutical companies spend $2.6 billion, on average, developing each new drug.

And less than 12% of experimental medicines ever make it to market. Researchers only fund these risky projects on the offchance that a successful drug will help them recoup their investment and turn a profit. But if the government sets artificially low drug prices, companies would have little hope of earning back their upfront costs. As a result, funding for research into new treatments for cancer, Alzheimer’s, and host of other conditions will evaporate, depriving patients of potential cures.

It’s good that Trump wants to lower drug prices — but price controls aren’t the solution. Let’s hope he nixes his advisers’ proposal and strives to slash out-of-pocket costs instead.