The wrong approach to drug price reform

It’s been a rough summer for Americans battling chronic diseases.

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. Though subsidized by the federal government, private insurers sell plans to beneficiaries, each featuring different monthly premiums, drugs and coinsurance at the pharmacy.

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

PBMs extract discounts from manufacturers, who want their drugs covered by Part D plans. In 2018, companies offered $166 billion in discounts and rebates on their drugs. PBMs keep a portion of these rebates and pass the rest to insurers, who then reduce premiums by a few dollars for all beneficiaries.

That does little to help patients who rely on multiple drugs. These folks still owe copays or coinsurance — a percentage of a drug’s total price — based on their drugs’ pre-discounted “list” prices.

Say a cholesterol medication costs $100. A PBM might negotiate a 50 percent discount, allowing insurers to pay $50. Since patients pay coinsurance based on list prices, not discounted prices, folks with 25 percent coinsurance requirements still owe $25, rather than $12.50.

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 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Now that the administration has withdrawn the proposal, patients may never see those savings.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 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.

Over time, this policy would undermine research into new drugs. Pharmaceutical companies spend $2.6 billion, on average, developing each new drug. Less than 12 percent of experimental medicines ever make it to market. Researchers only fund these risky projects on the off-chance that a successful drug will 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 other conditions will evaporate.

Let’s hope the president nixes his advisers’ proposal and strives to slash out-of-pocket costs instead.