Earlier today, the Trump administration
announced a new rule that will help reduce prescription drug prices for many
seniors enrolled in the Medicare Advantage program. How does it work? By
reforming a long-standing quirk in Medicare that prevented drugmakers from
competing with each other.
How competition lowers drug prices
When U.S. Health and Human Services Secretary
Alex Azar announced the Trump administration’s detailed plan to
reduce high prescription drug prices, much of the press yawned because many
journalists assume that the only thing that can reduce drug prices is
government-administered price controls.
In contrast to that conventional wisdom, the
plan contains a number of elegant and subtle solutions that will enhance the
role of competition in bringing drug prices down.
A surprising fact that few people know is that
America leads the world in encouraging doctors and patients to use low-cost,
high-value generic drugs. More than four-fifths of all prescriptions in the
U.S. are for unbranded, off-patent generic drugs that cost less than your
typical bottle of mineral water. For people with run-of-the-mill medical issues
like high blood pressure, early-stage diabetes, and high cholesterol, these
inexpensive drugs are a tremendous boon to public health.
The U.S. leads the industrialized world in the
utilization of unbranded generic medications.FREOPP
The real problem in the U.S. is the high price
of branded, on-patent prescription drugs—in essence, legal monopolies—where
manufacturers take advantage of their market power to charge extremely high
prices that are often divorced from the true clinical and economic value of
their underlying medicines.
Medicare’s outdated structure
Medicare was enacted in 1965, and is woefully
ill-equipped to deal with advances in medical and pharmaceutical technology.
The way Medicare covers prescription drugs is emblematic of the problem.
For those who buy private-sector health
insurance on their own, or obtain it from their employer, health insurance
covers prescription drugs in an integrated fashion. Not so for Medicare, which
runs four different insurance programs, with different premiums and co-pays,
that cover different kinds of prescription drugs.
Medicare Part A—what you might call the
original Medicare program—covers hospital stays, including drugs that are
administered in the hospital. A companion program, Medicare Part B, covers
drugs administered in doctors’ offices, such as drugs that require an
intravenous infusion. Medicare Part C, also known as “Medicare Advantage,” is
an increasingly popular, privately-administered Medicare program that covers
the same services as Parts A and B.
However, Medicare Parts A, B, and C don’t
cover the vast range of drugs—usually in pill form—that patients obtain through
retail pharmacies. That gap was closed under the passage of the Medicare
Modernization Act of 2003, one of President George W. Bush’s signature
initiatives. The MMA created a fourth Medicare program, Part D, to cover retail
prescription drugs.
Pills don’t compete with intravenous
infusions—until now
Part D, in general, does a great job of
leveraging competition among private insurers and drug companies to bring lower
prices to seniors. That’s why the program has come in massively under budget:
the only health care entitlement to do so in U.S. history.
But Medicare’s design puts an arbitrary
ceiling on competition because it prevents competition among retail drugs and
those administered in doctors’ offices and hospitals.
For example, a number of multi-billion-dollar
drugs for rheumatoid arthritis are administered in doctors’ offices under
Medicare Part B. Doctors receive a 6 percent commission on the average selling
price, or ASP, of prescription drugs they administer in their offices, giving
them a powerful incentive to steer patients to these drugs.
But a new generation of treatments for
rheumatoid arthritis are oral drugs, like Pfizer’s Xeljanz (tofacitinib), and
are financed through Medicare Part D. Because the various Medicare programs
operate separately, seniors don’t benefit from competition between Xeljanz and
many of the older drugs covered under Medicare B.
Similar problems exist in other disease areas
where some drugs are administered as infusions, and others as oral pills,
including multiple sclerosis and psoriasis.
Last year, in a paper published by the Foundation
for Research on Equal Opportunity, I proposed that Congress fix this
outdated structure by migrating to an integrated prescription drug benefit
under Medicare Part D. The new Medicare rule is a major step in this direction,
by integrating the way Medicare pays for Part B and Part D drugs.
Medicare drug competition offers seniors
direct financial benefits
Under the new rule, seniors
enrolled in Medicare Advantage plans (Part C) who have also signed up for
prescription drug coverage under Part D will now be able to benefit from
competition among a broader range of medicines.
The new rule allows Medicare Advantage plans
to use “step therapy” under which seniors might start with an oral drug paid
for by Part D, if it’s of equal clinical value but lower cost, and then step to
a more expensive injectable drug if the first medicine fails to work. Insurers
would be required to return at least half of the savings to seniors, possibly
in the form of those Visa gift cards often sold in grocery stores and
pharmacies.
This is a win-win for seniors and taxpayers.
First off, seniors will benefit from more competition in the form of hard cash
and lower insurance premiums. And lower average selling prices for Medicare
Part B drugs will create savings for the entire Medicare program, while
especially enhancing the value that Medicare Advantage plans can deliver for
seniors.
“Under the President’s leadership, for the
first time ever, [the Centers for Medicare and Medicaid Services are] bringing
negotiations to physician-administered drugs and delivering on our promise to
lower drug prices for patients,” CMS Administrator Seema Verma said in a statement. “For too
long, Medicare Advantage plans have not had the tools to negotiate a better
deal for patients. Today we begin lifting those barriers so plans can use
private-sector tools to drive down the cost of expensive drugs while also
offering new care coordination and drug adherence programs, to ensure that
patients are getting high-quality care at lower cost.”
Part of a larger effort
The Trump administration deserves credit for
doing the unglamorous work of changing Medicare’s byzantine rules in ways that
expand competition and choice, and lower health care prices. In recent
days, the administration has produced other new rules that will help small
businesses and individuals purchase lower-cost health plans, and proposed “site-neutral
payment” in order to prevent hospitals from overcharging for services delivered
in hospital-owned clinics.
It’s not the kind of work that will garner as
many headlines as the President's latest Twitter brouhaha. But it will make a
difference for far more people.
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