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November 8 2018

Who's left out of Medicare price negotiations? The patient

via Washington Examiner
by Hadley Heath

President Trump recently announced his administration would pursue a pilot program in Medicare to set drug prices at an International Pricing Index, meaning that for half of seniors insured by Medicare, foreign prices will be used as a benchmark for what the government will pay on their behalf.

While this proposal might seem at first glance to be helpful to patients, it will ultimately be to their harm. Setting prices based on other countries (mostly countries with socialized healthcare systems) will likely curb access and innovation.

This is not to say that the status quo in Medicare is ideal, either. No matter how drug prices or reimbursements for other health services are determined in Medicare, the negotiation will always leave out the most critical stakeholder: the patient.

In most price negotiations, there are two parties: a buyer and a seller. But in healthcare (and in most healthcare systems around the world), there are three parties: the buyer (Medicare, Medicaid, or insurance companies), the seller (health providers and drug companies), and the actual patient. This is sometimes referred to as “third-party” payment as opposed to a direct-pay model.

It’s not just drugs: Medicare has also struggled to get payment right for doctor’s services, recently leading to a major shift from “fee for service” to a “value-based” model in the Medicare Access and CHIP Reauthorization Act of 2015.

The criticism of fee-for-service payment was fair; it created a perverse incentive for opportunistic doctors to over-treat and over-charge, taking advantage of Medicare dollars.

But value-based payment comes with its own pitfalls, because the idea is to pay doctors according to their patients’ outcomes. This unfairly puts too much responsibility on doctors, when health outcomes are not always in their control. And sadly, it replaces one bad incentive with another, by now discouraging doctors from taking very sick patients with poor prognoses.

Similarly, some argue that the current model in Medicare drug pricing puts too much power in the hands of pharmaceutical companies and allows them to overcharge. Their recommendation is to empower Medicare to negotiate for lower prices. But any “negotiation” involving Medicare is likely to strong-arm the other party. After all, Medicare is the federal government.

While setting lower prices would be good for Medicare’s bottom line, it would not be good for patients. This is why price-setting is tricky: Set prices too high, and this will encourage overconsumption while wasting taxpayer dollars. Set prices too low, and there will be a shortage, meaning limited access to needed drugs.

Many Americans don’t see all that goes into drug development and production. It costs an average of $2.8 billion to bring a new drug to market, and the overwhelming majority of researched drugs never make it to market at all (10,000 to 1). Intellectual property protections allow drug makers to recoup their investment, but typically only for a set time, meaning initial prices for new drugs are extremely high compared to prices after patents run out. Limiting prices may seem consumer-friendly, but in reality, it will make it harder for drugmakers to create new cures.

Trump was right about one thing when he announced his new program: He said American consumers pay more because foreign consumers pay less. Price controls in other parts of the world already make it difficult for drugmakers to see a return, so they charge Americans more to make up the difference.

But the solution isn’t to import bad policy like drug ceilings. It is especially bad optics for Trump to tout a pilot program that relies on pricing input from countries with socialized medical systems during a national debate where his political opposition is pushing socialized medicine here.

Instead, President Trump should use drug-pricing reform as an opportunity to explain the inherent flaws in any system that is based on third-party payment. The buyers and sellers will perpetually be in a tug-of-war over price while patients are powerless.

This problem can only be properly addressed by engaging the private sector, promoting market competition, and actually allowing more individual skin in the game through reasonable cost-sharing. This is the opposite approach to price controls, and the only approach that might successfully lower prices without sacrificing access.



Independent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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