Recently President Trump issued four executive orders related to prescription drug prices. The first three orders were effective on July 24, 2020. The fourth executive order concerns drug prices for Medicare Part B drugs has a delayed effective date. This order, which applies to Part B medications, are those drugs received in a doctor’s office or in certain hospital outpatient settings. Beneficiaries pay both a deductible and 20% of the cost of the drugs received under Part B. The fourth executive order calls a change in the purchase price of those Part B drugs under what President Trump called a most favored nation status (MFN) provision. A MFN is a contract provision that assures the buyer that they are getting the lowest price that the seller has agreed to with other buyers.
As with all things health insurance, it’s a bit more complicated than it appears. Currently, Part B drug costs are based upon the average sale price + an add on percentage. The average sale price (ASP) is based upon the average sale price to multiple buyers. The MFN executive order would make the Medicare Part B drug price based upon the International Price Index (IPI) rather than ASP + %. The IPI price would reflect the prices paid by similar economically developed countries such as Canada and the UK. Keep in mind that Canada and the UK are single payer systems that have monopsony power because they are the only buyer of a product in that market, as opposed to monopoly power where this is a dominant seller.
A pharmaceutical company selling in a market with one buyer will make the choice to accept a lower than market value price rather than not sell any drugs. Also, those single payer countries have limited lists of approved drugs that often do not include newer drugs or more innovative treatments. The list of approved drugs also known as formularies, are set by the government run health care system.
Thus, the international pricing index reflects government policy rather than free market principles. The benefits of the free market in health care are important, including medical innovation and treatment options. Switching to international pricing will affect the availability of drugs and limit patient choice. The pharmaceutical companies have until August 24, 2020 to propose an alternative to the IPI. Any alternative pricing model needs to incorporate the free market benefits of innovation and patient choice.