Improving Drug Payment Policies

By March 24, 2017Commentary

Spending on prescription drugs and the unit price of those medications is high in the United States compared to other developed countries.  Pharmacy benefit managers and other entities claim to provide intensive cost management, but given the continued relatively high spending rates, their effectiveness can be questioned.  A report sponsored by the Pew Charitable Trusts suggests that looking at methods used in other countries may help the United States.   (Pew Report)   Six cost control methods are examined, including use of external benchmarking, which means looking at prices paid in other countries; internal benchmarking, which for drugs for which there are clinical equivalents, looks at the prices of those equivalents; value-based benchmarking, which ties price to outcomes; restrictions on off-label prescribing; payer-seller agreements, which reduce prices through various discounts, rebates, or volume caps; and coverage denial, in which a payer simply refuses to pay for a drug based on cost.  While all of these undoubtedly do help reduce prices and spending in other countries; all those countries have a national health insurance and/or national health system; therefore they have much stronger bargaining leverage than do the more fractured payers in the United States.

Political realities in the US also make it unlikely that some of these techniques could be used, particularly coverage denial.  We already primarily use payer-seller agreements, whether direct or indirect through PBMs and other intermediaries.  If there are clinical equivalents, the ability to use limited formularies does afford some bargaining power, although some regulators have constrained payers’ use of this power.  To the extent drugs are being paid for by large public payers such as Medicare or Medicaid, their natural bargaining power is also often limited by political lobbying.  When taxpayers are funding purchases, the most logical approach would be to demand full cost of goods from the manufacturers, including the clearly proven research and development costs related solely to each drug, and just put a margin on those costs, and a low margin at that.  The other suggestion we have made before is limiting the power given by patent rights, by reducing patent length proportionally to the ratio of price to cost and to the rate of unit price increases.  Manufacturers who want to charge high prices should face much more limited patent lives.  The Pew report is interesting, but not realistic in light of the current environment in the United States.

Kevin Roche

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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