Healthcare Economist on President Trump’s plan to lower Medicare drug prices

A recent report from Assistant Secretary for Planning and Evaluation (ASPE) found that for about 30 physician administered drugs, prices are 8 times as high as those charged in other developed countries.

To address the high prices, President Trump unveiled a three-part plan to reduce drug prices.  Under the “international pricing index” proposal, U.S. drug prices would be benchmarked against 16 other nations: Austria, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Ireland, Italy, Japan, Portugal, Slovakia, Spain, Sweden and the United Kingdom. Drug prices in these countries are lower so it is likely that prices would fall. Trump also proposes allowing private sector plans physicians and hospitals to negotiate directly with life sciences firms. Finally, Trump proposes offering physicians flat rate for each prescription rather than tie physician fees for drug administration to a share of the sales price.

These initiatives, if implemented, are likely to save cost, but may have an adverse effect on patient health.  Tying prices to other countries will drive down costs if other countries maintain their price. If this is the case, however, overall revenue given to innovators will fall. Previous academic research (Acemoglu and Lin, 2004; Finkelstein, 2004; Blume-Kohout and Sood, 2013) has shown that reduced market size leads to less R&D and less downstream innovation.  Research by my colleagues at Precision Health Economics (PHE) has shown that cancer mortality reductions were highest in countries that spent the most on cancer care (Stevens et al. 2015)

The impact of allowing price negotiation of Part B drug is unclear. Like the international price index case, if negotiations just lead to lower prices, innovation and long-run patient health could suffer.   It negotiations are based on treatment value, however, then high-value treatments could get higher reimbursement whereas low-value treatments would get lower reimbursement.  New programs such as the Innovation and Value Initiative use advanced economic modelling as well as feedback from patients to better measure treatment benefits, risks, costs and overall value. Value and cost are not the same thing. My own research (Lakdawalla et al. 2015) showed that even though the price of colorectal cancer and multiple myeloma treatment rose in recent years, the value that patients receive has remained flat or in improved.

The Trump proposition to impose flat rate reimbursement for physicians makes sense in theory, but could negatively affect patient access. Flat rate payment means that physicians will no longer be financially rewarded for prescribing more expensive medicines.  At the time, however, some physician-administered medications may cost tens or even hundreds of thousands of dollars over the course of a year.  Flat physician payments do not take into account the cost of capital needed to hold these treatments in inventory over an extended period of time.  Thus, physicians may begin refusing to stock high-value, but expensive treatments if the administration costs more than this new flat rate reimbursement level.

Overall, the President’s plan may success in reducing price in the short-run.  However, one must worry that long-run health of the nation may suffer to (i) decreased R&D and subsequent innovation, as well as (ii) decreased patient access to physician-administered drugs.

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