The problem with drug price controls

One of President Donald Trump’s biggest campaign promises in 2016 was a desire to see drug prices go down. Trump has kept the rhetoric going with a comment on Twitter in 2017 blasting drug prices and an announcement last year he planned to create a new framework of price controls.

“It also gives Medicare Part D plans new tools to negotiate lower prices for more drugs, and make sure that Medicare Part D incentives encourage drug companies to keep prices low,” the President crowed during a news conference at Health and Human Services last year announcing the plan. “There’s a big incentive to do that. We are not going to reward companies that constantly raise prices, which, in the past, has been most companies…Our plan will end the dishonest double-dealing that allows the middleman to pocket rebates and discounts that should be passed on to consumers and patients.”

HHS further framed the issue as America versus drug companies versus foreign governments.

“U.S. consumers and taxpayers generally pay more for brand drugs than do consumers and taxpayers in other OECD countries, which often have reimbursements set by their central government,” The administration wrote in their American Patients First plan while suggesting the burden of new drug development incentives needed to be spread equally between the U.S. and other nations. “In effect, other countries are not paying an appropriate share of the necessary research and development to bring innovative drugs to the market and are instead freeriding of U.S. consumers and taxpayers.”

Their ‘solution’ is to create an international price index looking at what other countries are charging for drugs and attempting to negotiate with pharmaceuticals on how to rein in the price.

HHS summarized the idea as Medicare setting drug prices based on whatever discounts American pharmaceutical companies give nations like France, Canada, or Germany. “With the model fully implemented, total payment for these drugs will drop by 30 percent,” HHS wrote last October noting there would be extra taxes involved in it. “The Target Price is 126 percent of the average price other countries pay for the drug. The model incorporates a new, larger add-on fee for hospitals and doctors that is independent of prices.”

Yay. New taxes.

The obvious problem is the fact doctors and hospitals will simply raise prices to make up the difference in lost money. It’s the easiest way to pass prices along to consumers.

Democrats, not to be outdone, have their own ideas on how to enact price controls. New Jersey Congressman Frank Pallone Jr. introduced the Lower Drug Costs Now Act of 2019 which puts Great Britain, France, Australia, Germany, Canada, and Japan on the price index list. Prices could be renegotiated each year:

In negotiating the maximum fair price of a selected drug, with respect to an initial price applicability year for the selected drug, and, as applicable, in renegotiating the maximum fair price for such drug, with respect to a subsequent year during the price applicability period for such drug, in the case that the manufacturer of the selected drug offers under the negotiation or renegotiation, as applicable, a price for such drug that is not more than the target price described in subparagraph (B) for such drug for the respective year, the Secretary shall agree under such negotiation or renegotiation, respectively, to such offered price as the maximum fair price.

There are plenty of problems with both proposals, especially with how they affect not only the public market but the private market.

“Both proposals give the government unprecedented price-setting authority in both the public and private markets,” FreedomWorks Regulatory Policy Manager Daniel Savickas to me in an email last week. “It threatens the ability for drug manufacturers to develop new drugs and market them in a timely manner, and we risk drug shortages beyond those already seen across the globe. These proposals are also tacit concessions that socialist economies have preferable drug pricing models, which (if that premise is accepted) puts our nation on the glide path to single-payer healthcare.”

The U.S. does have a drug price index as part of Medicare Part B. Americans for Tax Reform founder Grover Norquist noted in The Hill last December the U.S. bases its prices for certain drugs on the average sales cost for Americans. Why foreign countries need to be brought into the mix is anyone’s guess.

Of course, all this does is facilitate the fallacy that drug prices are high in general. The reality is a little bit different.

“I think drugs are actually, compared to the alternatives which might be medical surgery or not having the drug at all, drugs are pretty cheap,” economist Stephen Moore told me at a policy lunch put on by FreedomWorks in Washington D.C. on September 18th. “Especially the ones that, you know, are highly effective at relieving pain or suffering or even saving lives…[T]he truth is drugs have been relatively stable in price and the fact is that most people who have these diseases and other ailments are very lucky and happy to have them.”

It should be pointed out drug companies do what they can to lower prices for consumers. There are coupons available for people to buy prescriptions drugs if their insurance premium is too high or they don’t have insurance. It’s good PR but is also dispells the notion drugs are extremely expensive.

However, the same cannot be said for those who are on Medicare. One doctor I talked to said pharmaceutical companies are not allowed to offer the big discounts to people on Medicare Part D. This is a problem and one which could be easily solved instead of some sort of international price index. Of course, it’s easier to expand government involvement in things than decrease it.

There’s more to the drug price issue than Medicare Part D, coupons, and a potential drug price index. We’ll look at how long it takes for drugs to come on the market and (potentially) what drug companies have to say about the proposals, soon.

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