How to “Lower Drug Prices” Without Lowering Drug Prices

Yesterday, Alex Azar was sworn in as the Secretary for the Department of Health and Human Services. A key question is whether Azar will take action against high drug prices, and if so, what he will do. At his confirmation hearing, Azar stated clearly that “drug prices are too high.” And during Azar’s swearing-in ceremony, the President stated that Azar was “going to get those prescription drug prices way down.” But I’m skeptical that Secretary Azar will do much to address the problem in the near term.

To be clear, I’m skeptical for a host of reasons, none of which are necessarily reflective of Secretary Azar. Much like health care, drug pricing is complicated. HHS should (and will) worry about potential unintended consequences of drug pricing proposals, proceeding cautiously and taking concerns seriously. HHS’ ability to act may be limited without Congressional involvement, and Congress has thus far been unable to act on this issue. Other proposals may take years to develop or implement, leaving patients without relief in the interim.

As a former President of Eli Lilly, Secretary Azar understands the drug pricing system deeply. He’s absolutely right that “there’s not one action that all of a sudden fixes this.” But if Azar is under pressure to deliver drug pricing changes in the short term, I’d expect to see focus in three main areas. Here’s the problem, though: at least two of these would not necessarily lower drug prices individually or drug spending overall. They might well increase overall spending. Importantly, that may not be a bad thing (as I’ll explain). But they won’t hurt the bottom line of the drug companies the President believes are “getting away with murder,” and they may well bolster it. The third area may lower prices – but it wouldn’t be Azar’s accomplishment.

1. Reducing Patient Out-of-Pocket Costs.

Today, Medicare Part D patients’ out-of-pocket costs at the pharmacy may be based on the list prices of the drugs they take, even if their plan sponsor has negotiated a lower, rebated price. CMS has released a proposed rule under which sponsors would pass through some of those rebates to Part D beneficiaries. This rule would indeed lower the large out-of-pocket costs faced by many Part D beneficiaries at the point of sale.

But according to CMS’ projections, the rule would also increase premiums for all Part D beneficiaries, and would likewise increase overall government costs (see pages 327-28 of the proposed rule). These projections are not shared by all – PhRMA has offered a different view, in which CMS would achieve overall savings. But Secretary Azar may reasonably choose to alleviate the significant financial burdens faced by a portion of Part D beneficiaries, even if it increases overall spending by a smaller amount. Perhaps unsurprisingly, PhRMA has praised this proposal, and the trade association representing PBMs has argued that pharmaceutical companies would be a principal beneficiary.

2. “Value-Based” Payment Models. One of the policy proposals discussed by the working group compiling the President’s mythical drug pricing executive order is the promotion of value-based pricing models. In my research, I have referred to these as “innovative contracting” arrangements, as they are not necessarily tied to the clinical and economic benefits provided by a particular drug. But the idea is a common-sense one. If a drug doesn’t work for a particular patient, why shouldn’t the insurer (or even the patient) get a refund? If a drug can be prescribed for more than one disease, why not enable it to be priced differently for each indication? If Medicare and Medicaid are serious about moving away from volume-based payment models, maybe CMS should embrace outcomes-based pricing or indication-based pricing.

Great. Except here’s the thing: it’s more likely that these payment models will increase overall spending, rather than decrease it. As economists Amitabh Chandra and Craig Garthwaite have put it recently, “simple economics makes it clear that relative to uniform pricing, indication-based pricing results in higher prices for patients who benefit the most, higher utilization by patients who benefit least, higher overall spending, and higher manufacturer profits.” And this may or may not be a salutary development. Price discrimination can have positive effects for both patient access and pharmaceutical revenues. But again, it does not advance the goal of lowering drug spending.

3. The Magic of Competition. During his confirmation hearings, Secretary Azar extolled the virtues of promoting competition in the pharmaceutical industry. It may well take years to create and implement some of Azar’s suggestions, such as price negotiations in Medicare Part B. But Azar may find it easier to achieve another one of his goals – promoting generic drug competition – more quickly.

Why? Well, because FDA Commissioner Scott Gottlieb has been working on this since May 2017. Under Commissioner Gottlieb, in 2017 the FDA 1) almost eliminated the generic-drug approval backlog, 2) approved a record number of generic drug applications, and 3) began to publish a list of approved drugs with no generic competition, stating publicly that applications for generic versions of such drugs will receive expedited review. Yet when the White House has been criticized for its total inaction on drug pricing, it has not pointed to Commissioner Gottlieb and praised his efforts to promote generic drug competition. (I do not understand why this is and would love to hear any theories people have.) Secretary Azar will not make that mistake.

Perhaps Secretary Azar will surprise me, and take more extreme actions than I expect. Perhaps only Azar could. And even if he does not, the above-listed actions may be highly valuable ones (as I’ve argued in prior work). But don’t confuse them for punitive actions against an industry that is “getting away with murder.” The President’s rhetoric on this issue has lost its effect.

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