The problem with asking the government to negotiate better prescription drug prices

Published on
April 6, 2017

Amid rising prescription drug prices and dramatic spikes for specific medications, legislators introduced a drug pricing bill last week that would allow Medicare to negotiate prescription drug prices.

“The skyrocketing cost of prescription drugs has devastating impacts for people from all walks of life, and it is a major reason health insurance costs are rising for seniors, families and businesses,” wrote Sen. Maggie Hassan-D-N.H., in the Concord Monitor.  

At first glance, the idea of negotiating for better prices appears a no-brainer. In fact, more than 80 percent of Americans agree that the government should negotiate Medicare prices, according to a recent Kaiser Family Foundation study.  

But the solution is not that simple, as University of Southern California professor Neeraj Sood argued at a panel discussion on the topic Monday. Sood, the director of research at the Leonard D. Schaeffer Center for Health Policy & Economics, offered an economist’s perspective on what promises to be an increasingly important debate.

While most economists offer a qualified “maybe” on whether the government should negotiate Medicare prices, his answer is a resounding “no.”  

For one, there’s already price negotiation in the United States through private insurance plans, Sood said. Most Medicare beneficiaries already get their prescription drug benefits through a private plan, with Medicare simply paying part of their premiums. These plans hire pharmacy benefits managers to negotiate prices on behalf of millions of Americans.  

And, if Medicare began to negotiate prices — a process that would likely exclude some companies’ drugs from Medicare plans — it could become political, with legislators lobbying for drugs that affect their jurisdictions.

As for the question of whether the government should directly setting drug prices by law, the answer is less obvious: “It depends,” Sood said, on the amount of the amount of research and development a company has invested in the drug, and the degree of access patients have to the drug.

Being mindful of the amount of R&D involved is important since “when you have price controls, you’re reducing the size of the award for innovation.”

A sign of too much R&D may be if multiple companies are duplicating research efforts in the race to the finish. In that case, they’re wasting their efforts and not advancing science. Similarly, gaming patents by changing a drug slightly does not add value. On the other hand, if a company feels its R&D efforts are spilling over and helping competitors too much, it might stop innovating.

For some drug classes, the prices need to be put in check, while, for others, price setting could be harmful to innovation. Perhaps what the United States needs is more evidence on whether there’s too much or too little innovation for particular classes of drugs, Sood said.  

On the other side of the market innovation argument, health care policy expert Dr. Peter Bach, the director of Memorial Sloan Kettering’s Center for Health Policy and Outcomes, has argued against the idea that competition will work in the pharmaceutical industry, something he refers to as a monopoly that exhibits irrational pricing.

“The notion that this is a normal market, where competition will work, is foolhardy,” he told Morning Consult last year. He added: “There’s so much empirical evidence that there’s nothing competitive going on here at all.”

In a Center for Health Journalism webinar, Bach dismissed the innovation argument by pointing to copycat generics, which are costly even though they require no innovation.

Finding the right price

Sood presented another key question when considering drug pricing: Is there a large fraction of the population who is eligible for treatment and for whom it’s cost effective but they’re still not receiving it? If the answer is yes, one could argue the price is too high, Sood said.

For example, consider drugs such as Sovaldi and Harvoni, the ground-breaking treatments for Hepatitis C in Medicaid and prison populations. Even though the drugs are extremely effective, the cost has prohibited extensive use among these groups.  

In this particular case, the government could license the patent on one of the treatments, allowing them to treat these populations for less overall cost. And, since there are multiple pharmaceutical companies competing in this area, it would benefit one to take the government’s money up front.

“In some sense, this kind of deal works because it reduces the government’s budget in the long run and expands access to the drug for patients with the most severe access problem,” Sood said, adding that “the best thing is that it doesn’t rely on politicians or the government dictating prices.”

Panelist David Lazarus, a business columnist for the Los Angeles Times, pointed to several examples of dramatic price hikes on life-saving drugs such as insulin, something he said shows how the market is rigged against consumers with “predatory pricing.”

“In this country, drugmakers charge whatever they can get away with, which perhaps would be tolerable if we had an efficient, transparent marketplace in which patients benefit from robust competition and an ability to shop around for the best price,” Lazarus recently wrote in his Times column. “But we don’t.”

In response to price spikes on particular drugs such as insulin, Sood pointed out that there are already laws in place to protect Americans from price gouging. Companies accused of illegally inflating prices can face lawsuits.  

“Those kinds of anecdotes detract from the big picture question,” Sood said, arguing for a balance between access to drugs and the need to incentivize companies to keep creating new drugs that can save lives.

“The cure for Hep C is phenomenal,” he said. “If you regulate prices too much, and we lose the opportunity for cures … there could be a huge loss to society.”

For additional reading on this topic, check out these articles:

  • The UK’s approach: This article takes an in-depth look at what lessons the United States can borrow from the U.K. Quartz reporter Oliver Staley writes: “If Trump truly wants to bend the arc of rising drug prices, he might want to look at how it’s done in the UK.”

  • Kaiser Family Foundation’s issue brief: “This issue brief provides a short history of the concept of allowing Medicare to negotiate drug prices, describes various approaches, and assessments of their potential savings from the Congressional Budget Office (CBO), and considers the prospects for action in the future.”

  • Novel Pricing Methods: The USC Leonard D. Schaeffer Center for Health Policy & Economics center also has an informative issues brief, exploring “novel pricing models that better align the cost of all drugs- not just cures- to the value they provide may be ways to ensure the risk is not too high or the reward too little for drug makers to pursue cures that generate tremendous social value.”

  • Europe’s reference pricing: This piece from 2015 clearly describes how Europe uses reference pricing for a category of drugs, which math economist Austin Frakt argues does not suppress innovation, but “encourages a different form of it.”