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Trump Lays Out Ambitious Medicare Drug Price Control Proposal

Trump Lays Out Ambitious Medicare Drug Price Control Proposal

On the campaign trail in 2016, Donald Trump promised action on drug prices. Since his election as President, his proposals have largely tinkered on the fringes. But his latest proposal is indeed radical.

Recently, the Trump administration unveiled a Medicare proposal to substantially reduce what the government will spend on costly Part B drugs in the Medicare fee for service (FFS) program. In the Part B world today, providers purchase the drugs that they administer to patients and receive payment from Medicare FFS for the drug based on the average sales price (ASP) plus 6 percent. This compensates providers for purchasing and administering the drug. This is known as “buy and bill.”

The new model would rely on four primary changes:

  • Create private-sector pharmaceutical vendors for the current “buy and bill” system. Private vendors would procure drugs, distribute them to physicians and hospitals, and take on the responsibility of billing Medicare FFS.
  • Change the ASP reimbursement system to a flat fee for the drug itself.
  • The providers would be paid a flat payment for administration (storing, handling and administering the drug).
  • Lower costs by implementing international reference pricing. While the private vendors would negotiate price concessions, prices paid by the government over time would be based on the average prices for these drugs in developed countries abroad.

The change from the current system would be phased in over a five-year period, would apply to 50 percent of the country (randomly picked), and would cover most drugs in Part B. Patients would be projected to save $17.2 billion over five years. CMS is considering issuing a proposed rule in the spring of 2019, with a potential program start in spring 2020. The big questions are:  (1) Would the administration take this to Part D drugs in the future?; (2) How would Medicare Advantage be impacted?; and (3) What about a national drug policy across all lines of business?

We agree with the administration that the current “cost-plus” system effectively encourages the prescribing of the most expensive drugs. The proposal, though, is a bit of market-based competition with price controls. Exactly how effective these middle entities would be and how long it would take to set this up are open questions. A similar proposal died a few years back. As well, would drugmakers accede to these concessions? After all, Medicare fee-for-service does not ration care and has not traditionally locked certain drugs out as foreign country systems are able to do.

The executives at the various pharmaceutical companies were floored and drowning their sorrows in the days after the announcement. After all, PhRMA, the high-flying and powerful industry trade group, has lost a great deal of its clout over the past few years. It no longer can stop detrimental changes with a wink and a nod.

PhRMA’s objections to this latest proposal are part selfishness but also part policy. Drug innovation in the world today is predicated on a few known facts:

  • Other developed nations largely price control and the United States, with limited exceptions in a few programs, does not do so.
  • The United States is the biggest developed-world consumer of pharmaceuticals.
  • Given the two points above, it bears the brunt of drug innovation.

Thus, the entire paradigm for drugmakers could be upended, with vast implications on finances (e.g., company profits) and policy (e.g., will innovation dry up?).

Akin to his arguments on trade and tariffs, the President believes that the other countries should pay their fair share of innovation and that developed countries and drugmakers are ripping off Americans through high drug prices.

Trump is not entirely wrong. Europe, Canada and others tend to practice price control with rationing (if a given drug discount is not given). If true market forces existed in these countries, price might very well be lower in America. As it is, manufacturers make up the loss in other countries by having artificially high prices here. In the case of Part B drugs, drugmakers offer huge concessions abroad, but take advantage of the ASP plus model here by jacking up prices to make up for it. The same occurs for retail drugs.

At the same time, at least some of the disparity in drug prices can be attributed to the fact that these largely government-controlled systems make hard choices as noted above that we don’t make here. They do cut off access to certain drugs if not cost or clinically effective. Some attribute the American difference to morality, while others to a lack of fortitude.

Regardless, we know that any kind of proposal that impacts market pricing here in the United States will have some impact on innovation. Medicare is the “make or break” line of business for drugmakers in general. This especially applies to a subset of companies that have a disproportionate share of its revenue and margin coming from drugs used by older Americans. What comes of innovation if drug manufacturers can no longer make the profits they are making?  Will they continue taking risks in the development realm? Many argue that drugmakers have abandoned the true risk-taking of old, but the question remains will the next blockbuster drug now never be found?

Whatever your views of Trump or his latest proposal, a few things are clear:

  • He seems serious about change and this is by far the most radical of approaches so far.
  • He seems destined to keep pushing, which in and of itself is not a bad thing. There is hope that a rational system could emerge from the drug-price chaos we have today.
  • Trump is not afraid to be labelled a heretic. You have to go back to Nixonian wage and price controls and the abandonment of the gold standard (poor Bretton Woods!) for such an unorthodox proposal from someone in the Grand Old Party.

Marc Ryan

Marc S. Ryan serves as MedHOK’s Chief Strategy and Compliance Officer. During his career, Marc has served a number of health plans in executive-level regulatory, compliance, business development, and operations roles. He has launched and operated plans with Medicare, Medicaid, Commercial and Exchange lines of business. Marc was the Secretary of Policy and Management and State Budget Director of Connecticut, where he oversaw all aspects of state budgeting and management. In this role, Marc created the state’s Medicaid and SCHIP managed care programs and oversaw its state employee and retiree health plans. He also created the state’s long-term care continuum program. Marc was nominated by then HHS Secretary Tommy Thompson to serve on a panel of state program experts to advise CMS on aspects of Medicare Part D implementation. He also was nominated by Florida’s Medicaid Secretary to serve on the state’s Medicaid Reform advisory panel.

Marc graduated cum laude from the Edmund A. Walsh School of Foreign Service at Georgetown University with a Bachelor of Science in Foreign Service. He received a Master of Public Administration, specializing in local government management and managed healthcare, from the University of New Haven. He was inducted into Sigma Beta Delta, a national honor society for business, management, and administration.

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