On a New Basis for Drug Pricing and Competition

Fulfilling his longstanding promise to lower drug prices, President Donald Trump laid out a vision for what he believes will create a new path to increase competition in the pharmaceutical industry, reduce regulations and change incentives for a component of healthcare he has accused of "getting away with murder."

During a speech Friday, the president promised his actions would reduce what consumers pay at the pharmacy and would end abuse in a system he believes is organized to reward high drug prices. He blasted everybody, though: drug makers, health insurers, pharmacy benefit managers and others for profiting off American patients. 

"We are going to take on the tangled web of special interests ... the drug lobby is making an absolute fortune at the expense of American patients," Trump said. His administration also released a 44-page blueprint of the plan, entitled American Patients First. Here's the link.

Some of the proposed changes: 

• More flexibility to improve pricing negotiations (the government currently can't negotiate prices for drugs that are part of Medicare's Part D program, which covers most prescription drugs.) 
• Giving free generics to seniors. (Notably, generics are for the most part already free -- more than a decade ago, Walmart cut prices of many generics to $4 for a 30-day supply. Here's the coverage from the Wall Street Journal at the time: Wal-Mart Cuts Prices for Many Generic Drugs to $4. It's also worth noting that 90 percent of drugs currently prescribed are generic.) 
• Mandating that plans pass along rebates to patients. 
• Creating an out-of-pocket maximum so that seniors aren't on the hook for high prices.

The Flaw in Market Logic

The flaw in logic is treating drug pricing as a closed system problem.

Echoing President Trump, Health and Human Services Secretary Alex Azar said: “As part of President Trump’s bold plan to put American patients first, HHS is focused on solving a number of the problems that plague drug markets, including … foreign governments free-riding off of American investment in innovation."

Healthcare is really just one 'nested market' -- it is best understood as a $3.3 trillion dollar economy comprised of an ever-expanding zoo of interacting market segments and micro-services and new technologies. There are islands of features everywhere, all in their own way contributing to cost, and all in their own way contributing to improving some dimension of our health experience.

Execution is shaped by a linear set of assumptions and decisions, all bounded in a narrow operational construct: their market segment.

Everything thinks and works in isolation.

Health System Design

We have effectively killed off the independent sphere.

The challenge for the next healthcare is pulling a ceaseless flow of pieces and parts and prices together in a way that a whole system is born and becomes focused on generative value. 

Said differently, the core problem to solve in healthcare is not isolating the drug industry as a stand-alone input, or putting in place new regulation to "increase competition" in an industry sector that is already intensely competitive and regulated, but instead designing a different framework and set of incentives to enable and align a system whose output is better health.

If the organizing idea is outcomes, then the pharmaceutical is just one input to a much broader value strategy, one whose output is a new form of health engagement. The shift in market vision is from downward pricing pressure on product, to upward pricing possibility for system.

Outcomes-based competition is a strategic transformation. It is not a rigid creed. Rather, it is a spectrum of attitudes, techniques, and tools that promote collaboration, sharing, coordination and unique aggregations. This is a new frontier for design, and a particularly fertile space for innovation.

The change in competition should be in how we think about it.

/ jgs