What the candidates don't get about drug pricing

If you are like me, you are watching with relish the presidential debates on both the Republican and Democratic side.  Sometimes, amid the reality show theatrics, they actually engage in substantive discussions about issues like Social Security, immigration policy, and energy policy.

But the relish sours when they start talking about pharmaceutical pricing.  As an example, Donald Trump says that he could save $300 billion annually-- quite an accomplishment since Medicare’s total Part B and Part D prescription drug spending is about $140 billion.  Hillary Clinton doesn’t choose a number, but she calls for Medicare to start negotiating drug prices as a way to stop “predatory pricing” by manufacturers. 

All this tough talk plays well on the campaign trail.  But how will it play out?  Under current law, Medicare doesn’t negotiate the prices for prescription drugs obtained through the massive Part D program.  Rather, Medicare lets private payers negotiate their own discounts, and the Part D program just pays all or part of the beneficiary's premiums.

So the question really is whether Medicare (or Donald Trump) could negotiate a better deal than these private plans, presumably by leveraging its size (40 million enrollees across the entire Medicare program).  But some of these private payers are also very large.  UnitedHealth Group’s Medicare plans have more than 8 million members—almost the size of Sweden.   In addition, when UnitedHealth negotiates, it does so on behalf of a large pool of privately insured--on the order of 34 million enrollees.  That means UnitedHealth enrollment is about the size of Medicare, and more than all the Scandinavian countries combined. 

So why can’t UnitedHealth negotiate prices as low as the Scandinavian countries?  The answer isn’t about leverage due to plan size.  Rather, UnitedHealth has to maintain coverage rules (formularies) that allow it to compete with other U.S. insurers to get enrollees, and Americans have consistently signaled that they want access to the most innovative therapies. The option for a U.S. payer to absolutely say “no” to a proven curative treatment really doesn’t exist, and-- as a deal-maker like Donald Trump knows -- that’s a weak bargaining position.

Thus, when the candidates say they will do something about drug prices, what they really mean is that they are going to restrict access to some treatments, either through closed formularies or high cost-sharing with patients.  There is no other way to lower prices.  And they should be honest with the American people about that.

They also need to be honest about what it means down the road.  Higher prices in the United States drive pharmaceutical innovation.  We know R&D spending is greater in battling diseases where there are large patient populations, widespread insurance coverage, patent exclusivity, and research subsidies.  Consider, by contrast, the plight of Africa, where malaria kills more than 400,000 children each year, and yet we have few if any active efforts to develop antimalarials.  It takes the beneficence of people like Bill and Melinda Gates to find treatments.

We see the evidence in the U.S. as well.  The Orphan Drug Act of 1983 offered market-based incentives to develop treatments for rare diseases—in effect, a 5-year monopoly.  The number of drugs took off.   More recently, Medicare Part D increased R&D subsidies for diseases that predominantly affect the elderly, a sign that public funding can work alongside industry in finding new treatments.  All else being equal, however, policy efforts to reduce prices will greatly reduce innovation.

Americans don’t want to be like Africa and rely on Bill Gates to fight the illnesses we care about: cancer, Alzheimer’s, high cholesterol, and even obesity are areas of active research.   Yes, the rest of the world will free ride on us, but we are used to that.  We do it in defense policy as well.

So when the candidates start targeting high drug prices, my suggestion is that someone ask them how they are going to ensure we develop treatments to fight Alzheimer’s disease, diabetes, and the like. It seems like a good Town Hall question.  And, if they say they will replace profit-driven pharmaceutical innovation with a larger National Institutes of Health, be skeptical—but that is a topic for another day.