The Trump administration is pursuing a plan to control prescription drug prices under Medicare via what can only be called price controls.
In October, the Centers for Medicare and Medicaid Services (CMS) unveiled a plan for an “international pricing index” that would determine how much Medicare pays out for certain prescription drugs.
According to CMS, “CMS is considering testing an alternative payment for included drugs that would apply when [the average sale price] ASP is higher than an international price. Instead of paying based on ASP, CMS would pay for the drug based on a Target Price derived from international price index and designed to draw down Part B drug prices toward international prices over the course of the model.”
CMS estimates 30 percent savings “in total spending for the selected Part B drugs in the model.”
Unfortunately, setting prices based on the proposed international pricing index may have many unintended consequences.
While Medicare can certainly set the price it is going to pay for prescription drugs, CMS should consider that many of the western countries like the UK that will be included in the price index control drug prices via subsidies and similar price controls.
Imposing those same prices on drug producers in the U.S. will not reduce the cost of bringing these drugs to market. Instead, pharmaceutical companies will simply have to look for offsets elsewhere, increasing prices on other drugs to non-Medicare patients in order to meet their bottom lines. It’s a business, after all.
The only reason pharmaceutical companies produce live-saving drugs is because they are profitable. It’s the only way to sustain themselves. So, prices will have to go up elsewhere. That’s the way it works.
Then, when that pressure is felt elsewhere, it will then generate more pressure for further price controls by the federal government. Or, a natural reaction by the pharmaceuticals, if the price controls become onerous, then would be to lobby for more subsidies instead as an alternative to the price controls.
Either way, taxpayers pay more. Instead of reducing costs with bringing drugs to market, with some estimates as high as $2.7 billion to bring certain drugs to the market with all of the necessary approvals and regulatory requirements, the administration is unfortunately focused on controlling the end result. But this is an area that begs for deregulation.
Ultimately, if new drugs are not profitable to bring to market, in the extreme, then we won’t get new cures. That is stagnation. What you’ll wind up with is a market for existing drugs but not for new ones. Overseas, in Australia, certain drugs that are not approved for sale never get a chance.
Right now, the U.S. pays more for prescription drugs that fuels this necessary research into new, better drugs. Instead rushing to meet the rest of the world on the plateau of stagnation via their price controls, we should be considering making deals that would up other countries’ payments to fund innovation. This is something that could be negotiated.
With some of the most important cures yet to be developed, is now really the time to make new research costlier?
The Trump administration needs to slow this proposal down — and fully consider the likely market consequences of prescription drug price controls, especially to non-Medicare patients who will wind up paying — before it slows down innovation.
Robert Romano is the Vice President of Public Policy at Americans for Limited Government.
