Politically, this is a popular move.according to poll, Americans across the political spectrum support the government plan that Democrats have proposed in various forms for more than two decades.Congressional Budget Office To tell The program, made possible by last year’s Inflation Control Act, will save taxpayers $98 billion over the next 10 years.
Pharmaceutical companies are less enthusiastic, and if they choose not to participate in negotiations with Medicare, they face very steep fines or lose a huge customer base. (Medicare is the second-largest purchaser of pharmaceuticals after private health insurance, accounting for 30% of sales.) It is argued that this will lead to a reduction in pharmaceutical supplies. Six of those companies have already filed lawsuits seeking to block the plan.
Given that most Americans have at best a cursory view of how drug pricing actually works, this argument is easy to caricature. On the other hand, there is also corporate greed. On the other hand, government overreach.
However, according to Kellogg Company, amanda starkthis story is too simplistic and even potentially harmful because it ignores the fundamental trade-offs at the heart of the pharmaceutical industry.
“High prices are not necessarily a product of corporate greed,” says Stark, an associate professor of strategy. “They result from a lot of complex dynamics in the market, and some of the more advanced drugs are expensive for a reason.”
While it may sound great in the short term, Biden’s plan does not address these complex dynamics. Nor does it really acknowledge the long-term costs of determining prices.
“The goal should be to increase value, not just reduce price,” Stark says.
And while governments have a role to play, Stark said a better long-term strategy is to encourage competition and transparency in the market rather than giving more power to drug companies to get the prices governments want. Recommends policies.
“There’s always a trade-off,” Stark said. “With the current plan, consumers will probably be better off in the short term, but worse off in the long term. That may be a tradeoff that the government is willing to accept, but pretend that that tradeoff doesn’t exist.” That’s a little disingenuous.”
Why are drug prices so confusing?
To better understand the nature of this trade-off, it is helpful to understand how current drug pricing works. (Brace yourself: it’s complicated.)
In most markets, “price plays a key role,” Stark says. “They reflect the cost of production, what customers are willing to pay, and they show investors where their money should be spent.”
But in the pharmaceutical market, the signals sent by prices are confusing, to say the least.
First, this market is unique in that most drug buyers are insured customers. This weakens the classic relationship between supply and demand, as customers are much less price sensitive when some of the funds do not come directly from their pockets.
It’s even vague what “price” means. When an insured person buys a drug from Walgreens or his CVS, the out-of-pocket price (determined by the insurance plan) is significantly less than the “net price” (the price paid by the insurance company or Medicare) This often happens. access to medicines), which is often itself reduced from the “list price” chosen by the drug manufacturer. (List prices are similar to sticker prices at car dealers; they exist as a reference, but few people pay them.)
That’s not all. Different insurance companies can also vary widely in the prices paid for the same drug. The “net price” is negotiated by the pharmacy benefits manager. This manager essentially acts as a matchmaker, offering plan providers discounts (or “rebates”) from manufacturers in exchange for being top of the list of drugs covered by the insurance company. . Boost sales.
Also confusing is the fact that even though Medicare is a federal agency, since 2003 it has relied on private insurance companies like Aetna and Humana to negotiate with drug companies on its behalf. That same year, President Bush signed Medicare Part D, which allowed for: Medicare covers prescription drugs for the first time. However, the law includes a “non-interference” clause that prohibits authorities from directly negotiating the prices of these drugs, which drug companies successfully lobbied for.
A new approach to drug pricing
Approximately 50 million Americans currently obtain their prescription drugs through Medicare Part D. And in the 20 years since this program began, drugs have become more sophisticated and more expensive. That’s why the government is putting pressure on pharmaceutical companies to lower the prices of popular drugs.
However, lower prices inevitably lead to lower profits for drug manufacturers. In fact, the CBO estimates that this policy will reduce industry revenues by 7%. This is a problem if it means the industry will attract fewer investors and probably make less progress.
“We don’t want pharmaceuticals to simply raise prices without providing any benefit. But we also don’t want companies to invest heavily in research and clinical trials to ensure that drugs are already manufactured and He wants to incentivize people to improve their medicines, and he also wants venture capital firms to fund biotech startups. Otherwise, cancer drugs could be replaced by apps and scooters. It will increase.”
For this reason, Starc emphasizes the need for greater transparency in how prices are negotiated by different parties so that prices can actually serve as meaningful value signals, rather than simply mandating lower prices. I am.
“We need to lift the veil on some of these secret negotiations so consumers can better understand what they’re getting,” Stark said. “This means sunlight is probably the best disinfectant.”
A “healthier” pharmaceutical market
More transparency is just one of the reforms Starc calls for with new paper (with colleagues at Kellogg) craig garthwaite) Provides policy proposals to improve the pharmaceutical market, especially to stop forces that drive up prices without adding any value to customers or society.
Starc also hopes to see more competition in the industry. Three pharmaceutical wholesalers account for 90% of all prescription drug purchases: McKesson, Amerisource Bergen, and Cardinal. The same goes for the pharmacy market, with CVS Health, Walgreens, Cigna, UnitedHealth, and Walmart accounting for 64% of sales. There are very few independent companies left with market power.
And then there’s the shadow world of pharmacy benefit representatives, the intermediaries who negotiate “kickbacks” from WACs, or wholesale purchase costs. Its position on the value chain is Please come for inspection. Here again, we see a trend towards more centralization. The three largest PBMs, Caremark, Express Scripts, and OptumRx, account for 80% of the market share and are owned by large insurance companies (CVS, Cigna, and UnitedHealth, respectively). Although PBM has existed since his 1960s, vertical integration It’s relatively new.
For Stark and Garthwaite, smart policy would encourage stronger competition between companies at every stage of the value chain. One solution may be to encourage the implementation of priority pharmacy networks. In other words, PBMs could be encouraged to play the same role lower down the value chain by negotiating with pharmacies in the same way they negotiate with manufacturers. “They might say, ‘If you give us a competitive price, we’ll send all of our customers to Walgreens.'”
Another would be to expand the overall size of the drug market by allowing more drugs to be imported and increasing spending on regulators such as the FDA to ensure drug quality.
When it comes to pharmaceuticals, we have asked the FDA to introduce “bioequivalent” generic drugs (drugs that are chemically identical to their branded predecessors) to make it easier for more companies to enter this important market. It recommends speeding up the approval process. Lack of competition in small market generic drugs Martin Shkreli’s famous price gouging episode. High prices for generic drugs without competition may reflect market failure.
She explains that reforms that promote competition and reforms that increase transparency feed into each other.
“The more competitive the market, the more these price signals are generated,” Stark says. “And greater transparency around pricing and discount agreements could increase competition among pharmacy benefit managers.
