The Evidence Base

Informing Policy in Health, Economics & Well-Being
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USC Dornsife Center for economic and social research

What the Candidates Don’t Get About Drug Prices

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-type theatrics, they actually substantive discussions about issues like Social Security, immigration policy, and climate change.

But the relish goes sour when they start talking about pharmaceutical pricing. As an example, Donald Trump says that by unleashing Medicare to negotiate drug prices, he could save $300 billion annually– quite an accomplishment since Medicare’s total Part B and Part D prescription drug spending in 2014 was $143 billion. Without saying how much might be saved, Hillary Clinton also calls for Medicare to start negotiating as a way to stop “predatory pricing” by manufacturers.

All this tough talk plays well on the campaign trail. But what is the reality?

Currently, Medicare lets private payers negotiate for drug discounts, and Medicare just pays its part of the cost.

The question is whether Medicare can do a better job negotiating than these plans, since it is such a huge purchaser of drugs. In fact, some of these private payers are 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 people. That means UnitedHealth enrollment is more than all the Scandinavian countries combined.

So why doesn’t UnitedHealth pay as little as the Scandinavian countries? The answer is that it has to keep its formularies robust to compete with other U.S. plans, since Americans have consistently signaled that they want access to innovative therapies. The option for a U.S. payer to say absolutely “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.

Such policies would not only affect current patients, but also future generations. Higher prices drive the world’s 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.

Prescription Prices Ver1” by Chris Potter is licensed under CC 2.0

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 should be used to that. The analogy with our military defense is not without merit.

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

This post was originally published on LinkedIn by Dana Goldman.