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Making the Price Right: Ideas To Change Drug Costs Gain Momentum

Xconomy National — 

If the U.S. presidential primaries continue their current trajectories, the two contenders come autumn will have at least one thing in common: a stated desire to do something about high drug prices. Maybe you believe them, and maybe you think they’re blowing smoke up our nether regions. But momentum is momentum. With consumers, doctors, and politicians riled up and many people in industry nodding in agreement, the status quo of drug prices does not seem sustainable.

The way it generally works now: Drug companies set list prices but negotiate the prices downward, in secret, with a scrum of insurance companies and their middlemen (but not, importantly, with Medicare). Drug makers offer a variety of reasons for starting the bidding high. For example, R&D is expensive, especially with all the costly, failed programs that never come to market; some drugs, like the new wave of hepatitis C drugs, may save society from paying for future health crises by curing or preventing previously chronic diseases; others offer treatment options for patients who previously had none. Sometimes, though, companies don’t reveal the rationale behind the prices they charge.

None of this would be a national debate if the products in question were handbags or airline tickets. But drugs are critical to those who need them, and they generally don’t have a lot of competition. Even when competition finally arrives, as the Washington Post noted in an article on the pricing history of the leukemia drug imatinib (Gleevec), companies can sometimes shrug off price pressure.

Some drug industry representatives feel unfairly singled out by the attention, pointing out that other healthcare sectors are bringing financial pain, too. True enough: A Kaiser Family Foundation/New York Times poll last fall asked Americans who have had trouble paying medical bills about the sources of those problems. About two thirds named doctor visits, diagnostic tests, and lab fees, while just over half said prescription drugs. When asked what represented the largest share of their bills, drugs were much farther down the list.

The federal Centers for Medicare and Medicaid Services (CMS) say U.S. spending on prescription drugs in 2014 was $305 billion. Hospital costs were $978 billion, and spending in clinics and doctor offices was $615 billion. In coming years, drugs are projected to take up a bit more than 10 percent of U.S. healthcare budgets. But whether that’s too much, not as much as you’ve been led to believe, or somewhere in between, it seems changes in drug pricing and spending are inevitable. Ideas are coming from all angles these days. Which are actually possible, and which are just plain pie in the sky?

Since Hillary Clinton (no surprise) and Donald Trump (surprise!) have both said Medicare should be able to negotiate drug prices directly with drug companies, let’s start there. (For a refresher on the implications of that negotiating power, and why Medicare doesn’t have it, read this.)

It will take a Congressional vote to make it so. That seems to put the onus on Republicans, who likely would look askance at a Clinton administration push. If they still control both houses, that is; this topsy turvy political season isn’t over yet. (And believe it or not, there have been moments of recent bipartisan comity over Medicare.)

But insiders say 2017 could bring, well, anything.

“People of all political stripes are thinking of ideas,” says Michael Werner, an attorney at DC firm Holland & Knight and cofounder of the Alliance for Regenerative Medicine, the lobbying arm for part of the biotech industry. “The issue is really now in play, not just among critics of the industry but all the stakeholders.”

Adding to the hurlyburly is the CMS proposal to make changes to a different part of Medicare’s drug purchases. The so-called Part B program, which governs drugs administered in hospitals and clinics including many cancer and autoimmune treatments (as opposed to Part D’s retail prescription drugs), pays doctors the average sales price plus six percent of the drugs they administer. The six percent, say critics, encourages doctors to choose higher priced products and provides incentive for drug makers to start with higher prices. “The costlier the drug, the more the physician makes. It’s crazy,” says David Howard, an associate professor of health policy and management at Emory University in Atlanta. “I do think it encourages companies to set higher prices. It’s not the only factor, but on balance it pushes prices up.”

CMS wants to cut the add-on fee to 2.5 percent plus an extra $16.80 per day of treatment. Its proposal is for a five-year pilot program to test the new scheme against the current scheme, looking at its effect on prescription patterns, health outcomes, and spending. The pilot could also include several other strategies that the private insurance sector is already experimenting with, including pay for performance—which we’ll describe in a moment.

The Part B pilot wouldn’t kick in until after a two-month public comment period ends in May, and forces on either side are lining up.

Meanwhile, several groups have begun their own assessments of the actual value drugs bring to society, with the idea that such calculations could eventually form the basis of a more rational pricing system. The Boston-based nonprofit Institute for Clinical and Economic Review, or ICER, has weighed in with complex analyses of the … Next Page »

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