Should Medicare negotiate drug prices? Probably not

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A popular idea, but not a good one

It’s nice that the vast majority of Democrats (93%) and Republicans (74%) have found something to agree upon. Too bad it’s the overrated idea of having Medicare negotiate drug prices.

Prescription drug costs are rising again after years of flat or modest growth. New, expensive products are hitting the market while drug makers have also found ways to boost the prices of older products, even generics. There’s been a lot of ink (and electrons) spilled by people complaining about “the $1000 pill” and other outrages, like bad boy drug exec and price gouger Martin Shkreli. On the other hand, many Hepatitis C patients have been cured and the need for liver transplants and cancer treatment averted. That should be worth something.

Why do people think Medicare would be such a good negotiator? Private sector Part D drug plans already do a good job of price negotiation. Executives’ bonuses and stock options depend on getting good deals from the drug makers. Meanwhile, if Medicare tried to negotiate it would have to be willing to say “no” to certain drugs and to impose restrictions such as prior authorization and high co-pays. No doubt many in the vast majorities cited above would be quick to complain about those tactics, making it hard for Medicare to be the bad guy.

It’s a whole different ballgame if we’re talking about Medicare simply dictating the price it will pay or requiring rebates as Medicaid does. But that’s not negotiation.

In fact Medicare should do something about drug spending. Something more innovative than squeezing unit price. Medicare should develop and test full-fledged value-based medication reimbursement programs that reward manufacturers financially if their drugs work well and lower overall medical costs (not just drug costs). Only Medicare is big enough to get the attention of all the drug makers.

Medicare has done a good job testing out new payment models with providers (think Accountable Care Organizations and bundled payments), which set precedents that private payers can follow and improve upon. It should take the same approach with drugs –setting up innovative programs that can be tested and then implemented widely.

I want drug companies to have the potential to make a lot of money when they cure patients, improve quality of life, or lower medical costs. That’s good for patients, families, investors, private payers and the public purse. Outcomes based payment approaches led by Medicare could get us there. Medicare price negotiation or price regulation just won’t do the trick.

Image courtesy of Master isolated images at FreeDigitalPhotos.net

By healthcare business consultant David E. Williams, president of Health Business Group.

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