OPINION:
Prescription drug prices are rocketing into the stratosphere, and Democrats in Congress have a sensible plan to bring those back down to earth.
Currently, pharmaceutical companies can set whatever price they like for new drugs, because Medicare is not permitted to negotiate or set reimbursements. Those prices establish the benchmark for what insurance companies and benefit managers may obtain for the rest of the market.
As with some many areas where Washington tries to promote better access for essential goods and services, Medicare,, Medicaid and the Affordable Care Act have encouraged gaming and abuse.
Local cartels are common among hospitals, insurers and physician-specialist groups and pharmaceutical companies block competing new drugs and rig prices for generics. Too often prices for services and treatments are opaque and vary arbitrarily among purchasers. Filling prescriptions can require hours of hassle for patients and physicians with insurers and benefits managers.
It’s anything but a free, competitive market that conservatives prefer to ensure efficiency and the best possible prices for consumers.
A comprehensive House Ways and Means Committee study found U.S. consumers pay about 4 times more than those in other advanced in industrialized countries — and in some cases 10 times more. The problem is getting worse — prescription drug prices have risen twice the rate of inflation over the last 12 years.
Overall, Americans pay 75 percent more for health care through taxes, premiums and out of pocket expenses than do Europeans, Canadians and Japanese. The key difference is that foreign governments recognize that health care services and drugs are too essential for purchasers to bargain, a truly competitive market is not possible, price gouging is inevitable and the only logical solution is to regulate prices.
Pharmaceutical companies constantly remind us that high prices are necessary to generate profits that support research to develop new drugs. However, only about 17 percent of their revenue is devoted to those activities, and they spend vastly larger sums on media ads and schmoozing with doctors to promote often unnecessary use of drugs — for example, the near epidemic use of antidepressants by college students.
Although the United States accounts for only about one-third of the GDP of advanced industrialized economies, Americans contribute 70 percent of drug company profits. Effectively, Americans are subsidizing low prices abroad and paying an undue share of the burden for developing new treatments.
The Democratic bill emerging in the House, would compel drug companies to negotiate prices with the Secretary of Health and Human Services (HHS) that are no more than 1.2 times the average price in Australia, Canada, France, Germany, Japan and the United Kingdom for 250 patented drugs that do not face competition from generics. Those account for about 96 percent of Medicare Part D spending — that covers drugs patients obtained through retail stores and benefits managers by mail — and 45 percent of Part B spending — those treatments administered directly by physicians.
In negotiating those prices, HHS would be required to consider R&D budgets as well as the actual cost of manufacturing and distributing drugs, alternative treatments and the additional benefits created by new drugs over those already in use, and the relative importance of prospective U.S. and foreign sales.
The Germans have a similar system. New drugs are benchmarked against existing treatments and the value-added is estimated. If government officials and pharmaceutical companies cannot agree on a price, the matter is referred to an arbitration panel. If the drug company refuses to accept panel findings, the drug may not be sold in Germany — a powerful deterrent because it is the largest and richest market in Europe.
The Republican bill emerging in the Senate would limit price increases to the rate of inflation but not regulate the price of new drugs. Consequently, it would encourage drug companies to introduce new medicines at even higher prices than currently, in anticipation of limits on future price increases.
If Republican lawmakers are serious about bringing sanity to drug prices, they should instead work with Democrats to refine the House bill.
As foreign regulatory regimes are supposed to provide adequate margins for research and development, drug companies will have an incentive to negotiate harder and obtain higher prices with other major purchasers like Germany and Japan.
Drug prices and insurance costs would fall dramatically here but likely rise somewhat abroad. Unlike with defense, the Democrats’ plan would force free riders among our allies to better pay their fair share.
• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.
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