OPINION – Health economist Uwe Reinhardt once described the pricing in health care as "chaos behind a veil of secrecy". This description applies appropriately to the opaque US pharmaceutical market.
In order to create a health policy that works, we have to lift the secret veil about the prices of medicines. The recent proposal of the administration to fundamentally change the drug shortage process is a step in that direction.
Voters in 2018 said health care was their top priority, and the costs of prescriptions were the biggest concern. In spite of public perception, branded drugs did not exceed the charts last year. Instead, list prices rose by less than 6 percent, slowing growth the fourth year in a row. Why the mismatch between hard data and what voters believe? One reason for this could be the $ rebound system of $ 166 billion.
Patients usually have contact with two people to get their medications – their doctor and pharmacist. But the supply chain for drug distribution is more complex than that.
The first in the chain is the medicine manufacturer, who sets a list price – the figure that received the attention of the Congress. Next come the wholesalers, health insurers and pharmacy benefit managers. By the time a patient sees a final price tag, it has passed many hands.
The rebats game
When the competitive incentives of all these stakeholders in the supply chain collide, the outcome is not favorable for the patient or the taxpayer. This is particularly the case for the Part D program that provides coverage to more than 44 million Medicare beneficiaries for an annual cost of more than $ 100 billion, with an annual rate of nearly 18 percent.
Secretary of health care and human services Alex Azar has a plan to change that. He has outlined a proposed rule to review the discount system for Medicare Part D and Medicaid managed care organizations, with the aim of making the pricing system more transparent and reducing the patient's own costs.
When a seller issues a "discount", it returns a part of the purchase price to the buyer. Why would drug manufacturers do that? To begin with, they want a preferential placement on PBM forms, which can increase demand.
The incentive for the PPE is to get the largest discount on the catalog price – and to retain part of the discount for its services before the remainder is passed on to the health insurer.
The incentive for the health insurer is to apply all discounts to the price of the average plans, thereby stimulating the business community by shortening the general premiums.
Perverse enough, the medication with the highest individual discount for the most chronic, complex disease can result in premiums for the least ill patients. As a result, the average net price of a branded specialty drug in Part D increased by 22 percent annually between 2010 and 2015, while 25 percent of the expenditure in Part D related to less than 1 percent of all beneficiaries.
Finding the costs
If the discount system is a complex price web, consumers are the ones who get caught up in it.
Patients usually pay a co-insurance percentage, especially for an expensive brand name or a special medication. Because the co-insurance is calculated on the basis of the prescription price before discounts, patients often pay a larger share of the actual costs for the health insurer. This may help explain why voters have not seen the benefits of slowing price growth over the past four years.
Even the administration admits that accurately quantifying the outcome of their proposed changes is almost impossible. Interactions with the current health insurance system may mean that the premiums for Part D participants can increase between 8 and 19 percent. But depending on the insurance plan of a person and the covered drugs, cost-sharing expenses could compensate the premium increases, so that on balance the actual costs of the person could fall from 2 to 3 percent.
Although the consumer may benefit from lower copays, the federal taxpayer would not, according to the actuaries of the administration. Premium increases could result in federal spending up to $ 200 billion in the next 10 years. Private actuaries suggest that the impact on the federal budget can range from a saving of $ 100 billion to a cost of $ 35 billion.
No wonder that analysts have difficulty estimating the future path of health care expenditures. But with this proposal and others we can slowly but surely reveal the secrets of the prices of medicines.
G. William Hoagland is senior vice president at the Bipartisan Policy Center and a former executive director of the Senate Budget Committee.
The Bipartisan Policy Center is a DC-based think tank that actively promotes bipartisanship. BPC is working to address the key challenges facing the country through policy solutions that are the result of informed deliberations by former elected and appointed officials, business leaders and work leaders, and academics and proponents from both sides of the political spectrum. BPC is currently focused on health, energy, national security, the economy, reform of financial regulation, housing, immigration, infrastructure and governance. Follow BPC twitter or Facebook.
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