July 19,2019

ICYMI: Inside The Pharmaceutical Lobby's Campaign For More Government Subsidies Through Medicare Part D

In case you missed it: Avik Roy, a noted conservative economist, debunks big pharma’s talking points regarding recent Finance Committee proposals that will save taxpayer dollars, save beneficiaries' out-of-pocket expenses and lower beneficiaries' premiums, all while maintaining incentives to innovate and create new, life-saving medicines. Find excerpts from his op-ed below or read the entire op-ed here.
Inside The Pharmaceutical Lobby’s Campaign For More Government Subsidies Through Medicare Part D
Avik Roy
July 19, 2019
Senate health care leaders have developed a bipartisan, fiscally responsible way to reduce the cost of the Medicare prescription drug benefit, also known as Medicare Part D. But pharmaceutical companies, in a furious lobbying effort, are trying to blow up the deal by demanding that taxpayers spend tens of billions on drug industry subsidies.
The proposed legislation would cap seniors’ out-of-pocket costs in the Part D program at a fixed level, perhaps $2,500 a year. The problem is that capping out-of-pocket costs in this way would give drug companies an incentive to jack up their prices, because seniors would no longer notice any price increases above $2,500; taxpayers would be forced to pay for the increases in the form of greater Part D subsidies.
Hence, the proposal also caps the growth of government subsidies to drug manufacturers at consumer inflation (CPI). Drug companies would be free to raise their prices faster than inflation, but they would have to return to the taxpayer any subsidies they received above inflation.
The legislation would also mirror a market-based reform from the Center for Medicare and Medicaid Innovation, by shifting responsibility for managing catastrophic drug costs from Medicare to private insurers.
The net effect of the Senate proposal would be a win for both seniors and taxpayers. Seniors would benefit from a cap on their out-of-pocket costs, and taxpayers would benefit from a reduction in the growth of Medicare subsidies to drug companies.
Naturally, the drug industry is up in arms about that last part, and is aggressively lobbying behind the scenes to remove the taxpayer protection feature of the bill.
The go-to argument for the drug lobby is that limiting government subsidy growth to inflation is a “price control.” But it’s nothing of the sort, as subsidies are not prices. Under the Senate Finance proposal, drug companies would continue to be able to set whatever prices they wish for their products. But growth in subsidies to drug companies would be limited to consumer inflation.
That would provide drug companies with a strong incentive to focus on developing new, innovative drugs instead of taking advantage of government-sanctioned monopolies to raise prices on older drugs.
One argument the drug lobby is making is that if Medicare ties subsidy growth to consumer inflation, pharmaceutical manufacturers will respond by increasing launch prices, and the end result will be the same amount of Medicare spending. This is unsupported by actual experience with drug company pricing strategies.
Think about the Advair example above. If GSK had launched Advair in 2001 at 14 times the combined price of Flonase and Serevent—the drugs that are combined in Advair—no one would have paid that price. Consumers paying out-of-pocket wouldn’t have paid it. Private insurers wouldn’t have paid it. They would have stuck with Flonase and Serevent, even if using those drugs separately was mildly less convenient.
Drug companies have shareholders, and their CEOs are obliged to maximize shareholder values at all times. They already do launch their drugs at the highest possible prices they can. What limits launch prices is the ability of insurers to say no: to say that they won’t cover a drug whose price far exceeds its value to patients.
Insurers in the Medicare Part D program have the ability to say no in this way, except in six “protected classes,” where they are forced by law to pay for drugs regardless of their value to the patient or the market. (Advair is not a member of a protected class; the drug has simply benefited from its government-enforced monopoly status.)
If drug lobbyists truly believed in a market-based Medicare Part D program, they would work to eliminate protected classes. But the “protected classes” rule makes the pharmaceutical industry more money, so you can guess what’s happening….
Some drug lobbyists are pointing to a Congressional Budget Office report that raises the possibility that “drug manufacturers would be expected to set higher ‘launch’ prices for new drugs” if Congress curbed the growth in drug subsidies, “though the size of that response is uncertain.”
Put simply: no, drug companies won’t be able to raise launch prices in order to compensate for a taxpayer inflation rebate, because that would lead to absurd prices that no private plan will be willing to pay, especially in the competitive drug categories that affect most patients. …
If the fiscal responsibility provision is taken out of the Senate Finance proposal, with everything else left intact, the bill deserves to fail, as it would then result in a gigantic, tens-of-billions-of-dollars taxpayer-funded giveaway to price-hiking drug companies.
The two leaders of the Senate Finance Committee—Chuck Grassley (R., Iowa) and Ron Wyden (D., Ore.)—have shown impressive fortitude in keeping the deal together to this point. But the ultimate outcome will depend on how much members of the Committee care about keeping money in taxpayers’ pockets. We will know soon.