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JPAM Featured Article: Medicare Prescription Drug Price Negotiation

August 11, 2016 09:00 AM

Point/Counterpoint: "Medicare Prescription Drug Price Negotiation"

As part of our ongoing effort to promote JPAM authors to the APPAM membership and the public policy world at large, we are asking JPAM authors to answer a few questions to promote their research article on the APPAM website.

Point By: Rena M. Conti, Ph.D.

Counterpoint By: Geoffrey Joyce, Ph.D. and Neeraj Sood, Ph.D.

What was the genesis/history of the idea for your research?

Conti: Pharmaceutical based treatment for many dread diseases is undergoing a renaissance. Yet, the “financial toxicity” associated with many of these treatments for patients, their families and for payers is a growing concern. Policy makers are struggling to identify potential solutions that don't overly restrict patient access and erode public health goals and at the same time preserve incentives for continuing investment in the development of new breakthrough treatments. I am an expert of the financing and organization of medical care, with an emphasis on the biopharamceutical market. I am also faculty at the University of Chicago where I teach and research the empirical effects of public policies that intend to improve access and affordability of new medical treatments. My perspective is that awarding the federal government power over the prices of prescription drugs for Medicare and Medicaid beneficiaries offers some substantial advantages over the current system.

Joyce/Sood: Allowing Medicare to negotiate drug prices is one of the few policy issues upon which both Trump and Clinton (and Bernie Sanders, when he was in the race) seem to agree.  And at first glance, it’s easy to see the appeal given the rapid increase in prescription drug spending.  Many assume that constraining Medicare from negotiating has forced the government payer (and by extension, the taxpayer) into the role of a deep-pocketed pushover whom the pharmaceutical companies can charge whatever they wish.  However, the reality is much different. We wanted to inform the debate on Medicare price negotiations by highlighting some of the pitfalls of this policy and by suggesting alternate policies for constraining rising drug spending.  

What is the main conclusion that becomes evident from your research? (Or, what is our main takeaway?)

Conti: There are some substantial advantages to awarding the federal government negotiating power over the prices of prescription drugs for Medicare and Medicaid beneficiaries. Yet, in practice strongly opposed rhetoric stemming from many actors who profit off the current system may trump their strength.  “Second best” policies with great hope to rein in drug prices are already afoot in the private sector. Federal intervention to tame prices among selected drugs and/or drug classes with substantial public health import are also worth considering.

Joyce/Sood: Pharmacy benefit managers and health plans already negotiate drug prices on behalf of Medicare beneficiaries and millions of other Americans. Allowing Medicare to “negotiate” drug prices (which sounds good to taxpayers and voters) will only shift the negotiations from private plans to government bureaucrats. It is unlikely that government bureaucrats dealing with industry lobbyist and political pressure would be better negotiators than private plans. Federally mandated price controls will reduce drug spending in the short run, but will also likely reduce the pace of innovation over time.  Nonetheless, some government oversight of anti-competitive behavior and price gouging is necessary to make sure markets work for the interest of the consumer and not just the industry.  

What are some of the more interesting or surprising findings/conclusions, you discovered during this process?

Conti: I really enjoyed and learned from the point/counterpoint exchange with my esteemed colleagues.  I hope interested students, researchers and policy makers will do the same.

Joyce/Sood: Actually, Medicare does not lack negotiating power, despite its being prohibited from negotiating. This seems counterintuitive and comes as a surprise to many readers but it’s true since Medicare Part D plans are all administered by commercial insurers. Further, 75% of Medicare Part D beneficiaries are covered by the top 10 commercial insurers, most of whom use just four pharmacy benefit management companies to negotiate on their behalf.  So, Medicare drug prices are actually negotiated by some of the largest and most influential players in the market.

Authors' Bio

Rena_ContiRena M. Conti, Ph.D., (@contirena1) is an expert on the financing, regulation and organization of medical care, with an emphasis on biopharmaceutical markets. She is an Associate Professor of Health Policy in the Department of Pediatrics, section of hematology/oncology, and the Department of Health Studies. Dr. Conti is a 2007 graduate of the Harvard University Interfaculty Initiative in health policy (economics concentration).







Geoffrey Joyce, Ph.D., (@SchaefferCenter) is the Director of Health Policy at the Schaeffer Center at USC. Dr. Joyce’s research focuses on the costs of medical care and the role of insurance. He is the author of over 60 articles and book chapters, and his research has been published in leading medical, economic, health policy and statistics journals. Dr. Joyce’s research sponsors include the National Institutes of Health, National Institute on Aging, The Centers for Medicare and Medicaid Services, the Agency for Healthcare Research and Quality, the Department of Defense, Amgen, Merck, Genentech, UnitedHealth, Pacificare, and the California Healthcare Foundation. Dr. Joyce is also a research associate with the National Bureau of Economic Research and co-director of the RAND/UCLA Health Services Research Postdoctoral Training Program.




Neeraj Sood, Ph.D.(@SchaefferCenter) is Professor & Vice Dean for Research at the USC Sol Price School of Public Policy and Director of Research at the Leonard D. Schaeffer Center for Health Policy & Economics. His prior work has focused on the economics of innovation, HIV/AIDS, health care financing, and global health. He has testified frequently on health policy issues and his work has also been featured in several media outlets including the New York Times, Washington Post, U.S. News and World Report, and Scientific American. Dr. Sood is on the editorial boards of Journal of Health Economics, Health Services Research, and Forum for Health Economics and Policy. He is a research associate at the National Bureau of Economic Research (NBER) and board member of the American Society of Health Economists. Prior to joining USC, Dr. Sood was a senior economist at RAND and Professor at the Pardee RAND Graduate School.



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