President Donald Trump has proposed lowering drug prices by basing them on other countries’ costs, a monumental change that could save Medicare beneficiaries—as well as the government—millions of dollars.
But many Republicans oppose the plan because it promotes importing price controls from other countries, while Democrats feel it doesn’t go far enough. Numerous physician groups and provider advocacy organizations have already spoken out against the proposal.
Conservative groups are fighting it as well. Last month, FreedomWorks, a Washington-based advocacy group, and Americans for Tax Reform, an anti-tax organization, wrote a joint letter to HHS Secretary Alex Azar criticizing the proposal and demanding that it be withdrawn.
Trump released the outline of his plan shortly after the October publication of a government report showinig that Medicare was paying as much as 80 percent more than other advanced industrial countries, such as France and Germany, for some of the most expensive physician-administered medicines.
Additionally, the report showed that the costs charged by drug manufacturers to U.S.-based wholesalers and distributors were 1.8 times greater than in other countries for the most prescribed drugs.
Under the administration’s proposal, CMS would reduce the Medicare payment amount for some Medicare Part B drugs to make them more comparable to international prices by benchmarking them against 16 other European and Asian nations.
Additionally, it would allow private-sector vendors to negotiate drug prices and compete for physician and pharmacy business, and would increase the 4.3 percent drug add-on payment to 6 percent of historical drug costs. The proposal also would pay physicians a flat fee for prescribing medicines, independent of pricing.
HHS estimates this new payment model would save $17 billion over five years.
Edward Halperin, MD, chancellor and CEO of New York Medical College, says the proposal only addresses about 5 percent of the drug market, focusing on drugs administered by physicians in their offices, adding that Trump’s action is a slow motion, minimalist attempt to deal with a small proportion of pharmaceutical companies’ price gouging.
“It has nothing to do with the vast majority of the purchases of drugs: people filling prescriptions at either their brick-and-mortar or online pharmacies,” he says. “For a self-proclaimed economic nationalist, President Trump seems perfectly happy to outsource negotiating lower drug prices to European national health systems rather than do the right thing for most Americans: empower Medicare to directly negotiate lower drug prices for Medicare Part D with pharmaceutical companies.”
The possible impact on patient care
Lindsay Bealor Greenleaf, director at ADVI Health, which counsels healthcare companies on government affairs, says the Trump administration has enacted several promising reforms to align incentives across the supply chain and reward innovation, but the latest proposal to implement international reference pricing for Medicare Part B drugs is troubling.
She says the proposal poses significant access issues for seniors suffering from some of the most devastating and complex conditions, such as cancer, rheumatoid arthritis, and other autoimmune diseases.
“Compared to the rest of the world, the U.S. places a high value on access to therapies, which is why Americans currently enjoy access to cancer treatments about two years earlier than other developed countries,” she says. “If the government chooses to swap today’s payment design for a model that links to foreign countries’ socialist payment designs, then the speedy access to innovative therapies that we enjoy today is at risk.”
She argues that this IPI (International Pricing Index) model would hinder access to current and future drugs, and would restrict access to patients’ preferred physicians as many of today’s independent practices would be compelled to sell their practice to large hospital systems to absorb the uncertainty and financial risk associated with the proposal.
Independent practices already face pressure to sell themselves to hospital systems, she says, due to the significant reimbursement disparities between hospital outpatient departments (HOPDs) and physician offices, and due to the 340B drug discounts afforded to HOPDs and not physician offices. If finalized, this proposal would add to that pressure by creating significant reimbursement uncertainty for independent practices.
“The cures on the market today are the result of an environment that encourages and rewards innovation,” she says. “Going forward, if the U.S. reimbursement system is tied to socialist countries that do not reward innovation, manufacturers will lack the incentive to invest in the costly research and development that is required to produce these treatments.”
Although the proposed index is likely to save money in the short term, it will have an adverse effect on patient health in the long run, says Jason Shafrin, PhD, senior director of policy & economics for Precision Health Economics.
“Linking U.S. pharmaceutical prices to those in other countries to drive down cost means that the overall revenue for innovators will also fall,” he says. “Academic research clearly indicates lower revenues lead to pharmaceutical firms reducing their investments on research and development, leading to lower levels of future innovation.”
If only certain drug classes were affected, innovation could be expected to fall for just those specific therapeutic areas, he says. For instance, pharmaceutical firms could shift towards R&D for treatments that affect a larger number of working age adults.
“One item to note is that overall innovation may not be affected if the result of the plan is that pharmaceutical firms raise prices in Europe and Asia,” he says. “In that case, U.S. prices would fall, European and Asian prices would rise, and overall innovation may not change for these products.”
In the short run, however, it may be difficult to change prices abroad if these contracts are already negotiated.
Precision Health’s research shows that cancer mortality reductions were highest in countries that spent the most on cancer treatment. Therefore, Shafrin believes, while the Trump plan would produce short-term cost savings, it would risk worsening American’s long-term health prospects due to lowered rates of innovation.
The logic chain is whether more innovation results in more novel treatments, which then results in better patient outcomes. The study Shafrin cites does not link reimbursement to levels of innovation, but rather that more innovation/quicker adoption of innovation leads to better outcomes.
“The Trump plan will benefit patients’ wallets as lower drug costs likely would mean either lower patient out-of-pocket costs or lower premiums,” he says. “However, patient health is likely to suffer as there will be fewer new and effective treatments available, unless pharmaceutical firms are able to raise their prices in Europe and Asia.”
While costs may not be cut only from R&D, additional belt-tightening not affecting the bottom line assumes that pharma is inefficiently run and includes a lot of waste to wring out. Shafrin says if that were the case, pharma companies could already make more profits by cutting non-R&D costs.
“At a more basic level, pharma firms will consider whether to invest R&D dollars in a risky clinical area,” he says. “If there is additional belt tightening, that likely means return from that investment will be lower. Lower returns likely will reduce the number of treatments pharma will try to pursue.”
For instance, if a drug had a 5 percent chance of coming to market, with lower subsequent profits, perhaps pharma would only invest R&D funds in treatments that have a 10 percent chance of approval. The numbers are hypothetical, but they demonstrate how expected reimbursement and profits will affect the likelihood of individuals (or in this case companies) investing in the first place.
The effect on physician prescribing
John Driscoll, CEO of home health coordination company CareCentrix, explains that physicians currently are paid a percentage of the price of the drug that they administer. They lose income when they prescribe a less expensive medication, even though they are saving Medicare money, and they gain when they prescribe something more expensive and when prices increase. Under Trump’s plan, physicians would receive a flat fee, which is a more logical approach that aligns the interests of doctors and patients.
If office-based infusion becomes less financially attractive, he adds, in some cases physicians may refer their patients to far more expensive hospital outpatient facilities, driving system costs up. Ideally, Medicare would provide coverage for home-based infusion, which is more convenient, less expensive, and safe.
Shafrin says a drawback to flat rate reimbursement is that it could limit patient access to breakthrough treatments, as some physician-administered medications may cost tens or even hundreds of thousands of dollars per year and physician outlays on inventory for these treatments can be substantial.
“Flat physician payments do not take into account physician’s cost of capital needed to hold these treatments in inventory over an extended period of time,” he says. “Thus, physicians may begin refusing to stock highly effective, though expensive, treatments if the administration costs more than this new flat rate reimbursement level.”
For example: Drug A is more expensive than drug B, but expected survival for patients on drug A is 10 years compared with only one year on drug B. Most people would want patients to get the more effective drug A. But under the proposed plan, physicians may not be able to afford the capital cost of holding drug A in inventory.
Halperin says that by creating a flat fee for physicians to buy and sell drugs administered in their offices, rather than paying them as a percentage of the price of the drug, there will be no financial incentive for physicians to choose high-cost drugs over equally effective and cheaper alternatives.
“Physicians try to justify reasons to select expensive and complex treatments when simpler and less expensive options are just as effective,” he says. “To the extent that this proposal cuts the legs out from the profit motive that influences drug selection by physicians giving drugs in their offices, it will be to the benefit of patients—at least those in the 50 percent of the country affected by the proposal over the proposed five-year roll-out.”
In many European countries, there is a social contract that the government holds down the cost of treatment and assumes most of the cost, and patients are willing to wait longer for innovative treatment.
“Historically, in the United States, people do not want the government dictating prices centrally and do not want delayed access to potentially life-saving treatments,” Shafrin says. “The key question is: Are Americans willing to reduce innovation in the future in order to gain more affordability in the short run?”