Congressional Democrats want to fundamentally transform Medicare by imposing socialist price controls on prescription drugs. But they know such drastic changes would be dead-on-arrival in the Republican-held Senate.
In the meantime, some of them are coalescing behind a more moderate-sounding proposal that would achieve a similar result.
This proposal, known as "binding arbitration," would allow government-appointed arbitrators to dictate, er "negotiate," drug prices.
Currently, Medicare pays for drugs in different ways. Medicines that patients buy from pharmacies are generally covered through Medicare Part D, which relies on private health insurers that negotiate drug prices directly with pharmaceutical companies.
Medicare Part B covers advanced medicines often administered in hospitals and doctor’s offices. Physicians and hospitals buy the drugs at market prices, then bill Medicare for reimbursement.
Prices in both programs are determined via negotiations between private entities. As a result, Medicare patients have access to almost all drugs, including the newest, cutting-edge medications. The proposed arbitration process would be entirely different.
The basic idea is that a drug manufacturer would propose a price for its brand name drug. The government would also propose a price, which would almost certainly be less.
If the government and company couldn't agree, the government would appoint an arbitrator to determine the price. Both parties would have to accept.
In other words, the government would dictate, not negotiate, the price. In this case, arbitration is just an indirect form of government price controls.
The proposal would harm innovation.
Developing a new drug is expensive and time-consuming. It typically takes about 10 years for a drug to move from inception to ingestion. The process costs on average about $1.7 billion out of pocket. And only about 20 percent of drugs that receive Food and Drug Administration approval generate enough revenue to offset their research and development costs.
Arbitration would make it much harder for manufacturers to earn a return on their investments. Medicare is a major purchaser of pharmaceuticals. If the program pays below-market prices for drugs, investors would have little reason to continue funding research and development.
Fortunately, as FDA administrator, Dr. Scott Gottlieb took several steps to ramp up market competition, which is the best way to drive prices down without stifling innovation.
Just look at what happened to a certain class of hepatitis C medicines. When the first drug was released in 2013, it was expensive. But over the next four years, as five competitors came to market, the average price of those drugs dropped nearly 70 percent.
If lawmakers want to cut drug spending without leaving patients in the lurch, they'd be wise to foster more competition in the drug marketplace. Price controls are more about limiting access than price.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews
