How to reduce drug prices: One view

Oct 24, 2015

How to reduce drug prices: One view
The Opinion of the USA Today Editorial Board
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For fresh evidence that prescription drug pricing is out of whack, look no further than the recent case of Martin Shkreli, the hedge fund manager turned pharmaceutical CEO. Shkreli announced that his company would abruptly increase the cost of a 62-year-old drug, used to treat a life-threatening parasitic infection, from $13.50 per pill to $750.

Public outrage over the more than 5,000% price hike prompted Shkreli to grudgingly back down, but the larger point remained unchanged: He did it because he can in a market — if it could be called that — where drug prices are largely a function of what drug companies think they should be.

Enter Hillary Clinton, with a list of ideas designed to make drugs more affordable. Among other things, the Democratic front-runner would allow Medicare to negotiate directly with drug companies, rather than going through intermediaries. She would also require insurance plans to cap out-of-pocket drug expenses at $250 per month, pressure drug companies to invest more in research and development, and discourage those annoying “ask your doctor” drug ads on TV.

The list is way too long. Capping expenses for some people would require everyone else to pay higher premiums. And even if limited to changes in the tax code, the plan to discourage TV ads could be subject to a First Amendment challenge.

But allowing Medicare to negotiate directly with drug companies is an eminently sensible idea. In government, the first principles of spending taxpayer money ought to be: Don’t buy what isn’t necessary, and get the best deal possible.

The current system of Medicare buying for its Part D program through intermediaries makes a mockery of those principles. Its purpose is to undermine the purchasing power that the federal government has as the nation’s largest buyer of drugs. It empowers drug companies to charge what they like because the insurance companies are too fragmented to push back, and patients have little incentive to as they are largely spending other people’s money.

Medicare spends $58 billion a year on prescription drugs in its Part D program, plus $15 billion on drugs administered in doctors’ offices. Clinton’s proposal, which has also been advanced by the Obama administration but is fiercely opposed by the pharmaceutical lobby and its allies, would save taxpayers $121 billion over 10 years,according to the non-partisan Congressional Budget Office.

The argument that forcing taxpayers to spend more for Medicare somehow advances the cause of small government is utter bunk. The argument that Medicare would not so much negotiate prices as “set” them has some truth to it. But government would set the price of drugs in the same way that it sets the price of new fighter jets, interstate highway bridges or other products for which the government is the customer.

Of all the things in Clinton’s plan, fixing the way Medicare purchases drugs would have by far the biggest and most positive impact — both for taxpayers and health care consumers. While it would directly affect only Medicare spending, it would have positive ripples throughout the system because the Medicare price would be the starting point for other plans.

If Shkreli’s outrageous price hike helps generate support for changing the way the government buys drugs on behalf of its beneficiaries, he will have done an unintended public service.