Editorial: The Trump administration takes on drug prices

In his most aggressive response to date to high prescription drug prices, President Trump wants Medicare to obtain better deals by negotiating with pharmaceutical companies — just not directly. The proposal would affect only a limited number of drugs and would come with some potentially harmful side effects, but it’s a promising start.

The plan Trump unveiled Thursday could provide significant help to elderly Americans who pay thousands of dollars for medicines administered by their doctors, such as cancer patients. On the other hand, there’s a risk that it could cut drugmakers’ profits severely enough to slow the development of new treatments, or shift costs on to other Americans with private insurance.

It’s just a preliminary proposal at this point, and it may not get far. Fierce opposition from the pharmaceutical industry and some doctors forced the Obama administration to withdraw a more modest proposal on Medicare drugs. Trump’s plan, seemingly timed to help GOP candidates in the midterm elections, is likely to run into a similar buzz saw.

At issue are drugs in the Medicare Part B insurance plan, which covers physicians’ services. Typically, these medications are the ones administered by doctors in their offices, at hospitals or in outpatient clinics, not the ones consumers buy at a pharmacy and take at home. Doctors purchase the drugs, then are reimbursed by Medicare based on the drug’s average sale price plus a markup to cover administrative costs (currently 4.3%). Because the markup is a percentage of the average sales price, the system gives doctors an incentive to choose the most expensive drug available.

Such drugs tend to be pricey, and the co-pays can be quite costly — the patient’s is typically 20%. For drugs that cost $1,000 or more a month, that adds up fast.

Trump’s proposal calls for a testing a new payment system for drugs in roughly half the country, with participation mandatory for Medicare doctors and patients in those regions. Medicare would peg the price it pays for selected Part B drugs — those available from only one pharmaceutical company, as well as biological medicines — to the average paid in 16 other industrialized nations. Drug prices in those countries are 44% lower on the whole, according to a new federal study, and for some medications even lower than that.

The president framed this approach as a way to push back against “freeloading” by foreign countries that pay less for U.S. pharmaceuticals. But that’s almost exactly the opposite of what his proposal would do, at least at first. Instead, it would piggyback on the negotiations foreign, government-run health insurance programs do with drugmakers, allowing the U.S. to take advantage of the discounts they obtain.

Still, if the plan actually goes into effect, the pharmaceutical industry is sure to try to recover its lost profits elsewhere. The Trump administration is counting on manufacturers to extract higher prices overseas — ending the “freeloading” on U.S. investment in drug development — but they may also raise prices on other products for other Medicare patients and privately insured Americans. And the administration offered no good answer Thursday to that potential problem.

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The plan would also create a new set of private-sector middlemen between Medicare and doctors to try to negotiate even lower drug prices from manufacturers. Physicians would get a flat add-on fee instead of one based on the price of the drug, removing the incentive to use the most expensive medicines available.

Although the proposal’s reach isn’t very broad — it would affect only the fraction of consumers who receive drugs through Part B — the new incentives it would create and the use of international pricing benchmarks are smart steps. If things work as designed, the administration estimates, the new system could cut costs 30%, or $17.2 billion over five years. That would save Medicare patients as much as $3.4 billion over that period.

To its credit, the administration has taken or proposed many steps to confront the high cost of prescription drugs. Thursday’s, though, was the first to address the prices drugmakers charge head-on. Today, the industry’s pricing practices are largely opaque, and the monopolies manufacturers enjoy on patented medicines (as well as the absence of competing manufacturers for many obscure treatments) — combined with the ample dollars provided by insurers — allow them to set prices with little or no constraint from market forces. It’s not clear yet whether Trump’s plan for Part B medicines is the right approach, but it’s a proposal that deserves to be fleshed out and tested.

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