With great fanfare, and just two weeks before the congressional elections, President Trump announced a new initiative aimed at reducing Medicare drug prices. It is an issue he has been promising to address since his presidential campaign. But a close look shows that the package announced yesterday is quite modest.
The plan, which the Department of Health & Human Services acknowledges is just an experiment, would apply mostly to a handful of costly drugs administered in doctor’s offices. It would have no effect on prices for the much more common Part D drugs that beneficiaries buy at the pharmacy and take at home.
Only half the country—the White House has not said which half—would benefit. And the proposal would not begin to take effect until at least 2020 and would phase in over five years.
Targeting new cancer drugs
The most important thing to know is that the proposal would apply only to Medicare Part B drugs. These are injectable or infused medications administered in doctor’s offices, clinics, or infusion centers. They include common vaccinations such as flu shots, But the real target is a relatively small number of very expensive drugs used to treat diseases such as cancer. Administering these drugs is extremely lucrative for oncologists and some other specialists.
Overall, the consulting firm Avalere Health estimates that only about 15,000 Medicare beneficiaries were taking new Part B cancer drugs in 2016. And only a small subset of them would benefit from the Trump proposal.
HHS says the plan would reduce Medicare drug costs by $17.2 billion over five years. It sounds like a lot. But the Kaiser Family Foundation estimates that Medicare is projected to spend more than $800 billion for pharmaceuticals from 2020-2024. So even if the experiment works as the administration hopes, the effort would reduce total expected Medicare drug spending only by about 2 percent.
HHS says beneficiaries would save an estimated $3.4 billion through lower cost-sharing. While enrollees in traditional Medicare are required to pay 20 percent coinsurance on prescription drugs, most cover that cost with Medicare Supplemental (Medigap) insurance.
US v. foreign prices
Trump’s proposal aims at the gap between the high prices Medicare pays for drugs in the US and the prices in other countries, which tend to be far lower. The reason: Those countries have national health insurance programs that negotiate prices directly with manufacturers. Trump promised to adopt a similar direct negotiation model during the campaign but never followed though. In May, he laid out a broad framework for reducing the high cost of drugs.
Currently Medicare pays the average US sales price for the cost of Part B drugs plus a 6 percent markup. The plan would replace that formula with something called the International Price Index Model, where Medicare would pay based on an index of worldwide prices (which generally are lower than US prices) plus a redesigned add-on.
Just a few months ago, Trump said he wanted to force other countries to pay more for pharmaceuticals. But under this plan, which would tie US prices to theirs, the more foreign governments pay, the less the US would save.
Trump is right that the US pays a lot for drugs, especially new meds to treat complex diseases. And it is also true that the US is providing an implicit subsidy for the rest of the world that benefits from innovation while paying less for the same drugs.
But the proposal announced this week is more a toe in the water than the revolution that Trump is touting. Few older adults should expect to see lower drug prices as a result.