When is a “best price” anything but?
Medicaid regulations require that drug companies charge the state-federal health program for the poor the lowest or “best” price that they negotiate with any other buyer. In theory, the best-price requirement protects taxpayers from price-gouging. With the federal and state governments spending about $20 billion annually on drugs for Medicaid patients, such protection seems valuable.
In practice, the Medicaid Drug Rebate Program contributes significantly to a dysfunctional pricing process that undermines competition and inflates drug costs for those insured through employers, the individual market and government employee health benefit programs. It also threatens to stifle broad access to many new, innovative therapies.
The Medicaid rules behind the mandatory rebate are complex, involving formulas that make hospital bills look positively transparent. Each state's Medicaid program relies on measures that include wholesale acquisition cost, estimated acquisition cost, average wholesale price and average manufacturer price, to name just a few.
The rules have transformed the U.S. into one of the world's least innovative testing grounds for new pricing strategies, even compared with public-sector payers in other developed countries.
While it sounds reasonable because it seemingly protects Medicaid, the best-price requirement removed the incentive for manufacturers to negotiate with insurers who are seeking deeper discounts. Why cut prices for purchasers representing a smaller share of the market when that discount would have to be extended to one of your largest, nationwide sources of revenue?
Novel hepatitis C treatments are a good example of that phenomenon. These drug therapies mean that millions could escape liver cirrhosis or worse. But at a retail cost of up to $84,000 per treatment, public and private payers and pharmacy benefits managers have drawn up plans to limit availability of the treatments to only the sickest patients.
This is unfortunate. Curative drugs like these hepatitis C pills will achieve hundreds of billions of dollars in savings from not having to provide long-term care to patients who would otherwise need it, thus opening the opportunity to negotiate “cure-now, pay-later” arrangements. Public and private payers would pay manufacturers an initial price—in effect, a down payment—based in part on assessments of the long term clinical and social value of the drug, such as how many liver transplants and chronic cases will be avoided. Manufacturers would then be paid additional funds from the resulting savings if the drugs' metrics of success are achieved over time.
Faced with the complexity of the best-price rule, however, no such collaborations on new pricing mechanisms based on value are underway. The best-price regulation stands in the way of a win-win-win solution that would allow payers to preserve their budgets, keep manufacturers motivated to develop highly effective, game-changing drugs, and get patients the therapy they need, now.
CMS seems to be aware of this problem. On Nov. 4 the CMS advised state Medicaid plans to drop restrictions on hepatitis C prescriptions and, at the same time, asked drug companies to provide information regarding value-based purchasing arrangements.
Meanwhile, HHS Secretary Sylvia Mathews Burwell called a drug price summit for Nov. 20 in Washington. That would be an ideal time to announce that not only is Medicaid suspending its complicated best-price regulation, it is also prepared to do what Medicare by statute cannot: negotiate directly with manufacturers of curative drugs for a total price that is paid over the long term as savings are realized.
Burwell and Medicaid need to move quickly to value-based approaches to pricing specialty drugs to ensure access for the millions who can benefit. Presidential candidates and congressional committees see political opportunity in the public anger over drug prices, which has been further fueled by opportunistic companies raising generic drug costs. Some are calling for price controls, which would just create further pricing dysfunction, threaten the supply of life-saving medications and stifle innovation when we are making progress against some of the most pernicious diseases.
Progress in biology and science has outstripped our economic institutions. As a result, innovation in drug financing and pricing is long overdue. Linking payment to value over time is in the interest of every stakeholder. The answer is not to deny patients access to valuable treatments that can lead to longer, healthier lives. We can do better than that.
Dana Goldman is director of the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California.