What You Need to Know about President Trump’s Drug Pricing Plan

On Friday, President Trump gave a Rose Garden speech outlining his plan, entitled “America’s Patients First,” to combat rising drug prices. The plan incorporates policy ideas included in the president’s budget earlier this year, new proposals, and additional topics for discussion that could turn into more specific ideas in the future.

What’s the Problem?

Surveys suggest public frustration with the cost of prescription drugs. While such costs represent a small fraction of overall spending on health care, several dynamics help the prescription drug issue gain disproportionate attention. First, in any given year, more Americans incur drug costs than hospital costs. Whereas only 7.3 percent of Americans had an inpatient hospitalization in 2013, more than three in five (60.7 percent) had prescription drug expenses.

With more Americans incurring drug costs, and paying a larger percentage of drug costs directly from their pockets, the issue has taken on greater prominence. The rise of coinsurance (i.e., paying a percentage of drug costs, rather than having those costs capped at a set dollar amount) for pricey specialty drugs exacerbates this dynamic.

What Are the Proposed Solutions?

In general, ways to address drug prices fall into three large buckets.

Controlling costs through competition: These solutions would involve bringing down price levels by encouraging generic competition, or substituting one type of drug for another.

Shifting costs: These solutions would alter who pays for drugs among insurers, pharmaceutical benefit managers (PBMs), or consumers. While they may make drugs more “affordable” for consumers, they will not change overall spending levels. In fact, if done poorly, these types of proposals could actually increase overall spending, by encouraging individuals to increase their consumption of costly brand-name drugs.

Drug company and PBM stocks went up Friday following the blueprint’s release, largely because the plan eschews actions in the second bucket. The president’s plan includes a few tweaks to the system of “rebates” (de facto price controls) the Medicaid program uses, but includes none of the major Democratic proposals to use blunt government action to drive down prices.

In fact, the plan criticizes foreign price controls, attacking the “global freeloading” by which other countries gain the research and development benefits of the pharmaceutical industry without paying their “fair share” of those R&D costs. While the plan frequently mentions the disproportionate share of costs American consumers pay, it includes few specific proposals to rebalance these costs to other countries. It also remains unclear whether, if successfully implemented, any such rebalancing would successfully lower prices in the United States.

Other competitive proposals include giving Medicare Part D plans more flexibility to adjust their formularies mid-year to respond to changes in the generic drug marketplace, and prohibiting Part D plans from including “gag clauses.” These clauses prohibit pharmacies from telling consumers that they would actually save money by paying cash for certain drugs, rather than using their insurance.

In the cost-shifting bucket lie several of the proposals incorporated into the president’s budget. For instance, a cap on out-of-pocket expenses for the Medicare Part D prescription drug benefit would provide important relief to seniors with very high annual drug costs. However, to the extent that such a proposal would encourage seniors to over-consume drugs, or purchase more costly brand-name drugs, once they reach such a cap, this proposal could also increase overall Part D spending.

In a similar vein lie proposals about PBMs passing drug rebates directly to consumers at the point of sale. In most cases, PBMs had previously passed on those savings indirectly to insurers in the form of lower premiums. Giving rebates directly to consumers—a practice some insurers have begun to adopt—would provide relief to those with high out-of-pocket costs, but could raise premiums overall, particularly for those with relatively low prescription spending.

What’s Next?

The plan raises more questions than it answers—quite literally. The last and longest section of the blueprint includes 136 separate questions about how the administration should structure and implement some of the proposals discussed in the document.

Some proposals, while eye-catching, seem ill-advised. For instance, the proposal to “evaluate the inclusion of list prices in direct-to-consumer advertising” raises potential First Amendment concerns—government dictating the content of drugmakers’ communications with patients. Moreover, with many Americans viewing health care as a superior good, some consumers may view a more expensive product as “better” than its alternative. In that case this proposal, if ever implemented, could have the opposite of its intended effect, encouraging people to consume more expensive drugs.

The plan did not include the heavy-handed approaches to the prescription drug issue—Medicare price “negotiation” and drug reimportation—that Democrats favor, and that President Trump endorsed in his 2016 campaign. The document also makes clear the iterative nature of the process, with additional proposals likely coming after feedback from industry and others.

But to the extent that Washington has become consumed by the midterm elections fewer than six months away, the high-profile event Friday allowed Republicans and the president to say they have a plan to bring down drug prices—an important political objective in and of itself.

This post was originally published at The Federalist.

Just the Facts on Drug Negotiation

Congressional hearings often serve as elaborate theatrical productions. Members ask pre-written questions, receive formulaic answers, and in many cases use witnesses as props to engage in rhetorical grandstanding. The grandstanding element was on full display Tuesday during the confirmation hearing for Alex Azar, the Health and Human Services Secretary-designee. Sen. Claire McCaskill (D-MO) wanted to beat up on “evil” drug companies, and she wasn’t going to let facts get in her way.

McCaskill spent two minutes attacking pharmaceutical advertisements, including a reference to “the one for erectile dysfunction where they have them in two bathtubs,” before she tackled the issue of Medicare “negotiating” prices with drug companies. At this point she demonstrated ignorance on several issues.

Second, McCaskill failed to grasp that Medicare drug plans already negotiate with pharmaceutical companies, and that the discounts they obtain have helped keep overall premiums for the prescription drug Part D plan low. It may sound radical to McCaskill, who has spent practically her entire adult life working in government, but the private sector can negotiate just like the government, and probably do so more effectively than a government entity.

Third, McCaskill refused to believe that getting the government involved in “negotiating” drug prices would not save money. When Azar explained that removing a provision prohibiting federal bureaucrats from “negotiating” prices wouldn’t save money, McCaskill called his explanation “just crazy” and “nuts.”

It isn’t nuts, it’s economics. Even though McCaskill tried to lecture Azar on economics and markets at the beginning of her questioning, her queries themselves showed very little understanding of either concept. In a negotiation, the ability to drive a hard bargain ultimately derives from the ability to seek out other options. If Medicare must cover all or most prescription drugs, such that it can’t walk away from the proverbial bargaining table, it will by definition be limited in its ability to put downward pressure on prices.

But don’t take my word for it. As Azar pointed out to McCaskill, none other than Peter Orszag, who directed the Office of Management and Budget (OMB) under President Obama — said as much in an April 2007 Congressional Budget Office letter:

By itself, giving the Secretary broad authority to negotiate drug prices would not provide the leverage necessary to generate lower prices than those obtained by PDPs and thus would have a negligible effect on Medicare drug spending. Negotiation is likely to be effective only if it is accompanied by some source of pressure on drug manufacturers to secure price concessions. The authority to establish a formulary, set prices administratively, or take other regulatory actions against firms failing to offer price reductions could give the Secretary the ability to obtain significant discounts in negotiations with drug manufacturers.

Only the ability to limit access to drugs by setting a formulary or imposing  administrative prices, i.e. “negotiating” by dictating prices to drug companies, would have any meaningful impact on pricing levels. But this truth proved inconvenient to McCaskill, who admitted she “refuse[d] to acknowledge it.”

Instead, McCaskill continued haranguing him about the evils of drug companies. She pointed out that one congressman who helped negotiate the prescription drug benefit, Rep. Billy Tauzin (R-LA), “went to run PhRMA after he finished getting it through.”

Indeed he did. And as the head of PhRMA, he bragged about the “rock-solid deal” he cut with the Obama administration to help his industry. Big Pharma’s “deal” as part of Obamacare encouraged seniors to purchase costlier brand-name drugs instead of cheaper generics, which the CBO concluded would raise Part D premiums by nearly 10 percent. And who voted for that “rock-solid deal?” None other than Claire McCaskill.

As the old saying goes: If you have the facts on your side, pound the facts. But if you don’t, pound the table.

The facts indicate that McCaskill voted for a “rock-solid deal” with Big Pharma that raised premiums on millions of seniors, which actually makes her part of the problem, not part of the solution. Of course, that also makes her willingness to grandstand at Tuesday’s hearing, and her unwillingness to face facts she now finds politically inconvenient, less “crazy” than it first seemed.

This post was originally published at The Federalist.