Citizens Against Government Waste (CAGW) was troubled and mystified when the Trump administration issued an advanced notice of proposed rulemaking that would change Medicare Part B reimbursement for outpatient drugs from the Average Sales Price (ASP) plus 6 percent to instead a reimbursement system based on what other countries pay for the same drugs.  The plan would supposedly lower the cost of drugs, from Medicare currently paying an average of 180 percent of what other countries pay to 126 percent over a period of five years.   This may sound good, but it is a very flawed and dangerous idea.

Medicare Part B pays for prescription drugs that are purchased and administered by physicians in their offices or hospital outpatient clinics, such as by injection or infusion, and are not drugs a patient would usually take at home.  Examples of drugs reimbursed under Part B are cancer drugs, blood clotting factors, vaccinations, and injectable osteoporosis drugs.

CAGW agrees with Health and Human Services (HHS) Secretary Alex Azar that Medicare Part B is not a market-based payment system for drugs and that there is no negotiation involved. Medicare Part B still uses a price-control mechanism, albeit a statutory one.  Other countries, such as those in the EU or Canada, pay much less for drugs, but that does not occur because of market forces.  These countries use the threat of stealing patents and price controls to keep their drug costs down.  The proposed rule would simply move from one price-controlled system to another form of price controls.

It is unclear why the Trump administration would even consider such a pricing change.  The proposal is contrary to the President’s Council of Economic Advisers’ (CEA) February 2018 report, which recognized that the “United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations.  This indicates that our current policies are neither wise nor just.  Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area.”   The report also noted that, "Meaningful reforms would address the root of the problem: foreign, developed nations, that can afford to pay for novel drugs, free-ride by setting drug prices at unfairly low levels, leaving American patients to pay for the innovation that foreign patients enjoy … The United States could take actions that change the incentives for these countries to price drugs at levels that appropriately reward innovation, rather than disproportionately putting that burden on American patients and taxpayers.”

The U.S. began this process in the United States-Mexico-Canada Agreement, which acknowledges the importance of biopharmaceutical patents and strengthens enforcement of intellectual property rights.

The CEA report also pointed out that “any cost-plus reimbursement environment” can lead to fewer incentives to control costs and disincentivize doctors to prescribe less expensive drugs.  The report offers options for reforms including two that would make much more sense such as establishing physician reimbursement that is not tied to drug prices or moving Medicare Part B drug coverage into Medicare Part D, “where price-competition over drug prices is better structured.”

In Medicare Part D, prices are negotiated among private-sector players that include pharmaceutical manufacturers, insurers, pharmacy benefit managers, and pharmacies.  These private-sector negotiations have been instrumental in making Medicare Part D a successful government-created program.  In 2005, the Congressional Budget Office estimated Medicare Part D would cost taxpayers $172 billion in 2015; it’s actual cost was $75 billion.

An October 28, 2018 Wall Street Journal editorial, “A New Trump Rule Would Impose Foreign Price Controls on U.S. Drugs” hit the mark on why this proposal is the wrong solution to bring down drug prices.  It stated, “Mr. Trump is right that Europe, Australia and many others are freeloaders on U.S. innovation, and better intellectual property protections in trade deals might help.  But that is no reason to repeat their price-control mistake and undermine the reasons the United States is the last, best hope for medical progress.”

The Trump administration should abandon the proposed rule and refocus on making other countries pay their fair share of U.S.-financed drug development.