The WasteWatcher: The Staff Blog of Citizens Against Government Waste

President Trump’s Blueprint to Lower Drug Costs: A Lot to Unpack

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


On Friday, May 11, President Trump released his report on what his administration will do to lower drug costs.  The report, “American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,” is more than 30 pages long and shows how complex the pharmaceutical distribution system can be, particularly within government-funded healthcare programs.

The Blueprint identified four challenges that it will addressed.  They are:

  • High list prices for drugs,
  • Seniors and government programs overpaying for drugs due to lack of the latest negotiation tools,
  • High and rising out-of-pocket costs for consumers, and,
  • Foreign governments free-riding off of American investment in innovation

 

To address these challenges, the president’s plan will seek to implement policies that would improve competition, stimulate more effective negotiations, provide incentives for lower list prices, and create opportunities to lower out-of-pocket costs for patients.

Most of the president’s ideas will not be implemented overnight.  Some actions can be carried out within the executive branch relatively quickly but, others would need public notice and comment periods, which takes several months or longer to complete and implement.  Other changes would likely require congressional approval.

One problem the Trump administration recognizes is the high cost the Patient Protection and Affordable Care Act (ACA), or Obamacare, put on the pharmaceutical industry.  The law levied an annual excise tax on the industry, costing $2.5 billion in 2011 and steadily increased the tax to $4.1 billion in 2018.  (This tax is scheduled to drop to $2.8 in 2019 and beyond.)  Plus, ACA increased the Medicaid rebate amount from 15.1 percent to 23.1 percent of the average manufacturer price, and extended the mandated Medicaid rebate to managed care plans.  Fortunately, the tax reform law will provide some relief for the industry.

With regard to the excise tax and the increased Medicaid rebate found in ACA, the administration asked, “How have these changes impacted manufacturer list pricing practices?  Are government programs being cross-subsidized by higher list prices and excess costs paid by individuals and employers in the commercial market?  If cross-subsidization exists, are the taxes and artificially-depressed prices causing higher overall drug costs or other negative effects?”

One only needs to remember what President Ronald Reagan once famously said to answer those questions:  

Some say shift the tax burden to business and industry, but business doesn't pay taxes. Oh, don't get the wrong idea. Business is being taxed, so much so that we're being priced out of the world market. But business must pass its costs of operations—and that includes taxes—on to the customer in the price of the product. Only people pay taxes, all the taxes. Government just uses business in a kind of sneaky way to help collect the taxes. They're hidden in the price; we aren't aware of how much tax we actually pay.”

Citizens Against Government Waste (CAGW) is particularly pleased that some ideas were rejected that would have done nothing to bring down drug costs.  For example, the administration will not succumb to left-wing demands for the federal government to “negotiate” drug prices in Medicare Part D.  Robust private-sector negotiations already occur in Medicare Part D and this policy has made the drug benefit very successful, costing far less than predicted.  Governments do not negotiate, they implement destructive price controls.

This aligns with the decision to not allow massive drug importation from Canada or elsewhere.  Health and Human Services Secretary (HHS) Alex Azar said:

I want to raise a final point in the context of competition: Many people may be familiar with proposals to give our seniors access to cheaper drugs by importing drugs from other countries, such as Canada.  This, too, is a gimmick.  It has been assessed multiple times by the Congressional Budget Office, and CBO has said it would have no meaningful effect.

One of the main reasons is that Canada’s drug market is simply too small to bring down prices here.  They are a lovely neighbor to the north, but they’re a small one.  Canada simply doesn’t have enough drugs to sell them to us for less money, and drug companies won’t sell Canada or Europe more just to have them imported here.

On top of that, the last four FDA commissioners have said there is no effective way to ensure drugs coming from Canada really are coming from Canada, rather than being routed from, say, a counterfeit factory in China.  The United States has the safest regulatory system in the world.  The last thing we need is open borders for unsafe drugs in search of savings that cannot be safely achieved.

CAGW commends the administration for addressing the problem of other countries free-riding on U.S.-funded drug research through negotiating better trade deals and tackling compulsory licensing or IP theft that harms U.S. innovation.  Other countries use price controls to keep their drug costs down but, these countries produce little pharmaceutical research as a result.  According to a February 2018 Council of Economic Advisers’ report, “Reforming Biopharmaceutical Pricing at Home and Abroad,” Americans pay more than 70 percent of patented biopharmaceutical profits among Organization for Economic Cooperation and Development (OECD) members, yet the U.S. accounts for only 34 percent of the OECD’s combined GDP.  In other words, “pharmaceutical innovators – and foreign governments – around the world rely on America’s patients and taxpayers to finance critical research and development.”

For some time, CAGW has been concerned about the misuse of the 340B drug discount program.  As mentioned in its 2019 budget proposal, the administration is continuing to work to reform and improve program integrity by setting enforceable standards for program participation and requiring 340B entities to report on how the savings are used.  The administration is implementing a rule change to the Medicare Outpatient Prospective Payment System that reduces beneficiary out-of-pocket spending for 340B drugs and will save $320 billion in 2018 alone – a rule change CAGW favored.  For too long, hospitals have taken advantage of the program, using it to boost their profits.  It must be returned to its original intent of helping low-income, uninsured patients get access to heavily discounted drugs.

All players in the multifaceted world of drug manufacturing, price negotiations, distribution, and prescribing are still dissecting the Blueprint proposal and are beginning to express their views and concerns publicly.  Until the administration spells out exactly what it intends to do, either through proposed regulations or guidance documents, no one can be fully sure of how some of the proposals will be applied.

Some major and controversial areas that will be addressed are:

  • Pharmaceutical manufacturer rebates to pharmacy benefit managers and how they should be used, or changed to discounts instead, to help lower costs;
  • Moving some drugs currently covered under Medicare Part B, which utilizes price controls, into the Medicare Part D program, which uses private negotiations;
  • Developing value-based purchasing programs within government drug plans and removing barriers for this type of purchasing in private plans;
  • Changing Medicare Part D to give drug plan sponsors more flexibility and power in negotiating certain types of “protected” drugs, which are critical in treating serious illnesses; and,
  • Taking new steps to make it easier for generic drug manufacturers to get samples from brand-name manufacturers for certain drugs, which utilize a Risk Evaluation and Mitigation Strategies (REMS) regulatory distribution process because despite their effectiveness, present a high risk in usage.  Generic companies have accused brand name companies of using REMS requirements as an excuse to not provide samples so the drugs can be replicated for the marketplace.

 

CAGW will follow these forthcoming proposals in the next few months.  If they spur on competition; allow the market, and not government coercion, to lower drug costs; and save money for taxpayers and patients, CAGW will be supportive.

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