The Trump administration is planning to propose one of the biggest changes to Medicare in decades. The draft rule aims to reduce government spending by linking Medicare drug reimbursement rates to the rates in more than a dozen other Western countries that use price controls to hold down pharmaceutical spending.
If implemented, the rule would effectively bring socialist drug price controls to the United States. Though the government would save some money in the short term, the change would threaten patients’ health and discourage companies from funding experimental treatments for deadly diseases.
The rule impacts Medicare Part B, which covers drugs administered via shots and IV drips in hospitals and doctor’s offices. Most cancer treatments, for instance, are covered through Part B.
Currently, doctors buy these drugs on their own, treat patients, then bill Medicare for reimbursement. The government reimburses physicians for the average price of the medicine in the commercial market, plus a small markup to cover administrative costs.
On average, Part B drugs cost 80 percent more in America than in countries like Canada and the United Kingdom, which impose strict price controls on prescription drugs. If bureaucratic agencies — such as Canada’s Patented Medicine Prices Review Board — deem a drug too expensive, they refuse to cover it. Apparently, the Trump administration thinks these countries have the right idea. Officials at the Department of Health and Human Services believe that tying Medicare reimbursements to the average prices paid for drugs in a handful of foreign countries, where price controls are common, would reduce Part B drug spending by 30 percent.
Americans have little to gain and much to lose from statist price controls.
Drug companies from around the world are eager to launch their products in the United States, where prices are determined by free-market-based negotiations between private-sector firms. Drug companies are far less eager to sell their medicines for pennies on the dollar in price-controlled nations.
Consider that almost 90 percent of drugs launched worldwide in the last eight years are available in the United States. In contrast, only 66 percent are available in the United Kingdom, while less than half are available in Canada.
Price controls wouldn’t merely slow down drug launches and limit Americans’ access to new medicines. They’d also make future medical breakthroughs less likely.
Drug development is a risky undertaking. It can take decades and cost a staggering $2.9 billion to develop a new medicine. Most experimental drugs never even make it out of the lab. And 9-in-10 medicines that succeed in lab and animal testing fail in clinical trials. Manufacturers fund future research with the revenue from just a handful of successful products.
The rule would make drug development far less appealing to investors. If the potential return on investment were capped, companies would have little reason to spend billions trying to develop new medicines.
History shows us what happens to drug development when price controls are employed. Europe was a hotbed of drug innovation in the 1970s, producing over half all drugs worldwide. But European nations gradually ramped up price controls in the ensuing decades.
U.S. leaders resisted that temptation — which explains why America now attracts 75 percent of global biopharmaceutical venture capital investments and develops more than half of the world’s medicines, while Europe invents a mere third of drugs.
Price controls may yield some short-term savings, but they would cost patients dearly in the long run. It’d be a tragic mistake for the administration to press forward with its draft rule.
• Sally C. Pipes is president, CEO and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is “The False Promise of Single-Payer Health Care (Encounter). Follow her on Twitter @sallypipes.