Trump and Drug Reform

When it comes to the drug pricing debate, it's often easy to let the details obscure the heart of the issue.  Even understanding the Trump administration's newest proposal to bring down high drug prices requires understanding the supply chain at a considerable level of detail.  However, when one takes a step back, the broader principles at play become easier to see.

Government policies should enable the market to function, letting companies make more money when they offer a better product at a lower price.  This allows customers to choose their provider based on the level of customer service they receive. 

In the context of health care, that problem is devilishly tricky, fiendish when compared to the many other markets whose relatively seamless functioning we take entirely for granted. 

Primarily, this is because the government is deeply involved in every level of the market. Government regulation in pharmaceuticals is continuously interrupting the regular supply-and-demand equilibrium that drives other economic spheres.  However, it is a hard problem for the market to solve.  Consider the relative difficulty for a customer to decide on a doctor compared to a restaurant or a shoe brand. 

The new Trump administration proposal addresses this by making a fundamental change in how Medicare Part D works. 

Importantly, Part D is one of the most successful health care programs ever in ensuring that the health care industry does better when the health care customer does better.  How do we know?  For one thing, it's wildly popular with seniors.  The Healthcare Leadership Council reports that 9 in 10 seniors are satisfied with Medicare Part D. 

Secondly, the competition it harnessed has driven costs down, even as quality stayed level or increased.  The program notably, even historically, came in at 40 percent under its CBO-estimated costs in its first decade of existence.

The key to understanding this new reform, therefore, is understanding its goal in protecting the link between the interests of the seniors picking which plan to enroll in and the various companies that provide the health care they pay for.

The specific change is quite limited.  Currently, when Part D enrollees pay a co-pay that's proportional to the list price of the drug (e.g., 25% of $100 list price means a $25 co-pay), the new reform requires insurance plans to base the co-pay on the actual, negotiated price they're really paying for the drug.  So, if the plan receives a 40% discount on the $100 drug, for a net price of $60, the rebate is now 25% of $60, $15.

This change is necessary to address the difference in the composition of the drug market that is undermining the link between the well-being of customers (the enrollees) and the companies that provide the goods and services they're paying for. 

Specifically, a class of middleman companies known as pharmacy benefit managers (PBMs) have rapidly consolidated in the last five years, creating tremendous market power in the hands of two companies.  The incentives for insurance companies and drug-makers have gradually tilted toward benefiting the PBMs, even at the cost of enrollees.

As an example of this development, there is an increasing trend of seniors discovering that it would be cheaper for them to buy drugs entirely out of pocket than to pay the co-pay to purchase the drugs through their insurance plans.  There are even reports of PBMs issuing gag orders to pharmacies to prevent them from informing customers they could buy the drug cheaper on their own.

Generally, when you see companies fighting against the interests of the customers they are supposed to serve, it is a red flag that the basic incentive structure of the market has broken down somehow.

The new Trump drug pricing reform is critical in restoring those incentives, ensuring that companies that are paid to negotiate on behalf of enrollees are bringing them lower prices.

By requiring co-pays to be based on the real price paid for the drug, the proposal channels the considerable market power, creativity, and energy of the PBMs back in service of reducing costs for their customers.

On its own, it is a small, targeted change.  However, considered in the broader scope of the health care market, it falls right in line with many other efforts undertaken to make health care work as well as the rest of the economy.

Remi Alli is a freelance health care writer based out of Michigan.  Along with a J.D., she holds a master's degree in health law and policy.  She is the 2013 American Judges Award recipient for health-related legal writing. 

When it comes to the drug pricing debate, it's often easy to let the details obscure the heart of the issue.  Even understanding the Trump administration's newest proposal to bring down high drug prices requires understanding the supply chain at a considerable level of detail.  However, when one takes a step back, the broader principles at play become easier to see.

Government policies should enable the market to function, letting companies make more money when they offer a better product at a lower price.  This allows customers to choose their provider based on the level of customer service they receive. 

In the context of health care, that problem is devilishly tricky, fiendish when compared to the many other markets whose relatively seamless functioning we take entirely for granted. 

Primarily, this is because the government is deeply involved in every level of the market. Government regulation in pharmaceuticals is continuously interrupting the regular supply-and-demand equilibrium that drives other economic spheres.  However, it is a hard problem for the market to solve.  Consider the relative difficulty for a customer to decide on a doctor compared to a restaurant or a shoe brand. 

The new Trump administration proposal addresses this by making a fundamental change in how Medicare Part D works. 

Importantly, Part D is one of the most successful health care programs ever in ensuring that the health care industry does better when the health care customer does better.  How do we know?  For one thing, it's wildly popular with seniors.  The Healthcare Leadership Council reports that 9 in 10 seniors are satisfied with Medicare Part D. 

Secondly, the competition it harnessed has driven costs down, even as quality stayed level or increased.  The program notably, even historically, came in at 40 percent under its CBO-estimated costs in its first decade of existence.

The key to understanding this new reform, therefore, is understanding its goal in protecting the link between the interests of the seniors picking which plan to enroll in and the various companies that provide the health care they pay for.

The specific change is quite limited.  Currently, when Part D enrollees pay a co-pay that's proportional to the list price of the drug (e.g., 25% of $100 list price means a $25 co-pay), the new reform requires insurance plans to base the co-pay on the actual, negotiated price they're really paying for the drug.  So, if the plan receives a 40% discount on the $100 drug, for a net price of $60, the rebate is now 25% of $60, $15.

This change is necessary to address the difference in the composition of the drug market that is undermining the link between the well-being of customers (the enrollees) and the companies that provide the goods and services they're paying for. 

Specifically, a class of middleman companies known as pharmacy benefit managers (PBMs) have rapidly consolidated in the last five years, creating tremendous market power in the hands of two companies.  The incentives for insurance companies and drug-makers have gradually tilted toward benefiting the PBMs, even at the cost of enrollees.

As an example of this development, there is an increasing trend of seniors discovering that it would be cheaper for them to buy drugs entirely out of pocket than to pay the co-pay to purchase the drugs through their insurance plans.  There are even reports of PBMs issuing gag orders to pharmacies to prevent them from informing customers they could buy the drug cheaper on their own.

Generally, when you see companies fighting against the interests of the customers they are supposed to serve, it is a red flag that the basic incentive structure of the market has broken down somehow.

The new Trump drug pricing reform is critical in restoring those incentives, ensuring that companies that are paid to negotiate on behalf of enrollees are bringing them lower prices.

By requiring co-pays to be based on the real price paid for the drug, the proposal channels the considerable market power, creativity, and energy of the PBMs back in service of reducing costs for their customers.

On its own, it is a small, targeted change.  However, considered in the broader scope of the health care market, it falls right in line with many other efforts undertaken to make health care work as well as the rest of the economy.

Remi Alli is a freelance health care writer based out of Michigan.  Along with a J.D., she holds a master's degree in health law and policy.  She is the 2013 American Judges Award recipient for health-related legal writing.