“Negotiate” Rx?

You have heard that the answer to high drug costs is to allow Medicare to negotiate with pharmaceutical manufacturers. The VA is often held as an example of the negotiation process.

Now a new effort would allow the prices of Medicare negotiated drugs to be shared with insurers and self-insured employers.

It all sounds so simple and logical. What could go wrong? I have my thoughts, but just think about this. Why don’t physicians, hospitals and other health care providers all accept Medicare or even Medicaid reimbursement rates from private payers?

Why do insurance companies and private individuals pay much more for the same services?

The reason is that government rates could not sustain health care providers without adverse consequences on them and ultimately for patients. In effect, private insurance subsidizes government plans.

In a similar way, the United States subsidizes the rest of the world where drug prices are mandated to be lower.

HOWEVER, the facts are “the median net income margin reported by 35 pharma companies between 2000 and 2018 was almost twice as high as it was for the 357 non-pharma companies in the S&P 500 investigated by the study’s authors—13.7 percent versus 7.7 percent. Though they add the difference was less pronounced when company size, year, or research and development expenses were taken into account.” Source: https://www.newsweek.com/big-pharma-companies-profits-industries-study-1490407

If you want the details of the study, you can find the report here.

The process of negotiating results in one of three outcomes.

• Win – Win
• Win – Lose
• Lose – Lose

To have a Win-Win for drug prices means the manufacturer gets something in return for lower prices. That something is higher sales volume for its drug. If a drug sells for $100 and they sell 1,000,000 scripts, that $100,000,000 in revenue. When they negotiate to sell for $75 they need to sell 1,333,333 scripts. So, how do they do that?

Be sure their drug is on the drug formulary or increase marketing or both. Either has consequences for patients and for the viability of other manufacturers. Medicare Part D beneficiaries are painfully aware of the impact of strict formularies.

Negotiating drug prices is not as simple as it may appear. Politicians who promote this are misleading you.

Lowering the overall income of pharmaceutical companies has other potential consequences, possibly cutbacks in research and development or more costs transferred to government agencies.

The bottom line is dealing with the price and use of prescription drugs must be done, not through the glib idea of negotiating prices, but through a comprehensive look at the process from start to finish and then deciding what changes and tradeoffs society will accept.