An executive order signed in October by President Joe Biden instructing his administration to find more ways to lower prescription drug prices could, potentially, have a larger effect on skyrocketing drug prices than this summer’s long-awaited passage of the Inflation Reduction Act. While measures in that act, such as capping out-of-pocket drug prices for seniors on Medicare, and allowing Medicare to negotiate prices with pharmaceutical companies, are the government’s strongest actions ever against Big Pharma; they are not enough to set off a badly-needed revolution in the fundamental way drugs are priced.
The executive order, on the other hand, is an opportunity to jumpstart that revolution. That’s because this order instructs officials to delve into how one measure of the Inflation Reduction Act—Medicare’s new power to negotiate drug prices—can be maximized and used to drive down drug prices in general.
As I write this, the government agency that runs Medicare is currently building up a team of data and negotiation experts and selecting which 10 drugs they will start with to kick off this new approach; eventually, with more drugs added each year, the list would include up to 60 drugs by 2029. Until now Medicare was not allowed to negotiate prices, simply paying whatever retail price private health insurers had worked out for medications. Often these prices are based on health insurers’ purchase volume and other factors that have nothing to do with patient outcomes. (Medicare spends nearly $200 billion a year on drugs).
The Inflation Reduction Act specifies the factors that the negotiations should consider, including the lowest average price in other developed countries, and the average price wholesalers and pharmacies pay. These miss the mark; and that is why the executive order is such a welcome development.
The order will allow administration officials to consider additional and alternative factors on which to base these negotiations, and the prices Medicare and Medicaid pay for drugs in general. The most important among those that administration officials, namely those in the Department of Health and Human Services, will consider is patient outcomes.
Paying a price based on outcomes, known as value-based contracting or value-based purchasing, means that payers base their prices on how much the drug actually helps patients. This model requires taking into account not just what clinical trials show about a drug’s efficacy, but also longer term real world data on how it affects patients. For example, a drug may have what sounds like a high price, but could actually reduce future care costs, like eliminating the need for surgeries or other additional medications, making such a price worth it. But if a drug only provides partial relief, the cost of that drug should be significantly lower. This can be carried out in several different ways, for example, by paying for drugs in installments, based on patient progress, or receiving reimbursement for drugs that do not prove effective.
Adopting value-based contracting is the only way we can see sustainable long-term lower consumer drug prices. Such a model, hopefully pushed into fruition by this executive order, will mean that the Inflation Reduction Act will usher in not an era of government price setting, but an era when drugs are equal in value to their price.
If Medicare is encouraged to adopt this model, it would not only save the government money, but inspire all payers, whether public or private, to reassess how they pay for drugs. Even those payers, including private health insurance providers, who have long negotiated prices with drug companies, could be inspired to trade in the current model —where discounts are often based on purchase volumes— for a new model that looks at the outcomes of drugs.
Long sorely absent from the broken drug pricing system in the U.S., this approach ensures that transformative drugs are covered, patients get the drugs they need, and that money is not wasted on products that don’t deliver results. Finding a better model for pricing drugs is becoming even more important as many of the newest drugs, including promising gene therapies for devastating rare diseases like spinal muscular atrophy and cystic fibrosis as well as for more common diseases like sickle cell disease and diabetes, are among the most expensive on the market. These also have huge potential to lower lifetime drug and other care costs for patients–if they work, or to simply cost taxpayers billions in wasted resources if they don’t.
While some insurance companies have slowly been adopting a value-based contracting approach, government programs like Medicare and Medicaid have one thing private payers don’t have – the heft and impact of a plan with tens of millions of members. By leveraging its large membership, Medicare could by embracing value-based contracting significantly influence the pharmaceutical market, pitting competing drugs against each other, or encouraging pharmaceutical makers to figure out ways to deliver drugs more cheaply. This will speed up innovation, as pharma companies will be eager to produce more transformative medications that are worth their prices, whatever those may be.
The new executive order provides a golden opportunity for the government to set off a true revolution in drug pricing – and if it does take advantage of that opportunity, all of us will benefit.
Photo: z_wei, Getty Images