Perverse Incentives in the Medicare Prescription Drug Benefit

Assessing US Pharmaceutical Policy and Pricing Reform Legislation in Light of European Price and Cost Control Strategies

This article compares the pharmaceutical pricing policies employed by public and private insurers in the United States with seven price and spending control strategies employed in the United Kingdom, France, and Germany. Differences between American and European policies explain why American pharmaceutical prices and per capita spending are higher than in European nations. The article then analyzes two recent bills as examples of significant American reform ideas-H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act (introduced in 2019) and the Build Back Better Act (BBBA, introduced in 2021)-and compares them with European cost control strategies. Key drug price provisions of the BBBA were incorporated into the recently enacted Inflation Reduction Act (IRA). H.R. 3 would have used an international (mostly European) price index to cap U.S. prices; the BBBA would cap Medicare prices at a discount from average U.S. market prices. Neither bill would employ the key cost control strategies that European nations do. Both bills would have significantly less impact on prices than legislation that employs European-style cost controls. This article proposes steps that Congress could take in line with European strategies to lower purchase prices and costs for patients. These measures would have to overcome political obstacles that currently stymie reform.

Common Pharmaceutical Price and Cost Controls in the United Kingdom, France, and Germany: Lessons for the United States

To identify pharmaceutical spending-control options for the United States, we analyzed the policies of the United Kingdom, France, and Germany, which encourage drugmakers to undertake innovations that improve health while controlling spending. Their main strategies today include: using legislation to set default rules that increase the insurer's bargaining position, employing health technology assessment that measures cost-effectiveness or comparative effectiveness and caps the purchase or reimbursement price, setting a single maximum price for similar drugs (reference group pricing), capping prices near prices in other European countries (external reference pricing), prohibiting price increases, contracting to obtain discounts as sales volume rises, procuring drugs through competitive bids, and requiring manufacturers to pay rebates when spending exceeds a global budget. Each strategy addresses a distinct cause of high spending and supports overall goals. Most recent US reform proposals recommend incremental changes that would not address the major sources of high and increasing pharmaceutical prices. However, some US reform proposals resemble certain European strategies and could bring more significant change. US policymakers should consider adopting each of the strategies employed in these countries.

Should Medicare adopt the Veterans Health Administration formulary?

Since January 2006 all Medicare beneficiaries have been eligible to obtain outpatient prescription drug coverage through private stand-alone drug plans (PDPs). We estimate a model of beneficiary demand for PDPs and use it to compute the loss of consumer surplus due to tightening PDP formularies to the level found in the Veterans Health Administration (VA). Under a generous assumption of cost savings attributed to increased bargaining leverage associated with exclusion of more drugs from formularies, we find the loss in consumer surplus to be smaller than the financial savings that could be shared between Medicare and beneficiaries. According to our estimates, Medicare beneficiaries could be compensated for the loss in consumer surplus associated with tighter PDP formularies with the savings generated by such formularies.

Controlling prescription drug costs: regulation and the role of interest groups in Medicare and the Veterans Health Administration

Medicare and the Veterans Health Administration (VA) both finance large outpatient prescription drug programs, though in very different ways. In the ongoing debate on how to control Medicare spending, some suggest that Medicare should negotiate directly with drug manufacturers, as the VA does. In this article we relate the role of interest groups to policy differences between Medicare and the VA and, in doing so, explain why such a large change to the Medicare drug program is unlikely. We argue that key policy differences are attributable to stable differences in interest group involvement. While this stability makes major changes in Medicare unlikely, it suggests the possibility of leveraging VA drug purchasing to achieve savings in Medicare. This could be done through a VA-administered drug-only benefit for Medicare-enrolled veterans. Such a partnership could incorporate key elements of both programs: capacity to accept large numbers of enrollees (like Medicare) and leverage to negotiate prescription drug prices (like the VA). Moreover, it could be implemented at no cost to the VA while achieving savings for Medicare and beneficiaries.