06/09/2016 08:38 am ET | Updated Jun 09, 2016

The Secret Washington Battle Determining Drug Prices

Part B drug payment policy. Boring. Obscure. But an ongoing battle over these policies will affect you -- especially what you pay for drugs.

Everyone is outraged over exorbitant -- and ever-rising -- prescription drug prices. Over the last two years drug prices have gone up double digits even when general inflation -- and even health care inflation -- has been historically low. Politicians have proposed many ideas to curb them: Drug importation from Canada; Medicare drug price negotiation. And in California voters will decide on an initiative that ties what state agencies pay for drugs to the price paid by the Veteran's Administration, which are among the lowest in the country.

Most of these ideas are political non-starters. And even if they were enacted, they won't solve the drug-price problem. For instance, Medicare's negotiating authority would be hollow without a drug formulary and the ability to not carry a drug. Plus, if Medicare lowered its prices, drug companies would raise prices for private insurers, as they do with hospital payments.

To respond to the public's demand for action, CMS, the government agency that runs Medicare, came up with pilot programs -- limited experiments -- to curb what the government pays especially for high-cost drugs like those for cancer, multiple sclerosis, and immune suppression for organ transplantation. It would also lower what seniors have to pay for the drugs. The Part B program accounts for slightly over $20 billion in payments, which is less than 5% of the estimated $457 billion the United States spends on all drugs.

Currently, for those part B drugs, doctors and hospitals are paid the average sales price (ASP) of a drug plus 6%. Just as a car salesman working on commission has an incentive to sell a Mercedes rather than a Fiat, the part B "plus 6%" payment formula encourages the use of high-cost drugs. For instance, an oncologist makes $600 for prescribing a $10,000 a month brand-name chemotherapy (like the drug Abraxane, for which the price tag exceeds $13,000) but makes only $6 for a $100 generic drug that is just as effective. You don't have to be rapacious scoundrels like the CEOs of Valiant and Turing Pharmaceuticals to be tempted to prescribe the $10,000 drug. Indeed, studies show that, in the aggregate, oncologists do succumb to these perverse incentives by prescribing more expensive drugs. This drives up Medicare spending and burdens millions of seniors with higher co-pays for their drugs.

A few months ago, Medicare proposed pilot programs that would institute changes to see if they could lower costs and improve quality. First, instead of paying the "plus 6%," Medicare would pay a flat fee of $16.80 plus 2.5% of the average sales price. (The 2.5% is to account for variation across the country in the ASP.) This program pays physicians more for drugs costing up to $440 per dose and less for more costly ones. Crucially, the Medicare plan does not prohibit use of any drug. It simply leaves physicians to make prescribing decisions based on clinical need rather than their own financial interests.

Medicare proposes to test other incentives to promote the use of high-value drugs. One would be to eliminate seniors' co-payments or cost sharing for high-value drugs. Another would be "reference pricing," paying the same low price for all drugs with the same clinical effect. Yet another would allow Medicare to pay drug companies based on outcomes -- paying only for those patients in whom the drug works.

Both AARP and Consumer Union support the pilot programs. But the drug companies are apoplectic.

Why? Obviously they want to stave off policy changes that might result in a loss of sales. But what they really want to do is draw a line in the sand. If the drug companies can defeat the Part B experiments, they will use the victory to scare off any future attempts to regulate drug prices.
The fate of the Medicare proposal is in the balance. Strangely, key stakeholders who normally denounce high drug prices are supporting the drug companies. Politicians are objecting. Hypocritically, oncologists who complain about their patients' "financial toxicities" from high-cost chemotherapies are against the plan. And some so-called patient advocacy groups are also objecting.

Not surprisingly, all of these stakeholders have financial interests aligned with the drug companies. Politicians get significant campaign contributions from the drug companies. According to the Center for Responsive Politics, in the 2012 election cycle big Pharma spent over $50 million in campaign contributions. In the 2014 cycle they contributed $32 million, and so far in 2016 their contributions have exceeded $30 million. Oncologists make more money from prescribing high-cost drugs. And the vast majority of those patient advocacy groups are fronts for drug companies, receiving hefty donations from them.

The Medicare Part B proposals are quite modest: They are experiments, testing new ideas to control high drug costs, not mandated policies for the whole country. And they are reasonable: Why should we pay physicians more for prescribing a more expensive drug? Why shouldn't we encourage physicians and patients to use cheaper clinically equivalent drugs?

If the drug companies win this fight over Part B, the entire country will be the loser. Drug costs will continue to rise with impunity -- and drive up health insurance premiums. Medicare will pay more, and all of us -- especially the six million seniors who have large co-pays for Part B drugs -- will pay more out of pocket. And their new-found political muscle would prevent any future laws or regulations to limit drug prices.