The program gets the incentives right
As prescription-drug costs have risen steadily in recent years, politicians of both parties have made audacious claims that billions could be saved by imposing lower prices on drugmakers. Yet newly developed drugs are expensive because they are enormously valuable to patients relative to existing alternative treatments. Unless the patent system allows drugmakers to initially capture much of the value associated with these new therapies, multi-billion-dollar investments in research and development of new products will not be made. Price controls on patented drugs therefore come at the expense of future medical innovation, and politicians unwilling to make that trade are likely to be unable to greatly reduce drug prices.
As effective therapies can save thousands of dollars by keeping patients out of the hospital, reformers should instead focus on promoting new insurance arrangements to better protect enrollees from drug costs. Medicare Advantage is leading the way in this respect: shielding seniors from catastrophic costs, eliminating drug-benefit premiums, and reducing drug deductibles by an average of 67 percent relative to standalone Medicare drug plans. (By giving Medicare beneficiaries the option to receive health coverage from competing private insurers, MA allows seniors to receive more generous medical benefits by choosing more efficiently run plans.)
Drug prices are politically salient because they touch most seniors. Whereas only 15 percent of Medicare beneficiaries had inpatient hospitalizations in 2015, 91 percent used prescription drugs — with median drug spending of $902 per year. Americans therefore remain eager for politicians to generate major savings: A March 2018 poll found that 80 percent thought that prescription-drug costs are unreasonable, while 77 percent believed that President Trump and his administration were not doing enough to reduce them.
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Chris Pope is a senior fellow at the Manhattan Institute. Follow him on Twitter here.
This piece originally appeared in National Review Online