Reforming Medicare Payments for Part B Drugs

Bringing new, more effective pharmaceutical products to market is expensive, time-consuming, and risky. Intellectual property protections and regulatory requirements help promote that research, but they also give manufacturers a pricing advantage. Government price setting, which some policymakers support, could slow the growth of Medicare spending but is likely to favor short-term cost cutting over the longer-term societal benefits from clinical innovation. The Trump administration has proposed a test of a new Medicare Part B payment system for drugs administered in physician offices and hospital outpatient clinics. The International Pricing Index Model would use private vendors to negotiate prices with manufacturers for Part B--covered drugs. Vendors would be paid using a formula notionally based on prices paid in other high-income countries for the same products. The effect of this policy is an arbitrary payment cut. We propose an alternative market-based approach that would (1) fully empower competing private vendors to negotiate prices for Part B drugs and allow physicians and patients to share in the savings, (2) test a change in the current Part B reference pricing model to include international prices from the few countries that allow manufacturers flexibility in setting their own prices, and (3) use international and domestic clinical data evaluations to inform pricing for products for which there is no effective competition.
June 2019 The rising cost of prescription drugs has been a focal point for debate in Washington and across the country. Policies affecting the market environment for prescription drug pricing [...]