Free market for drugs? It won’t work, but here’s what might
Trump has vowed to use new bidding procedures to curb the soaring cost of new drugs — but there's a better solution
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This article was originally published on The Conversation.
The United States faces a major problem with prescription drug prices. Even as the prices of most goods and services have barely budged in recent years, the cost of drugs has surged.
During the presidential campaign, both Hillary Clinton and Donald Trump cited the high cost of prescription drugs as an issue that needed to be addressed. Most recently, the president took direct aim at the pharmaceutical industry, saying it’s “getting away with murder” and arguing “new bidding procedures” are necessary to lower drug prices.
Trump didn’t get into specifics about what that would mean, but the most often suggested way to lower drug prices has been to expand the ability of major government buyers, such as Medicare, to negotiate prices.
While such negotiations could result in lower prices, we believe, based on our experience as economists and public policy experts, an alternative using public utility pricing would work better and ensure the discovery and distribution of important new medications.
“Medically necessary”
The recent drug price data are indeed frightening.
In 2015 spending on prescription drugs rose by 8.5 percent to $309.5 billion, compared with a rise of just 1.1 percent for consumer goods and services. Spending for specialty drugs increased by an even heftier 15 percent, on average. Individual examples that made big headlines, such as Turing Pharmaceuticals raising the price of Daraprim (a lifesaving drug for people with weakened immune systems) from $13.50 to $750 a tablet, are even more extreme.
In a competitive market, prices of a product are forced down to their costs plus a fair profit. Drug companies, on the other hand, can get away with raising prices without losing customers because the demand for certain medications is insensitive to their cost. If a drug will save your life, you’ll probably pay whatever the cost, if you can.
The problem may soon get worse. Last May, Washington state’s Medicaid program was ordered to provide the hepatitis C drugs Sovaldi and Harvoni after a court ruled they were “medically necessary.” The Washington State Health Care Authority had previously provided Harvoni — which costs $94,500 for an eight-week course of treatment — and Sovaldi — $84,000 for 12 weeks — to only the sickest patients.
Since then, other participants in Medicaid and private insurance plans have filed similar suits. Some states, including Florida, Massachusetts and New York, have already altered their Medicaid programs to pay for such life-preserving expensive drugs.
If “medically necessary” rulings become more common, producers of these drugs will have no need to worry that higher prices will reduce sales. They will be able to charge whatever they want and increase revenue and profit without hurting unit sales because insurance providers will need to make such drugs available to their policy holders.
A proposed solution
So what can be done to fix the problem?
Allowing more government agencies to negotiate prices is one option. While this has lowered the prices paid by the Veterans Administration, it may not be the best way to go in a market like the one for many innovative new specialty drugs in which consumers have no good substitutes to choose from.