Health care costs are notoriously high in the United States, and the price of prescription drugs is a major reason for this. Nationally, Medicare accounts for about one-third of prescription drug spending. To combat rising costs for this component of the program, legislation being drafted in Congress includes a price negotiation mechanism that could help reduce Medicare spending if enacted.
Spending on prescription drugs is higher in the United States than in other countries
The United States spends nearly three times the average of other developed countries per capita on health care, which is largely due to high drug costs. A 2021 study by the RAND Corporation, a nonprofit research organization, found that the cost of brand-name drugs in the United States was more than triple the cost of those same drugs in other developed countries. One reason is that there are loopholes that allow pharmaceutical companies to extend or create new patents in the United States, many of which are not actually new drugs. These patents lessen competition, limit the production of generic versions and thus allow companies to charge higher prices here compared to other countries. There are a number of other factors that contribute to other countries paying different prices for prescription drugs, but this largely comes down to the lack of state drug price regulation or negotiation. -United.
How would Medicare negotiate prices?
Currently, Medicare does not have the right to negotiate prescription drug prices with manufacturers, forcing the government to pay relatively higher prices for drugs. Medicare Part D is an optional segment of the program that helps beneficiaries pay for prescription drugs. If the provisions being discussed to negotiate prices are signed into law, the US Department of Health and Human Services (HHS) would be authorized to negotiate prices for up to 10 drugs in 2025 and 20 drugs in 2028 and beyond.
The high costs are concentrated on a relatively small number of drugs; the 100 most expensive drugs account for nearly 50% of all Part D expenditures. The goal of price negotiation is to achieve a “maximum fair price” that more similarly matches the average international market price , which represents the average price in six countries: Australia, Canada, France, Germany, Japan and the United Kingdom. The agreed price would then be made available to insurers and organizations that sponsor Medicare Part D plans as well as commercial payers in the group and individual markets. If pharmaceutical companies do not comply with the negotiation process, a maximum excise tax of 95% would be invoked.
Would Negotiating Drug Prices Make a Difference for Medicare Beneficiaries?
Overall, allowing HHS to negotiate drug prices would reduce costs for both the federal government and consumers. A recent Congressional Budget Office (CBO) estimate of a similar plan to tackle drug prices showed savings of nearly $300 billion over the next decade.
The concept is already in practice in other federal government agencies that provide health services. The Veterans Health Administration, the Department of Defense, and Medicaid all have the power to negotiate drug prices, and they pay less than Medicare, on average, for top-selling brand name drugs. With prescription drug spending on the rise — which cost Medicare $116 billion in 2021 from $2 billion in 2000 — price negotiation would be a useful tool to reduce costs. In a recent report, the Center for American Progress wrote that “lowering drug prices through negotiation, inflationary discounts, and insulin and cost-sharing caps would allow people – especially those with chronic diseases and disabilities – to access the treatment they need”.
The price of prescription drugs in the United States is high and rising, with costly consequences for both consumers and the federal balance sheet. Allowing Medicare to negotiate drug prices is a promising policy lawmakers could consider to reduce health care spending, lower costs for consumers, and put our country on a stronger and more sustainable fiscal path.
Related: Infographic: Spending on Prescription Drugs Has Grown Exponentially Over the Past Decades
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