Today’s drug pricing policies are creating perverted motives.
In the previous two columns, we saw how a free health care market would reach prices for brand medicines. In this column I will briefly discuss what the federal government is now doing, because political decision -making is facing perverted motives, because private insurers are also facing perverted incentives and how we can move towards free market reforms.
Prices negotiated Medicare: Offers that cannot be rejected
Some time ago, the Congress Budget Office (CBO) investigated whether the federal government could save significant money by negotiating with drug manufacturers on the price of drugs covered by Medicare. The CBO concluded that the government is unlikely to make much better than private negotiators, since Medicare covers each medicine. In other words, without the ability to get away from the negotiating table and refuse to buy the drug at all, there is only so much that the negotiation can be achieved.
With the passage of Inflation Reduction Act (IRA), the word “negotiation” becomes a little more than a euphemism for price controls. The “negotiated” prices within the IRA are not the result of formal negotiations for free market. The Federal Government – through the Ministry of Health and Human Services (HHS) – “Maximum fair price” For selected medicines. Any company that refuses to comply with the negotiation process will be affected by a special excise tax starting at 65% of a product sales in the US and increases by 10% every quarter, to a maximum of 95%.
As an alternative to tax payment, manufacturers can choose to withdraw all their medicines from coverage to Medicare and Medicaid. (This would be like giving up 40% to 45% of all manufacturer’s sales.) Also, drug manufacturers are required to pay discounts on Medicare if they increase prices for certain medicines faster than inflation rate.
Bad as all this is in terms of industry, the image could be worse. According to the compulsory Canadian authorization law, the Canadian government claims the right to produce patents with patents without the permission of the patent holder – and to sell the same medicine at a lower price. Although this is not too often, the threat should certainly be at the back of the minds of industry representatives when negotiations on prices are carried out.
Medicine’s policy: perverted motivation
In all government healthcare systems around the world, politicians face perverted motivation favor healthy people over the sick.The reason: In every given year, in any health insurance group, approximately 5 % of registered will represent about half of the expenditure. However, in a democracy it is difficult to expect civil servants to spend half the budget for health care for 5 % of voters. In Our analysis of foreign healthcare systems, My colleagues and I found that in the country after the country there was a persistent model: an over -contribution to the healthy and derogatory to the sick.
You can see the same pattern in the Medicare system. Since its beginning in 1965, Medicare paid for low expense that relatively healthy people could easily pay from their own resources, leaving those with serious medical problems exposed to thousands of dollars out of pocket.
This standard was also repeated at Medicare Part D (medication), which began in 2003.
In 2022 the IRA law provided additional protection for the most ill registered. But deciding which medicines will be included in the initial “negotiations” price, the government chose those medicines that cost Medicare the most money, not the drugs that put the biggest financial burden for the registered.
Private insurance: perverted motivation
Due to unwanted regulations, private insurers also face perverted motives. With an exception described below, no insurer in the healthcare system wants to register with a sick person. No employer. No commercial insurer in the market. No Medicaid Managed Care program. And no security network.
Whenever someone with expensive medical problem enters one of these plans, the organization loses money. If the patient leaves the plan (for any reason) the plan earns money. If the plan develops a rumor that it is really good at handling serious medical problems, it will attract more sick people and suffer more losses.
Given the horrific economic incentives created by the government regulation, the surprise is not that some patients are experiencing mistreatment. The surprise is how few there are.
A remarkable exception to these observations is the Medicare Advantage program.
More than half registered Medicare are now in private health insurance plans. Like everyone else in the country, they pay for community ratings independent of their state of health. But unlike everyone else, their premiums are supplemented by Medicare based on individual risk assessments.
As a result, the overall premium that the plans receive makes them healthy and the sick equally attractive from the economic point of view.
Free market reforms
As noted in Part II, in a free health insurance market, companies will use objective data to determine if a drug was costly. They will publish the standard they use to make these determinations (how much to spend per year of life, eg). People who are more risks- opposed to the average could buy “conclusion” insurance that pays for medicines not covered by their health plan. Also, different designs could have different cost-benefit standards, provided they are completely revealed.
We could do this now with the Medicare Advantage (MA) program. As proposed in Part II, we could also consider leaving the law on antitrust legislation and allowing its insurers to collectively negotiate with drug companies as a group. This would allow Monopsony on the buyer’s side to negotiate with a monopoly on the seller’s side.
What about traditional Medicare? In addition to the perverted political incentives discussed above, there is another problem: Medicare drug coverage and its medical coverage are the responsibility of different insurers with conflicting interests. If a chronic patient does not take his or her medicines, the company financially secures drug profits because it avoids the cost of medication. But if the patient appears in an emergency room because he has not taken the drugs, this cost is covered by the medical insurer.
This problem does not arise in the Medicare Advantage program, because only one insurer covers all costs. This is why some MA designs make maintenance medicines free to chronic registered. Plans believe that drug costs are lower than the cost of ER visits and hospital imports that may occur with patients with non -compliant.
An answer to the dysfunctional arrangement to traditional Medicare is to encourage MA recording with (1) release and making these plans more attractive and (2) MA’s registration for the default option for new recorded Medicare. Since the MA program has a lower cost and higher quality than traditional Medicare, these would be good things to do in each case. One final step is to let traditional Medicare pay the drug prices negotiated by MA plans instead of government negotiations and government price controls.
Then we could reform the individual market (where people who are not in Medicare buy their own insurance) according to Medicare Advantage Lines – a reform Professor Lawrence Kotlikoff and I suggested several years ago. Something similar could be done with Medicaid Managed care.
This leaves the purchase of employers. Space does not allow a long discussion on how to reform it but Stanford Economist John Cochrane He has shown how the private insurance market could work in a way that insurers do not have perverted motivation to attract healthy and avoid the sick. In fact, without the poor intervention of the government, this type of insurance would have been naturally evolved through free market competition.
