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How the IPI Model Would Introduce New Market Competition to Medicare Drug Spending

The administration’s new initiative on competition and negotiation will result in lower drug prices for seniors.

The Centers for Medicare & Medicaid Services (CMS) recently asked the public: “How can we get drug companies to give American doctors and patients better deals on Medicare Part B drugs?” Somehow, that has led to accusations of importing price controls, threatening patient access, and jeopardizing new cures. It’s time to set the record straight.

Medicare isn’t proposing to set prices in Medicare Part B; it already sets prices in Medicare Part B. CMS isn’t proposing to import foreign price controls; the current Average Sales Price methodology for Part B drugs defended by opponents of this policy, some of whom benefit from the higher prices set by Medicare, enables and subsidizes socialist governments and their artificially low price fixing regimes. As a result, Americans pay 80 percent more, on average, for the most costly physician-administered drugs than patients in other developed countries. Free market advocates and those who have philosophical concerns about government price fixing should be among the most vocal opponents of the status quo.

Americans for Tax Reform has called on the Trump Administration to “ensure that other countries remove their innovation-destroying policies,” and recently accused the Administration of surrendering to foreign countries on drug prices. They could not be more wrong. HHS recently called out the extent of foreign free-riding in Medicare Part B, and CMS followed suit by asking the public for thoughts on an “International Pricing Index,” or IPI, demonstration project to test what could be the first effective tool against foreign price controls. How? Drug companies that don’t agree to prices demanded by foreign governments don’t have to do business there or can negotiate a price more in line with what Americans pay and, therefore, they would not be affected. Or, they could continue giving cheaper prices to countries overseas and take a cut in their drugs’ reimbursement from Medicare. 

Simply put: The IPI demo doesn’t just seek to end foreign free-riding, it introduces competition and negotiation to Medicare Part B drugs. And it provides drug companies with a valid reason to walk away from the negotiating table when other countries demand low prices subsidized by America’s seniors. The socialist systems to whom drug companies are giving better deals simply do not have monopoly power when compared to the importance of participating in the Medicare program.

Drug companies would have you believe that the current Average Sales Price system represents the free market. But for at least 30 percent of Part B spending, Medicare prices are at least half of the market, meaning there is effectively no competition within that substantial federal spending among competing products, so Medicare just pays the bill. In the words of MEDPAC, the system “does not spur price competition among products with similar health effects.”

Need an example? Medicare spent over $1 billion on a particular eye drug last year. The manufacturer of that drug charged America’s seniors 500 percent more than the average price paid by people in economically similar countries. The company could get away with these outrageous price hikes because Medicare represents over 70 percent of its business for that drug, and people with Medicare benefit very little from any discounts provided to other payers.

It’s a crazy system. And it has to change.

Additionally, we believe the IPI model may well mean that, as our prices drop, other countries’ prices rise. But it does not mean that America’s seniors will experience access restrictions.

For those who claim that this proposal hampers future innovation, let us remember that the best way to support future pharmaceutical innovation is to build a sustainable market-based system for pricing prescription drugs. That is the goal of this proposal.

The possible savings American patients would receive over five years represents less than 1 percent of pharmaceutical R&D spending during that time; and the pharmaceutical industry has offered no evidence of that amount having a meaningful impact on innovation.

Additionally, we aren’t interfering where the programs are already working. The IPI demonstration project only applies to Medicare Part B. In the Medicare Part D prescription drug benefit, private plans and drug companies negotiate deals that give seniors access to drugs at a cost comparable to those in Europe. And even in Medicaid, we get far better deals than seen overseas and some 1,300 drugs are essentially free after rebates.

Secretary Azar is delivering on the promises of President Trump’s blueprint, which seeks to keep the U.S. as the world leader in biomedical innovation, so that we always have new cures and cutting-edge treatments for complex diseases like cancer and autoimmune conditions. But when U.S. drug companies voluntarily cut the price of those drugs in Europe or overseas by 80 percent, and Wall Street analysts say they can do so without losing money, Medicare beneficiaries should benefit, too.

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Drug Pricing
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