Two Ways to Reduce Prescription Drug Costs
High and rising prescription drug costs are contributing to the budgetary pressure faced by the federal government. Also, a significant number of patients face very high out-of-pocket costs.
As part of our Health Savers Initiative, a project of the Committee for a Responsible Federal Budget, Arnold Ventures, and West Health, we recently published two policy briefs outlining and estimating new policies that would save money for the federal government and patients by increasing competitive forces in the prescription drug market. These new options add to the menu of options already produced by the Health Savers Initiative.
Our two new briefs focus on options to reduce prescription drug prices. They include:
- Injecting Price Competition into Medicare Part B Drugs. This brief examines how a new payment formula for physician-administered drugs in Medicare Part B could inject price competition into drug classes that have clinically comparable options but wide price variation – blunting the advantage that higher-priced drugs have under the current formula.
- Limiting Evergreening for Name-Brand Prescription Drugs. This brief examines how changing Food and Drug Administration (FDA) rules that grant market exclusivity to name-brand drugs could increase generic competition, curtailing manufacturers ability to take advantage of the current rules by using “evergreening” strategies to extend their exclusivity periods and either delay generic drug market entry or limit the number of patients who switch to a new generic.
Through its briefs, the Health Savers Initiative works to identify bold and concrete policy options to make health care more affordable for the federal government, businesses, and households.
For policymakers interested in pursuing legislative improvements, our goal is to provide well-developed, innovative, and viable policy options. We also aim to bridge the divide between the promising ideas often found in academia and the development of specific policy levers that can be legislated and implemented. Finally, our project aims to attach savings estimates to these options that, when possible, measure the savings not just for the federal budget, but also to national health expenditures, federal and state government health programs, and to premiums and cost sharing for individuals.
These briefs highlight options meant to help policymakers gain a better understanding and weigh the costs and benefits of whatever health savings policies they choose to pursue. They do not represent official recommendations from the Committee for a Responsible for a Federal Budget, its board, or the partner organizations.
Injecting Price Competition into Medicare Part B Drugs
Currently, Medicare Part B, which covers outpatient physician services, pays for physician-administered drugs by reimbursing physicians the average cost for each specific drug plus a 6 percent add-on percentage of that cost. This arrangement creates misaligned incentives that blunt price competition and advantage higher-priced drugs – especially within drug classes that have clinically comparable options but a wide variation in prices.
This policy option looks at implementing “clinically comparable drug pricing,” where Medicare payments for physician-administered drugs would be set at a single price for groups of drugs within the same therapeutic class. That price would be set at the weighted average of prices manufacturers charge for each of the clinically comparable drugs.
This reform should encourage physicians to administer lower cost drugs and manufacturers to lower prices to maintain market share. The policy would reduce Medicare costs and would likely result in savings for Medicare Advantage plans and commercial payers.
Over the next decade (2021-2030), implementing “clinically comparable drug pricing” could:
- Reduce total (gross) Medicare spending by at least $122 billion in just three drug classes.
- That includes $56 billion of savings to fee-for-service Medicare, $37 billion in lower beneficiary premiums and cost sharing, and $29 billion in savings for the Medicare Advantage program.
The policy would also generate private sector spillover savings. For example, in the rheumatoid arthritis class of drugs, the policy could:
- Reduce commercial drug costs by at least $21 billion.
Limiting Evergreening for Name-Brand Prescription Drugs
To encourage medical innovation, the FDA grants temporary market exclusivities to new name-brand drugs. These exclusivities prohibit generic drug competitors' access to the market for a limited period. However, drug manufacturers are often able to take advantage of the current rules, using “evergreening” strategies to extend their exclusivity periods and either delay generic drug market entry or limit the number of patients who switch to a new generic.
One evergreening tactic manufacturers employ involves introducing a new “line” or version of their drug shortly before a generic competitor is released. This new line can be granted its own exclusivity period. For example, a manufacturer may introduce an extended-release formulation just before a generic of the original immediate-release formulation enters the market. This can allow a brand manufacturer to maintain market share in the face of generic competition – increasing its profits and increasing payer and patient costs.
New FDA exclusivity rules could lead to meaningful savings for consumers, commercial insurers, and government payers. The policy change could also speed up the market entry of brand extended-release and other reformulations, providing clinical benefits to patients.
Over the next decade (2021-2030), this policy could:
- Reduce federal deficits by at least $10 billion.
- Save Medicare Part D $7 billion in drug costs and Medicare beneficiaries $4 billion in lower premiums and cost sharing.
- Reduce federal and state Medicaid drug spending.
- Reduce private sector drug costs by $9 billion.