Federal Drug Price Negotiations, Perverse Incentives, and Medicare Reforms
The article examines the current federal government approach to drug price negotiations under Medicare, especially in light of the Inflation Reduction Act (IRA). The Congressional Budget Office (CBO) found that government negotiation would not significantly outperform private negotiating efforts unless it had the option to completely refuse purchasing certain drugs.
The IRA shifts this dynamic by setting "maximum fair prices" for selected drugs through the Department of Health and Human Services (HHS), backed by severe excise tax penalties for non-compliance. Drug manufacturers can avoid these penalties only by withdrawing their products entirely from Medicare and Medicaid coverage, impacting a significant portion of their sales. This regulatory approach contrasts with free-market negotiations and is more akin to price controls.
The article highlights perverse incentives within government-run health care systems globally and specifically in Medicare, where political pressure often leads to under-provision of care for high-cost, seriously ill patients and over-provision for the relatively healthy majority. Medicare and Medicare Part D historically expose the sick to high out-of-pocket expenses, though IRA introduced some protections for the sickest enrollees. Private insurers face similar distortions, largely avoiding high-risk patients due to financial losses, resulting in market imbalances. Medicare Advantage (MA) presents an exception, as it uses risk-adjusted payments that make both healthy and sick enrollees financially viable for insurers.
The author suggests leveraging MA to promote free-market reforms, including collective bargaining for MA plans with drug manufacturers and deregulation to improve enrollment and coverage effectiveness. Additionally, the article discusses misaligned incentives in traditional Medicare due to split coverage between separate drug and medical insurers, which MA plans avoid by covering all patient costs.
The piece proposes shifting traditional Medicare towards MA-styled reforms, including adopting the MA negotiated drug prices instead of government-set price controls. Finally, the article touches on individual and Medicaid markets, suggesting they could be restructured similarly to Medicare Advantage to correct incentive problems.
While noting the complexity of the employer-sponsored insurance market, the author references academic work that outlines how a free-market insurance system could evolve without the adverse incentives currently caused by government interventions. These insights emphasize systemic challenges and potential reform pathways relevant to insurers, policymakers, and health care economists focused on optimizing Medicare drug and medical coverage within the U.S. market.