Americans spent almost half a trillion dollars on prescription drugs last year, or nearly $1 out of every $6 spent on health care. And the total is rising fast, driven by an increased reliance on medications and a shift toward
Americans spent almost half a trillion dollars on prescription drugs last year, or nearly $1 out of every $6 spent on health care. And the total is rising fast, driven by an increased reliance on medications and a shift toward higher-priced drugs.
Federal taxpayers help pay for some of those drugs, and last week the Obama administration proposed a new approach aimed at encouraging the use of the most effective medicines, not the most expensive ones. The proposal was quickly denounced by doctor groups and drugmakers, who argued it could harm patients. But what it really targets is a bad business model that makes health care needlessly expensive.
The focus of the experiment is Medicare Part B, the optional but popular insurance program for older Americans that covers physician and outpatient services. Part B pays for a number of specialty medicines, such as chemotherapy drugs administered in a doctor’s office or hospital. These drugs cost Americans more than $22 billion last year, which was twice the amount spent in 2005. The biggest part of that increase was a tripling in the amount spent on biologic drugs — complex medications generated from living cells — that federal researchers said was mainly because of price hikes.
The Part B drug program exemplifies a problem in the health care system. The way Medicare pays for prescription drugs gives doctors an incentive to choose the most expensive alternatives, and gives drugmakers an incentive to raise prices relentlessly.
Here’s how Part B works for many of the drugs it covers. Doctors, clinics and pharmacies buy medications for the patients they treat, then get reimbursed by the government based on the average price paid for those drugs plus a 6 percent markup. The obvious problem is the more expensive the drug, the more the doctor, clinic or pharmacy makes on the transaction. That encourages them to use the most expensive of the effective treatments, which in turn encourages drugmakers to raise prices.
The system has one important safeguard: Brand-name drugs and their cheaper generic equivalents are reimbursed at the same, comparatively low price, which encourages prescribers to use the generics. But prescribers still have the option to choose a different, more expensive brand-name drug that might not have a generic. If it’s more effective, great. If not, the system gets nothing for the extra money spent.
On Friday, the administration published plans for a five-year experiment designed to test ways to shift to a system that encourages prescribers and drug suppliers to get better results at lower cost. In one part of the test, prescribers would receive a much smaller markup — average cost plus 2.5 percent — and a fixed fee of about $17 per prescription. Other methods to be explored include paying the same amount for different drugs that yield similar effects, and eliminating the 20 percent copay for drugs that deliver the biggest bang for the buck.
The drug industry’s trade association defended the current Part B system, calling it “an effective, market-based pricing mechanism that works to control costs.” But as with so much of the health care system, Part B’s prescription program doesn’t function that way, with prices influenced only by supply and demand. The interests of the people who need care and pay the bills for it have to be aligned better with those of the doctors, hospitals and drugmakers that provide it. The administration’s proposal is an overdue step in that direction.
— Los Angeles Times
