New Taxes Won’t Lower Drug Prices

Prescription drug prices continue to be a hot political issue, with the Trump administration preparing to release an action plan as soon as repeal and replace legislation clears Congress.

Mick Mulvaney, who heads the White House budget office and is participating in the talks, floated an idea last week that should quickly be crossed off the list of policy ideas.

He told the LIGHT 2017 Forum at Stanford University that prescription drug companies receive a “tremendous giveaway” in Medicare’s prescription drug program because they don’t pay the rebates the companies are forced to pay in Medicaid.  “We’ve actually floated that idea with the president, to be a little bit heavier-handed on the rebates they have to pay in order to drive the prices down,” Mr. Mulvaney said.

The fact is that rebates are taxes.  How could imposing a new layer of federal taxes on prescription drugs lower the cost for consumers?   It couldn’t.  The tax will not reduce drug prices and will more likely increase them.  And it will discourage investments in research into new cures that could increase competition and bring prices down over the longer term.

The Medicaid rebates Mr. Mulvaney is talking about basically are kickbacks that companies must pay the government in order to participate. The companies also are required to give Medicaid their best price, which has the perverse effect of raising the base prices upon which the rebate is calculated.  This market distortion actually deters genuine price negotiation and therefore drives up the cost of prescription drugs in Medicaid—prices paid primarily by federal and state taxpayers.

Unlike Medicaid, there is genuine price competition in Medicare today for pharmaceuticals.  The private drug plans participating in the Medicare prescription drug benefit compete fiercely to get the best prices from drug makers, with plans vying to provide the best value at the best price to attract subscribers.  The savings from these negotiations go to seniors rather than into federal coffers.

According to a recent study by QuintilesIMS Institute, drug costs paid by plans and patients in Medicare Part D are 35% below list prices across 12 therapy classes widely used by Medicare beneficiaries.

The result:  Seniors pay premiums for their drug benefit that average $34 a month—about half the amount the Congressional Budget Office predicted they would be paying by now when Part D was created.  And taxpayers benefit as well:  The Medicare prescription drug benefit program is costing taxpayers 45% less than CBO’s initial 2004-2013 projections. The key is genuine market-based price competition.

And the Medicare drug benefit program is hugely popular with seniors. Several surveys show 90% or more of Part D enrollees are satisfied with their coverage and say their coverage works well, according to the Healthcare Leadership Council.  They like the choice of plans and benefit from price negotiations.

Finally, CBO has said that giving the secretary of Health and Human Services the authority to negotiate lower prices for a broad set of drugs on behalf of Medicare beneficiaries would have “a negligible effect on federal spending.”  It based this assessment on its view that the Secretary would not be able to leverage deeper discounts for drugs than risk-bearing private plans, given the incentives built into the structure of the Part D market where plan sponsors bid to participate in the program, compete for enrollees based on cost and coverage, and bear some risk for costs that exceed their projections, according to the Kaiser Family Foundation.

Government price negotiations also would severely curtail the number of drugs that would be available to beneficiaries.  The Veterans Affairs has a great deal of experience in this space.  The result of its price negotiations with drug companies isn’t good:  The VA offers veterans 12% of the newer drugs on the market, compared to 81% in Medicare Part D, according to a survey by Xcenda.

The logic is clear:  Private competition is a stronger force for price negotiation than government price controls, which have the inevitable effect of reducing the supply of new and innovative drugs, distorting markets, creating shortages, rationing, and driving up prices.

The answers lie not in more government taxes and regulation, but in carefully crafted initiatives that target the problem, as outlined in a post by American Action Forum President Doug Holtz-Eakin.

Holtz-Eakin explains, “There is no general prescription drug ‘crisis’…Instead, there appear to be two significant, different issues: (a) high costs of some specialty drugs, especially cancer treatments, and (b) sharp price spikes for some generic drugs (especially after they are bought by new companies).”

He outlines market-based policy responses and concludes, “In the end, the president does not need a sweeping prescription drug policy. He needs some carefully crafted initiatives in targeted areas.”

What is needed are modernized incentives and processes for companies to develop new and better drugs.  With new Food and Drug Administrator Scott Gottlieb now confirmed, he will bring his broad and deep understanding of the health sector to his work in streamlining the FDA toward that goal.

Once place to start is with the critical need for new treatments to respond to the problem of drug-resistant infections and the decline in the development of new antibiotics.

Pacific Research Institute scholar Wayne Winegarden explains this “increasingly serious threat to global public health” in a new paper that explains how market-based policies can lead to more cutting-edge research and newer, effective treatments.

In a survey jointly conducted by the Galen Institute and Center Forward, we found that voters strongly support having policymakers in Congress and the administration embrace policies that will speed innovation.

Purple Insights interviewed 800 registered voters and found that nearly all those surveyed favor action on public policies that support medical discovery into new treatments and cures. They want the United States to continue to develop new treatments and cures for diseases and believe these new discoveries are an opportunity to help the United States maintain its competitive edge.

The solution is more competition and innovation, not more government interference and taxes.

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About the author

Grace-Marie Turner is president of the Galen Institute, a public policy research organization that she founded in 1995 to promote an informed debate over free-market ideas for health reform. Full biography