Steps to Control Prescription Costs – Testing Ways to Cut Drug Prices in Medicare

Anyone who follows the health insurance industry at all (or at least watches the news) knows that prescription drug prices continue to be the target of many on Capitol Hill and a rallying cry for what is wrong in health care. The challenge has always been: what can anyone do about it?

For many, tinkering with a free market by forcing prices down through regulation (like many European countries do) sounds like big brother taking it one step too far. But congress may finally be coming around to their best leverage point, Medicare.

As noted by a recent NY Times article, Medicare spent over $457 billion on prescription drugs last year making it by far the largest consumer of and payer of prescription drugs in the country. With buying power comes leverage which if used correctly can begin to trickle down to the rest of the commercial market. For example, currently Medicare payments to doctors and hospitals for Part B drugs are generally based on the average sale price of a drug plus 6 percent. Instead of simply paying a flat fee, plus a markup why not push doctors to substantiate which drugs are working, if there are better alternatives, and paying for outcomes and not services.

Some of the ideas being tested to put pressure on the rising costs are compelling. For example, Medicare would set a standard payment rate, or benchmark, for a group of “therapeutically similar drug products.” Basically this means is a generic or brand name drug has proven to be effective, why pay for the more expensive version (plus 6%). Another idea is having Medicare pay drug companies based on how well their treatments work in patients. Payment might be linked, for example, to the effectiveness of a drug in preventing heart attacks. Or yet another idea is Medicare would reduce the 6 percent add-on payment to 2.5 percent and pay a flat fee per drug on top of that.

If we, as a country, want to get serious about bending the costs curve of prescription drugs we need action and substantive solutions. Starting with Medicare makes a lot of sense. Let’s just hope this doesn’t get locked up in political gridlock. Our prescriptions costs are counting on it.

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