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Negotiation: A three-step solution to affordable prescription drugs

September 04, 2019

Medicare often spends $3,590 for an individual's 30-day prescription after adjusting for all rebates, and prices continue to rise.

Dr. Richard G. Frank of the Harvard Medical School and Dr. Len M. Nichols of George Mason University's College of Health and Human Services offer a perspective published today in the New England Journal of Medicine that balances prescription drug costs and incentives for innovation.

"The problem is lack of competition, and consumers and taxpayers are left picking up the check," explains Nichols. "Giving Medicare the ability to negotiate prices with pharmaceutical companies is critical to bring down the cost of health care."

Medicare spending for prescription drugs is growing at higher rates than other Medicare spending (9% for Medicare Part B drug spending and 7.3% for Medicare Part D, annually). Specialty drugs--those for a smaller number of patients that cost more and require clinical supervision--were responsible for 63% of the spending growth in Medicare Part D from 2010 to 2015.

"We need carefully designed Medicare prescription drug negotiations," says Frank. "We've proposed specific criteria to guide negotiations and maximize savings while preserving incentives for innovation."

To optimize negotiations, Frank and Nichols recommend two guiding principles: (1) targeting the right drugs and (2) establishing reference prices for negotiations. Medicare would begin negotiations on drug pricing when one of two criteria are met: (1) little competition with high markups and (2) high levels of annual Medicare spending or more than $500 million.

However, negotiations need to meet 3 items for success. First, Medicare will need the power to penalize manufacturers if a reasonable price could not be obtained. Second, upper and lower limits of drug pricing would be set in advance by using the dollars per quality-adjusted life-year (QALY) gained or a similar index. This step will allow higher prices for drugs providing more clinical value and, thereby, provide incentive for developing medications needed most by populations. Third, a neutral third-party arbitrator would become involved if negotiations could not be reached between Medicare and a manufacturer.

Implementing these criteria, which are administratively feasible, would foster exchange and voluntary agreements between Medicare and pharmaceutical manufacturers to balance power amongst consumers and manufacturers while preserving incentives to innovate. This process would reduce the cost of prescription medications for taxpayers and consumers and slow accelerating Medicare expenses.
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Richard G. Frank, PhD

Richard G. Frank, PhD, is the Margaret T. Morris Professor of Health Economics in the Department of Health Care Policy at Harvard Medical School. He has served as the deputy assistant secretary for planning and evaluation, special advisor to the Office of the Secretary, and assistant secretary for planning and evaluation at the U.S. Department of Health and Human Services. His research is focused on the economics of mental health and substance abuse care, long term care financing policy, health care competition, implementation of health reform and disability policy. Frank holds a PhD in Economics from Boston University.

Len M. Nichols, PhD

Len M. Nichols, PhD, is the director of the Center for Health Policy Research and Ethics (CHPRE) and a professor in the Department of Health Administration and Policy at George Mason University's College of Health and Human Services. He serves on the board of directors of the National Committee for Quality Assurance and the Physician-Focused Payment Model Technical Advisory Committee (PTAC), which advises the Secretary of Health and Human Services on Medicare payment policies. He served as senior advisor for health policy at the Office of Management and Budget in the Clinton Administration and was an Innovation Advisor to the Center for Medicare and Medicaid Innovation in 2012. His research is focused on using payment and delivery reform to achieve health equity goals. Nichols holds a PhD in Economics from the University of Illinois.

About Harvard Medical School

Since the School was established in 1782, faculty members have improved human health by innovating in their roles as physicians, mentors and scholars. They've piloted educational models, developed new curricula to address emerging needs in health care, and produced thousands of leaders and compassionate caregivers who are shaping the fields of science and medicine throughout the world with their expertise and passion. For more information, visit https://hms.harvard.edu/.

About the George Mason University College of Health and Human Services

George Mason University's College of Health and Human Services prepares students to become leaders and shape the public's health through academic excellence, research of consequence and interprofessional practice. The College enrolls 1,917 undergraduate students and 950 graduate students in its nationally-recognized offerings, including: 5 undergraduate degrees, 12 graduate degrees, and 11 certificate programs. The College is transitioning to a college public health in the near future. For more information, visit https://chhs.gmu.edu/.

George Mason University

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