By making full use of his executive authority, President Donald Trump has helped to reduce health care costs by increasing choice and competition.
But his recent executive order to base Medicare drug prices on rates set by foreign governments is a misstep.
Instead of importing price controls, the Trump administration should pursue bipartisan Medicare reforms that would cap seniors’ out-of-pocket spending on prescription medicines and save taxpayers tens of billions of dollars.
Technically, two Medicare drug programs exist. The first (Medicare Part B) pays for medicines that are usually administered by doctors, such as chemotherapy infusions. The second (Medicare Part D) covers prescription medicines that beneficiaries typically pick up at neighborhood pharmacies.
Although Trump’s executive order provides little in the way of detail—a job that will fall to bureaucrats at the Centers for Medicare and Medicaid Services—it calls for linking drug prices under both Parts B and D to those paid by selected foreign governments.
Imposing price controls would be a mistake with both programs, but their application to Part D would be doubly unfortunate.
Part D represents the leading edge of Medicare reform. The government provides income-related subsidies to seniors, who shop for the private drug coverage that best meets their own needs.
Drugmakers and pharmacy benefit managers negotiate price discounts on drugs, just as they do for employer-sponsored coverage or individual health insurance. This is a marked difference from the traditional Medicare fee-for-service program, which relies on a highly politicized, bureaucratized, and fundamentally corrupt government rate-setting process.
Consumer choice and competition have made Part D the rarest of government programs, one in which spending has not spiraled out of control. In fact, government actuaries report that federal general revenue spending on the program was $70.2 billion in 2019. That is less than federal Part D spending in 2016 ($82.4 billion).
Beneficiary premiums help pay the program’s costs. Because those costs have grown only moderately, premiums remain low. In 2021, the program’s 16th year, premiums will average $30.50. That’s less than government actuaries (erroneously) projected for 2006, the program’s first year ($35).
By providing seniors low premiums for drug coverage, the Part D program has reduced Medicare spending on doctors and hospitals. Some drugs are expensive, but they cost less than hospital stays. Chris Pope of the Manhattan Institute estimated that $100 in Medicare Part D drug spending reduces Medicare spending on other covered services by $95.
The Part D program isn’t perfect. In recent years, spending on costly medicines known as “specialty drugs” has risen sharply. That is in part because the program’s complex benefit structure incentivizes drugmakers and pharmacy benefit managers to push a beneficiary’s spending into the highest benefit tier, where taxpayers pick up 80% of drug costs.
Congress last year developed bipartisan reforms to realign these incentives. The legislation would have required drugmakers and pharmacy benefit managers to bear the lion’s share of costs in the catastrophic tier, giving them strong incentives to negotiate better prices on the costliest medicines. It also capped the amount a senior would have to spend in any year on their prescriptions.
These reforms can serve as the centerpiece for legislation that would have reduced drug spending for beneficiaries, while saving taxpayers tens of billions of dollars.
Instead, some members of Congress, including those who supported the Part D reform, refused to back those reforms unless they were coupled with sweeping price controls. House Speaker Nancy Pelosi, D-Calif., jammed a partisan price control bill through the House, dooming Part D changes that most members support.
Faced with the prospects of accomplishing little on drug pricing, the Trump administration settled for an executive order advocating price controls.
The administration’s frustration with partisan inaction on Medicare reform is understandable. Its decision to impose poorly conceived and constitutionally dubious regulations is not.
Price controls employed by foreign governments have no place in the U.S. Countries that impose them limit generic competition, stifle innovation, and deny their citizens access to many newer medicines.
For example, while Americans have access to 96% of breakthrough cancer treatments introduced between 2011 and 2018, Canadians have access to only 59%, the Swiss to 62%, and the French to 66%.
The government should not adopt policies that threaten Americans’ access to the newest and best medical treatments. Nor should it discourage pharmaceutical innovation, particularly at a time when we are relying on the industry to develop COVID-19 vaccines and treatments.
The president’s executive order would damage the Medicare Part D program, which is generally working well for taxpayers and seniors.
The administration should advocate reforming Medicare Part D through bipartisan congressional action, not deforming it with foreign price controls.