Chernew on the Trump Drug Pricing Plan: Balancing Innovation and Affordability

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Harvard healthcare economist Michael E. Chernew, PhD, who is co-editor in chief of The American Journal of Managed Care®, discusses elements of the Trump administration proposal to control drug prices.

Creators of Trump’s blueprint to control drug prices, American Patients First, say it represents real reform. Critics see a pulled punch to the pharmaceutical industry.

Having any plan shows how frustrated voters are with drug prices, and if this one doesn’t work, “it won’t be the last word,” said Michael E. Chernew, PhD, the Leonard D. Schaeffer Professor of Health Care Policy and director of the Healthcare Markets and Regulation Lab at Harvard Medical School, who serves as co-editor-in-chief of The American Journal of Managed Care® (AJMC®).

Chernew, a former vice chair of the Medicare Payment Advisory Commission (MedPAC), discussed the proposal for a podcast that will appear Tuesday on During the discussion, he presented the drug pricing challenge as a classic regulatory dilemma: how to keep prices high enough to encourage innovation while still ensuring access to those who need life-saving therapies.

“We are always trying to balance innovation with affordability,” Chernew said. “What I think we are hearing politically in this country is that people want more emphasis on affordability and less emphasis on innovation—or at least people believe they can have more affordability with the same amount of innovation.” Chernew, however, has his doubts.

President Trump and HHS Secretary Alex Azar, a former Eli Lilly president, outlined the proposals March 11, and Azar has since defended the plan from critics who say the administration went too easy on the pharmaceutical industry. (Not all agree; conservative commentator Avik Roy said the blueprint “isn’t perfect,” but could have a major impact.) In a letter released the day of the plan, Azar; FDA Commissioner Scott Gottlieb, MD; and CMS Administrator Seema Verma said the plan had 4 major parts:

  • HHS will increase competition in the drug markets
  • Medicare Part D will gain new tools to negotiate discounts for seniors
  • Manufacturers will gain new incentives to lower list prices
  • The administration will act to reduce consumers’ out-of-pocket spending

No direct negotiating for Medicare

Chernew said the most important thing about the plan is what it does not do: Trump did not ask to empower Medicare to negotiate directly with drug makers, something he and opponent Hillary Clinton both supported as presidential candidates in 2016. Instead, the administration wants to expand the role that private sector health plans play in negotiating discounts in Medicare Part D. AJMC® asked Chernew to explain the pluses and minuses of this approach.

“The advantage of having the private sector manage the negotiation is there’s some flexibility related to what people might demand, and the ability for some people to get access to more drugs, in a range of ways,” Chernew said. “The disadvantage, of course, is with a bunch of competing health plans, there’s no way they’re going to have the bargaining clout of the US government, should they elect to use all their bargaining clout.”

He pointed to Azar’s explanation that if private plans end up with different formularies, a senior who needs a certain prescription can shop around for a plan that offers the best deal. Azar had a different view of the government’s use of its “clout,” and portrayed it in darker terms, saying that if Medicare did the negotiating for the whole system, pressuring companies to lower prices would mean leaving some drugs off formulary.

Much ado about rebates

In the weeks before the plan’s release, Gottlieb made several speeches criticizing the role rebates play in price escalation and the lack of transparency surrounding them. So, it was no surprise that that these discounts, which manufacturers pay to health plans or pharmacy benefit managers to maintain their formulary position, came in for scrutiny in Trump’s plan. AJMC® asked Chernew: should rebates get all the attention, as opposed to actual drug prices? Chernew agreed this an essential question.

Rebates, he said, have created a system that makes it hard for policymakers and others to understand what’s happening. “What really matters is the ultimate price we pay for drugs. In fact, it is the case that drug prices—after you take into account rebates—have risen much more slowly than drug prices before you take into account rebates. Most of the rhetoric around rising drug prices focuses on the spending before the rebates are applied, largely because you can’t get adequate data on the rebates,” Chernew said.

Focusing on prices strikes at the heart of the matter: the search for that point of equilibrium—or a mechanism to achieve it—between innovation and access. The challenge, Chernew said, is that this search remains unresolved. “It’s certainly reasonable to focus on the rebates, but the fundamental problem is not around the rebates—it is around the overall prices of drugs. And that is super important, because it is the higher overall prices of drugs that both encourage innovation—which is a good thing—but discourage access, and place a burden on patients who need access to these new drugs,” he said. “That is where the dilemma lies.”

Details are a work in progress

Chernew said it’s too soon to say whether ideas like merging Medicare Part B and Part D will work; right now, this is a goal, and the details will matter. “It sounds appealing to think about how to merge those 2 programs, but I think operationally, that’s going to be very challenging to do. There’s going to be the potential for a lot of unintended consequences for what patients have to pay out of pocket,” as the patient cost-sharing elements of each program are quite different.

He would be “astounded” if there was any traction to the idea that US trading partners raise their drug prices so make the system fairer for American patients. Chernew is not convinced it would work anyway. “I question the hypothesis that if they pay more in Canada we will be charged less in the United States.”

Last week’s action by Gottlieb to publicly shame companies that have been withholding samples needed for testing to create generic drugs has merit, Chernew said, even if there’s not empirical evidence that it works. It fits with the plan’s overall emphasis on promoting more competition, which Chernew believes is one of its most important elements. The premise of the patent system is that innovators enjoy protection from competition for a set period, during which they can charge high prices; after that, he said, everyone is supposed to enjoy the fruits of innovation. Ending the abuses and distortions could add to the roster of generics and biosimilars, and “basically keep the premise alive.”

Americans have had enough

“The American public is unwilling, or unable, to continue to spend ever-increasing amounts on healthcare services,” Chernew said. While there are questions about how far drug prices can be lowered without harming innovation, the topic “is a matter of debate.”

What is clear, however, is that frustration among Americans has reached the point that drug prices are now a central issue on the nation’s political agenda. Both Trump and Clinton talked about it for a reason: they saw the range of polls taken in 2016, which showed this was the single healthcare issue that united Americans across the ideological spectrum. A March 2018 Kaiser Health Tracking poll found that 52% of Americans believe legislation to lower drug costs should be top priority for Trump and Congress, while 72% say pharmaceutical companies have “too much influence.” Trump, who has been criticized for not “draining the swamp” as promised, listed what pharmaceutical companies spend on lobbying while unveiling the drug pricing plan.

Chernew agrees with those who say the Trump plan doesn’t go as far as it could have—it doesn’t call for central government management of drug prices. But there’s plenty of incentive for the administration and Congress and do something that makes a difference. “While these may be weaker solutions than many would like,” he said, “if it turns out they don’t address the problem effectively, this won’t be the last word on how we are going to deal with high drug prices and high medical spending more broadly.”