Everyone’s focused on ever increasing drug prices, including our elected officials on Capitol Hill.

Many are calling for Congress to create a single-payer health-care system. Others on Capitol Hill are introducing statutes to allow the government to negotiate Medicare prices with manufacturers.

I’m not sure if these are the best approaches to reducing drug prices, especially since neither approach will create actual competition that continuously reduces drug prices.

ADVERTISEMENT

We’ve built marketplaces that are the envy of the world, but our government hasn’t been able to create a marketplace for its prescription coverage programs. This would force drug manufacturers to compete on price, as well as drug efficacy, safety and side effect profiles.

In my opinion, this wouldn’t be hard to do. All Congress needs is the political courage to defy the drug manufacturer lobby. They also need the political will to change the way federal programs work, starting with Medicare, which is its largest coverage program.

How Medicare currently operates

Under the current Medicare program, the federal government provides coverage for essentially every approved drug at whatever price the drug is sold.

Meanwhile, the government collects rebates and other monies from manufacturers, but keeps all information about all collected monies entirely confidential.

In so doing, the government creates perverse incentives for manufacturers to raise their prices to make up for the amounts the government collects, resulting in ever-higher federal costs.

ADVERTISEMENT

Making matters worse, Medicare beneficiaries don’t even get the benefit of drug manufacturer’s rebates since rebates aren’t factored into Medicare beneficiaries deductibles or coinsurance payments.

Under Medicare, the federal government also never discloses the amounts it collects on a drug-by-drug basis. As a result, doctors and patients can’t determine the government’s net cost for any drug.

Finally, the government fails to disseminate simple information that would inform doctors and patients about the likely efficacy, safety and side effect profiles of any drug.

Creating a functioning drug marketplace

For any marketplace to work, people need to know the actual prices — as well as the comparative usefulness — of competing products.

What can the federal government do to ensure this knowledge is available to everyone prescribing and taking drugs in the Medicare program?

The government needs to stop collecting secret amounts of rebates and other direct and indirect monies from manufacturers.

Instead, the government needs to require every manufacturer that wants to sell its drugs to Medicare beneficiaries to submit the net cost (factoring in all price reductions) at which the manufacturer is willing to sell each of its drugs.

Submissions should take place on “bid days”, say twice a year — on Jan.1 and July 1 — at a single point in time. This will preclude any manufacturer from knowing the prices that other manufacturers submit and create real competition.

Then the government needs to publish every drug’s net price, by therapeutic category, for all to see. Thus, anyone prescribing any type of drug will be able to search the relevant therapeutic category and compare the net costs of every drug in the category.

Together, these steps will impose price competition. Moreover, unlike the price negotiations that other countries conduct, periodic bid days will create price competition leading to lower drug prices.

Any manufacturer on the first bid day that submits a higher price for its drug than other manufacturers submit in a specific therapeutic category will thereafter lose market share. As a result, on a subsequent bid day, that manufacturer will almost certainly submit a lower price to gain market share.

Meanwhile, any manufacturer that gains market share by submitting a lower price for its drug on the initial bid day will know that it can be underbid, subsequently. Therefore, that manufacturer will have to decrease its price still further on subsequent bid days to maintain market share.

As each bid day takes place, in every therapeutic category where there are at least two drugs available, manufacturers will continuously reduce their prices to ensure they can sell their drugs.

However, the government must take an additional step, because doctors and patients need to know not only each alternative drug’s net cost, but also the relative efficacy, and safety and side effects of each drug. Therefore, the government needs to couple its net price information with simple information related to each drug’s efficacy, safety and side effect profiles.

Today, it’s extremely difficult for anyone to obtain and understand, the above information. As a result, many doctors rely on drug manufacturer reps to provide this information. And most patients have no idea about the utility or potential negative consequences of the drugs they are taking.

If the federal government combines price information with efficacy and side effect information on every drug, the government will create a functioning drug marketplace.

In the long term, manufacturers will likely realize that it makes little sense to spend time trying to gain FDA approval for high-cost drugs that have little efficacy.

ADVERTISEMENT

Similarly, manufacturers will stop obtaining FDA approval for copycat drugs that offer no new benefits and can no longer be sold at high prices. Instead, manufacturers will focus on developing more useful drugs that will truly improve our health.

This is America, and we don’t need to replicate other government approaches to controlling drug prices. Congress needs to create a functioning marketplace that will solve our twin problems of overpriced drugs and opaque drug information.

If Congress changes how Medicare operates, the private marketplace will likely follow.

Linda Cahn is the founder and head of Pharmacy Benefit Consultants and the National Prescription Coverage Coalition.