Health Reform Pharmaceuticals Public Policy

My take on American Patients First

In broad strokes, the American Patients First plan aims to lower list prices, lower patients’ out-of-pocket costs while maintaining incentives for innovation.   In short, this is a sensible strategy, although there are some concerns about how more restrictive formulary designs could restrict consumer choice.

American Patients First in brief

To maintain manufacturers incentives to innovate, the plan insures that if manufacturers of brand-name drugs do lower their prices, they will keep a larger share of this price through a reduction in mandatory government discounts, such as the 340B program. Further, the government aims to incentivize other countries (outside the US) to increase their drug prices to incentivize innovation.

Consumers will pay less as well because any rebates received would be credited to their cost sharing, some/all Part B drugs would be moved to Part D, and there would be an out-of-pocket maximum.  Further, the administration is considering $0 cost sharing for generic treatments for low-income seniors. Additionally, approvals for low-cost generic and biosimilar products would be expedited and Part C/D plans would be able to substitute generic onto their formularies mid-year.

Why would list prices fall?  The American Patients First blueprint would allow Part D plans to negotiate similar to drug plans in the private sector.  Further, the administration is considering limiting cost increases to inflation after brand names launch.

Defining price/cost/what we pay

The first quotation from President Trump in the American Patients First blueprint is the following:

One of my greatest priorities is to reduce the price of prescription drugs. In many other countries, these drugs cost far less than what we pay in the United States.

Clearly drug prices/cost are important here.  However, you will note a number of price/cost related concepts: price, cost, what we pay.   Let’s take each in turn:

  • Price: I’ll define this as the list price for a drug
  • Cost: Health plans rarely pay the list price.  Through negotiated rebates with manufacturers, government mandated discounts (e.g., the 340B program; Medicare best price), and other factors, health plan’s costs is much less than the list price manufacturers charge.  Conversely, one could say that manufacturer’s do not keep the full price.  One study from USC found that manufacturers keep only 41% of the list price, an amount similar to the amount intermediaries keep.
  • What we pay.  This is patient out-of-pocket cost.  This varies by insurance plan, type of drug (oral vs. injectable), but out-of-pocket costs include coinsurance, copayments and deductibles.

What should we be paying?  In an ideal system, prices would be high to incentivize innovation, but patient out-of-pocket costs would be low to maximize use of high value treatment.  A paper by Lakdawalla and Sood (2013) argues that this two-part price mechanism is actually accomplished though the health insurance system.  Health insurance increases dynamic market efficiency.  Since most of the cost to develop a drug is R&D and production costs are relatively low, economic theory says that price and marginal cost should be equal implying that patient out-of-pocket costs should be low.  This is exactly what health insurance does (or is supposed to do).

Key components of the American Patients First Plan

Incentivizing innovation

A key argument in American Patients First is that manufacturers should keep a higher share of the list price.  The President’s plan would consider eliminating the ACA’s “excise tax [on brand drugs], an increase in the Medicaid drug rebate amounts, and an extension of these higher rebates to commercially-run Medicaid Managed Care Organizations.” Additionally, the administration seems to want to limit the scope of 340B discounts which would result in more revenue in the hands of manufacturers.

The administration also wants to raise the price that other countries pay. This proposal echoes a recommendation from the Council of Economic Advisors. Life science firms R&D decisions depend on their expected global revenue.  As prices in non-US OECD counties are much lower than the US, the US consumer is footing most of the bill for innovation.  In short, non-US developed countries are getting a great deal at the expense of US consumers.  The Trump plan would “assess the problem of foreign free-riding”, however it is not entirely clear how the US would incentivize/compel other countries to increase reimbursement for drugs.

On the downside, the administration would facilitate introduction of generics and biosimilars.  These would include faster regulatory approval and fewer “loopholes” that branded product manufacturers could use to delay the introduction of generics.  While this is good for current consumers, it would drive down life sciences revenue and could be an impediment to innovation.

Despite the threat from increased generic competition, on net this is a sensible approach.

Moving toward value-based payment

The administration is also considering novel approaches that link prices more closely to the value they prescribe. Some drugs are used to treat multiple diseases, but these drugs may be more effective for one of the diseases than another.  The Trump plan would consider the use of indication-specific pricing whereby high-value treatments are paid more.  Outcomes-based contracts would also be considered as well as value-based insurance design.  In fact, there is already a value-based insurance design pilot study in Medicare that began in January 2017.

These approaches make sense as high-value treatments would receive higher reimbursement.  This would incentivize life sciences firms to focus on developing high-value innovations

Lowering patient cost

This would occur through increased access to generics and biosimilars and an out-of-pocket maximum on Part D drugs.  Generic manufacturers would have easier access to brand samples.  It appears that the FDA would ease the path for biosimilar regulatory approval.  A report from my former colleagues at Acumen explores the impact of moving some Part B drugs to Part D (and vice versa).   The plan calls for lowering patient cost-sharing for 340B drugs.

Additionally, if rebates that lowered drug costs were applied to a patient’s coinsurance, this would lower out-of-pocket costs as well.


Sharing the actual list prices more readily would help consumers better know treatment prices.  The administration would also update “…Medicare’s drug-pricing dashboard to make price increases and generic competition more transparent.”

Lowering list prices through increased competition (and government mandates)

The administration would allow drug plans more negotiating leverage with drug manufacturers.  As stated in American Patients First, they are looking to reform Medicare Part D in order to “…give plan sponsors significantly more power when negotiating with manufacturers.”  For instances, some Part B drugs could be moved over to Part D and Part D plans could negotiate prices.  In addition, plans could negotiate when there is a single drug available.  The proposed plan would “…require a minimum of one drug per category or class rather than two.”  The additional negotiating leverage would drive down prices, but it also could severely restrict patient access.

Another provision in the President’s FY2019 budget would establish “an inflation limit for reimbursement of Medicare Part B drugs.”  While this restriction would add predictability to drug prices, and would lower prices mechanically; manufacturers may respond by increasing the list price at launch.  Thus, the inflation limit may result in higher drug prices at the start of a drug’s patent period but lower prices towards the end.

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