Price Controls Can Be Deadly
A 2003 law fixes the price Medicare will pay for injected drugs to an “average sales price” that is at least six months old at any given time. This flawed concept means even if a generic firm raises its price to reflect increased production costs, the new price won’t get paid by Medicare—meaning purchasers would be losing money for months at a time. The result is that generic prices can’t rise to reflect changing demand or the need for bigger investments in manufacturing.
To fix this, we should lift existing price controls when it comes to critical injectable drugs that are generic. First, Medicare can be directed to ditch the flawed “average sales price” and reimburse manufacturers for these drugs according to the price that is paid by wholesalers on the open market and already reported to Medicare. Then generic firms could adjust prices to match rising production costs and meet demand.
These drugs should also get a holiday from other Medicaid price-control schemes that serve to distort market prices…. Better still, Medicare can move the reimbursement of these drugs from its price-controlled “Part B” scheme and into its “Part D” drug program, which already pays for the pills that senior citizens get from pharmacies….
Allowing generic injectables to be priced competitively would allow manufacturers to recoup the costs of production and bring shortages to an end.
See Scott Gottleib WSJ editorial. See also our previous posts here, here, here and here.
Price controls worked so well for the Soviets, especially when it came to wheat. When will we learn?
The price control system has an added incentive for oncologists to substitute more expensive drugs for generics since the generics are often in short supply and the fees Medicare pays on more expensive drugs are higher.
I am confused. On October 26, the American Action Forum published a paper by Doug Holtz-Eakin and Han Zhong, “Medicare Part B Drug Reimbursement: Why Change a Market-Driven System That Works Well At Controlling Costs?”, which argued that Average Selling Price (ASP) plus 6 percent worked well.
I struggle to define ASP as a controlled price because it is a passive calculation of what all payers pay. It replaced Average Wholesale Price (AWP), a.k.a. “Ain’t What’s Paid”, which was more subject to manipulation.
Many have argued the fact that ASP only updates with a six-month lag, which means marginal suppliers cannot re-enter the market immediately after a shortage happens (or, in a more perfect market, just before a shortage happens). I struggle to follow this line of thought. Surely, marginal manufacturers cannot ramp up in 24 hours!
Also, if these suppliers cannot manage a pricing lag of six months, they have some serious marketing and strategy problems. Do prices of highly engineered goods in other markets enjoy the power to change prices daily? As well, if the suppliers suffer from the 6-month lag in an enviroment of rising costs, they benefit when costs decrease. (Although, it looks like that doesn’t happen, due to ever increasing regulation.)
So, I think it’s straight bureaucratic obstruction of manufacturing capacity to blame.
Nevertheless, there’s no reason (with a little effort on the electronic invoices) that the ASP could not be updated a lot faster than every six months. Nowadays, it should almost be live.
Good post.