New Medicare drug pricing rule — a small ‘step’ in the right direction

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The Trump administration’s most recent effort to fight high prices for prescription drugs takes a small step in the right direction. A recent new rule issued by Health and Human Services will use market-based competition to help lower the cost of prescription drugs for the more market- sensitive Medicare Advantage program.

Medical care providers have a financial incentive to prescribe expensive medicines because they often earn a commission based on the value of the drugs they prescribe. Thus, the cheaper the drug, the less commission the care provider stands to earn.

{mosads}Human nature and profit motive being what they are, health-care providers often underutilize cheaper, but effective drugs in favor of their more expensive alternatives. Ignoring or under-prescribing less expensive drugs costs Medicare—and taxpayers—money.


With its over-sized government subsidies, Medicare insulates patients from the high prices of their prescribed medications, removing a powerful force from the prescription drug market — customer sticker-shock.

Medicare’s subsidies tend to mean that patients themselves only pay a little more for the expensive drugs than they would for the less expensive alternative. But that leaves the taxpayers and a debt-laden Medicare program to cover the difference.

The Trump Administration’s new “step therapy” rule does not cure this malady, but it does offer at least a partial market-based remedy that is nothing to sneeze at. Under the new rule, the Medicare Advantage program will allow health-care providers to begin treatment by prescribing patients less expensive drugs (so long as they are safe and have shown similar clinical results) before “stepping up” to more expensive drugs if the cheaper drug does not work. Even if temporary, the initial use of less expensive drug options will help lower Medicare costs and maybe even premiums.

The new rule also creates incentives for patients to ask their care providers for step therapy. Under the rule, insurers will be required to rebate some of the savings from any step therapy prescribed back to the step therapy patient. Such rebates will give patients a profit-incentive of their own for requesting lower priced drugs from their doctors.

Step therapy for Medicare Advantage patients must be used carefully.

Commissions are not the only reasons that doctors prescribe high-price drugs. In many cases, those more expensive drugs are likely to be the most effective and beneficial—they are the ones the patient needs.

Furthermore, Medicare enrollees are older and more at-risk to other health problems, making it more difficult, and risky, to transition from one drug protocol to another. The new step therapy rule contains a number of safeguards for such concerns, but patient performance will and should be watched closely as the rule is implemented.

As Medicare continues its much needed march toward modernization, adopting market-based incentives like step therapy can be significant strides. Private-sector health insurance companies have been using approaches like this one for years in an effort to contain costs, help lower premiums, and attract new customers.

And even though step therapy protocols adopted by Medicare Advantage may play a relatively small role in the drug-pricing game, it is always encouraging and better-late-than-never for government programs to try market-based solutions.

As health care and prescription drug costs continue to climb and the U.S. population ages, Medicare programs need all the competitive advantages and cost-conscious initiatives they can get. Permitting well-monitored step therapy prescriptions may be a small step, but it’s still a step in the right direction.

Rea S. Hederman Jr. is executive director of the Economic Research Center at The Buckeye Institute and vice president of policy.

Tags Medicare Medicare Advantage

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