The Prescription Drug Market

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Commenter mbp3 has some trenchant thoughts on the pharmaceutical market:

One thing you don't mention in this post (but perhaps you discuss in your piece on pipelines) is that pharmacy benefit managers (PBMs) like Medco are structured such that their incentive to maximize profits aligns with employers/government incentive to reduce costs. Medco makes more money from each generic drug dispensed than from each brand name drug, even though the cost of brand drugs can be 10x higher.

So, I submit that the Medicare prescription drug program has come in below original spending projections because incentives are aligned: plans that prescribe more generics cost less for customers and allow the PBMs such as Medco to generate more profit. A win-win for everyone except brand drug companies.

The new HC reform bill does not have the same alignment of incentives. Goverment will attempt to cut costs administratively, by reducing Medicare payments and forcing companies to pay large fees, while doing vey little to reduce the subsidy given to employer based plans and while increasing the number and scope of mandatory coverage.

Later (s)he adds:

I think the structure of Part D had a lot to do with it. Management of the prgram was outsourced to profit maximizing companies, the reimbursement is based on a competitive bidding system so a higher bid forces a plan to charge a higher monthly premium -- which can make the plan less attractive to seniors. Also the entire program is re-bid each year -- meaning unhappy seniors can switch plans at the end of each year.

Look at the rate of generic drug substitution in Medicare - it's 70%+. Much higher than in any other country that uses a single payor / nationalized system. These systems have the same opportunity to generate savings as in the Medicare drug program, yet they have not done so, at last partly because there is little incentive to do so.

What I'm saying is, yes there were structural changes happening. BUT, the Medicare drug program was structured in such a way as to take advantgae of these changes and perhaps to accelerate them. HC reform is not.


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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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