Lawmakers Forget Incentives Matter on Prescription Drugs

Blog Post
Monday, May 02, 2016

Health care cost-control efforts in the United States can often be described simply as “changing incentives.” The focus on incentives can be traced to two main circumstances:

1) The majority of politicians have opposed efforts to reduce costs simply through government price-setting, a mechanism widely used around the world to control costs.

2) The incentives in the U.S. health care system have been severely misaligned for decades, with all the actors -- from consumers to employers to insurance companies to physicians and hospitals -- having incentives to increase spending.

The most notable cost-related health care system changes of the past decade have attacked some of this misalignment and those efforts have contributed to historically slow growth rates for health care costs over the last five years.

The one area primarily untouched by those changes, prescription drug costs, is also the one area where inflation is growing rapidly, with 12.2 percent growth in 2014. Yet there appears to be an effort in the House and Senate to thwart experiments designed to test how to best change the incentives physicians face in administering prescription drugs, according to reports in the Huffington Post.

Some background that helps to explain why this congressional effort is so unfortunate:

Historically, consumers and patients, under a third-party health insurance system, have little incentive to control costs because they have an inherent desire to spend a lot on their own care while costs are often hidden in that they are paid for by “someone else” -- the insurance company.

The increased prevalence of high-deductible health insurance plans has given consumers more “skin in the game” and made them more sensitive to costs. Many experts attribute part of the recent health care inflation slowdown to this shift.

Employers, who provide most private insurance in the country, have also had little incentive to control employee health costs. They have just passed cost increases on to employees by maintaining health insurance and not increasing wages, spurred on by the tax code’s exemption of health insurance from taxation. The Affordable Care Act’s “cadillac tax” on high-cost health insurance is designed to cap the tax incentive and encourage employers to more actively search for less expensive health insurance, while ideally increasing employee wages.

Insurance companies are also feeling increased pressure to assist in systemic cost control because they can no longer reduce costs by picking whom they insure. They also face more competition in the insurance exchanges and to some degree in the Medicare Advantage program.

Finally, the shift away from fee-for-service medicine has been all about changing the incentives of physicians and hospitals, who have traditionally been paid based on how much they do, not the value of care they provide. This shift has enjoyed the most bipartisan action of all of the recent health care system changes.

That is what makes recent opposition to the testing of changes in prescription drug payments so disappointing.

Presently, physicians who administer drugs in their offices under Medicare Part B are paid 6 percent of a drug’s average sale price. This clearly creates a perverse incentive: physicians benefit monetarily from prescribing more expensive -- but not necessarily more effective -- drugs.

To combat this, the Centers for Medicare and Medicaid Services (CMS) recently announced some pilot projects following recommendations from the non-partisan Medicare Payment Advisory Commission to test the impact of reducing the piece of physician payments directly tied to drug prices. One pilot would reduce the amount tied to a drug’s average sales price to 2.5 percent plus a $16.80 fee. Another test will look at whether reducing cost-sharing for patients impacts which drugs get prescribed.

These are pretty straightforward attempts to fix incentives that have no rational basis. The hope is that the results from these pilot projects will be watched closely by private insurers so that they too can learn the most effective ways to align incentives to promote better care and lower costs.

One wonders what misaligned incentives are leading members of Congress to attempt to hamstring CMS or cancel the pilots altogether. For the sake of the health care system and the federal budget, let’s hope those incentives will get realigned soon because prescription drug costs are projected to continue rising more quickly than other health system costs. If Congress is opposing just testing what seem to be obvious changes, that does not bode well for the much more difficult choices it will have to make to control drug spending.