Please enable JavaScript to view this website.

Potential Consequences of Lowering Current Medicare Drug Prices

On October 25, 2018, President Trump unveiled a new plan that would completely change how Medicare pays for certain pricey drugs.1 It is an unorthodox move for Republicans, but Trump is pushing ahead with his bold plan to lower drug prices.2 As one of the promises of his presidency, Trump has set out to lower drug prices, utilizing the Medicare plan to restore fairness to American consumers.3 Trump said, “[t]he American middle class is effectively funding virtually all drug research and development for the entire planet.”4 Trump believes that American seniors are the ones who pay the biggest share of high drug prices and vows that, “[a]t long last, the drug companies and foreign countries will be held accountable for how they rigged the system against American consumers.”5 Additionally, speaking in Washington, Health and Human Services Secretary Alex Azar declared that the pharmaceutical industry could not stand by and defend the status quo on current drug pricing.6

The United States is the largest funder of research and development (R&D) in the pharmaceutical industry but lacks the bargaining power to reduce drug prices.7 This is a stark contrast to the large public health programs present in many countries.8 After Trump’s address, Azar told reporters, “[f]or some drugs we are paying upwards of 300 or 400 percent, and in some instances we pay 700 percent more than other countries do.”9 He added, “President Trump asked us to fix this problem, and here’s how we plan to do it.”10

The proposed Medicare plan is not Trump’s first attempt at lowering drug prices.  Trump has attempted other ways to lower drug prices and has tweeted at drug companies to lower their prices.  Additionally, Trump signed a bill banning “gag clauses,” which ban pharmacists from disclosing cheaper drug options to consumers.11 This is also not the first government attempt at lowering drug prices; the Obama administration attempted a similar proposal but was met with so much pressure from the drug industry that the administration abandoned it.12

In addition to lowering prices, the Centers for Medicaid & Medicare Services (CMS) wants to establish a system where drugs are sold to venders as opposed to being directly sold to doctors’ offices and outpatient centers.13 Additionally, the agency wants to remove incentives for doctors to prescribe more expensive drugs by paying doctors a flat rate as opposed to a rate based on a percentage of the drug’s price.14

This proposal has the potential to reshape the biotechnical and pharmaceutical industries. However, such a proposal will most likely face resistance from major pharmaceutical companies, as well as doctors, hospitals, patient advocacy groups and other health professionals.

The Rising Cost of Drugs

During the 1990s, pharmaceutical industries focused their efforts on “blockbuster drugs” which aimed to solve large public health issues such as high cholesterol and high blood pressure.15 One of the most recognized drugs of this era was Pfizer’s Lipitor, which lowered cholesterol, and went on to make more than $20 billion dollars a year before its patents expired.16 However in the 2000s, pharmaceutical companies adopted a new strategy, pioneered mainly by Roche and Genentech. They focused on targeting rare diseases which affect fewer than 250,000 Americans, allowing them to charge higher prices, while keeping research and development (R&D) costs low.17

Bringing a drug to the market is incredibly expensive. In addition to the R&D costs of just developing the drug, the Food and Drug Administration (FDA) requires three levels of clinical trials, Phase I, Phase II, and Phase III.18 Each phase refers to a different population that the drug is tested on before it undergoes FDA review.19 The FDA requires that clinical trials be performed on no less than 20,000 patients over the course of five years, a process which can cost well over $2 billion.20 If a drug successfully makes it past each stage, it then enters a highly competitive market, competing against many lower cost alternatives.

To overcome these barriers, Roche and Genentech decided that they would focus on rare diseases, so that they could minimize costs associated with Phase III clinical trials.21 Phase III clinical trials for rare diseases require testing on approximately 10% of the patient population normally required, leading to a significant decrease in the R&D costs.22 If the particular drug passed FDA review and entered the market, because of the limited competition for drugs of rare diseases, the drug could be priced aggressively, leading to larger profits. 

The United States does not regulate the prices of new prescription drugs when they come to the market. 23 In contrast, other countries will assign a government agency to meet and negotiate an appropriate price with the pharmaceutical company.24 These agencies also make decisions about whether new drugs can come to the market.  This is in stark contrast to the United States which allows all drugs that have passed FDA review to come to the market, regardless of whether they are more effective or less effective than existing drugs on the market.25 This has led to high drug costs in the United States, but lowering drug costs could potentially make the pharmaceutical industry less desirable to investors.  There is a trade-off between the cost of drugs and investment because decreased investment could lead to decreased R&D for new drugs.

Medicare B and Higher Drug Prices

Medicare Part B is a system of price controls set by a private industry, where drug companies can charge taxpayers any price for a drug that they deliver to seniors.26 This allows for further enrichment of drug companies and their shareholders.  Due to these policies, drug development in the United States has focused on drugs under Medicare Part B, which are those that are administered directly in doctors’ offices and drugs for individuals over the age of sixty-five, since Medicare is for older individuals.  This has led to Americans paying more for prescription drugs that deal with ailments such as cancer and inflammatory illnesses.27 Medicare beneficiaries are responsible for about twenty percent of the cost of the drug.28 Therefore, under the current system, once a drug passes FDA approval, a drug company can set any price and Medicare is essentially obligated to pay it.29

Additionally, under the Medicare Modernization Act of 2003, doctors receive a six percent commission on drug infusions, which is tied to the average selling price of a drug.30 Furthermore, doctors and hospitals who administer Part B drugs are currently reimbursed the average price of a drug plus 6 percent. 31 This ends up creating incentives for doctors to inform patients of more expensive drugs because the doctors end up receiving a higher commission for more expensive drugs. The increased costs of drugs that are passed on to Medicare has helped fuel Trump’s new proposal.

Trump’s Proposal

Historically, Medicare has paid 106 % of the “average sales price” for drugs that patients receive at doctors’ offices.32 Additionally, according to the Medicare Payment Advisory Commission, an independent agency that advises Congress, Medicare drug spending has grown at approximately more than nine percent a year since 2009.

Under Trump’s new plan, Medicare will be able to eliminate the six percent commission that doctors earn on drugs and replace it with a flat rate. Doctors would receive the same amount regardless of whether they administer an expensive or inexpensive drug. Secondly, the new plan would allow Medicare to create a payment model that would set the price of certain drugs in line with the price in other countries.33 This new pricing model will be in line with the International Pricing Index which is based on sixteen countries.34 These countries are: Austria, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Ireland, Italy, Japan, Portugal, Slovakia, Spain, Sweden, and the United Kingdom.

The new plan will be a pilot program, piloted by CMS, and it would cover half of the American population.  The Trump administration estimates that the new plan will reduce Medicare Part B spending by $17 billion over the next 5 years.35 They estimate that this would result in significant savings for seniors who are enrolled in Medicare, who are required to pay for their share of their Medicare Part B drug costs.  Most Medicare beneficiaries have supplemental insurance, such as Medigap policies or retiree health benefits to help cover costs of drugs under Medicare Part B.36 Additionally, while the numbers seem large, the actual scope of the new plan is very limited and will not lower overall drug prices by a large margin.  The new plan only applies to Medicare Part B which accounts for eleven percent of Medicare drug spending and three percent of all Medicare spending.37 Additionally Congress would still have to approve a new payment index and make it apply to all payments.

Some examples of expensive drugs that fall under this category are Aranesp, for anemia caused by chemotherapy or chronic kidney disease, Lucentis, for eye conditions that result in vision loss, Rituxan, for rheumatoid arthritis and certain cancers, and cancer drugs such as Avastin, Herceptin, and Keytruda.38  Keytruda and other cancer medicines are currently listed at prices of more than $100,000 a year.39 There are limitations in the new plan, such as differences in dosing and formulations of drugs between other countries and the United States. Additionally, prices might not reflect the actual amount since they do not always show the effect of rebates offered by drug manufacturers.40

As noted earlier, the new plan will use foreign drug prices as a reference to for prices in the United States. Other countries usually have lower drug prices because governmental agencies negotiate prices with pharmaceutical companies and regulate which drugs can enter the market. Democrats have long championed for similar negotiations, while Republicans have held steadfast to the free market system. Republicans fear that such regulation and negotiation could cause Medicare to dictate prices or restrict access to expensive drugs.

Free Market vs. Price Fixing

As mentioned earlier, the United States operates under a model where drugs can freely enter the market (after FDA approval) and pharmaceutical companies can freely set the price of each drug. Trump’s proposed plan seems like price fixing in the pharmaceutical industry, which runs counter to the usual Republican affinity for the free market system. According to Gerard Anderson, a health policy professor at Johns Hopkins University, “[t]his is price fixing. This is setting the rates based upon international standards. It couldn’t be more anti-Republican.”41

The main drug lobbying group, the Pharmaceutical Research and Manufacturers of America (PhRMA), immediately released a statement by the CEO Stephen Ubl, arguing that the current free market system in the United States allows patients the best access to innovative drugs.42  Ubl further declared that the new plan would restrict individuals’ access to new medicines and discourage innovation.43 

Past administrations have been hesitant to create policies that would potentially restrict individuals’ access to new or existing drugs. The new plan is a sign that the current administration is serious about tackling the issue of high drug prices. In May however, Trump laid out a forty-four page plan about changing incentives and increasing competition in the pharmaceutical industry.44 While this plan will definitely bring changes in the industry, the root cause of high drug prices is still the fact that manufacturers have the freedom to set prices of drugs that have passed FDA approval. 

The Pharmaceutical Industry’s Response and Other Challenges

When the Obama administration launched a similar proposal, they were met with heavy lobbying opposition and they eventually withdrew the proposal.45 It is expected that pharmaceutical companies will come out swinging against this new proposal in a similar fashion.

PhRMA immediately fought back claiming that the new plan would “jeopardize access to medicines for seniors and patients with disabilities living with devastating conditions such as cancer, rheumatoid arthritis and other autoimmune diseases.” 46 The Biotechnology Industry Organization (BIO) declared that the new plan would undermine the Medicare Part B drug program.47  It is still too early to know how the pharmaceutical industry will react, but from the initial reactions, they will most likely fight back to preserve the current model where they have the freedom to set prices.

Other Possible Reform Measures

One possible way to create reform in the prescription drug industry is to expand Medicare Part D. Currently Medicare Part D is a program that pays for drugs seniors buy at retail pharmacies as opposed to doctors’ offices and outpatient centers. This program gives seniors a wide range of drug choices, because private plans compete on price. Expanding Medicare Part D to include drugs administered in doctors’ offices and outpatient centers would sort of be like making a joint Medicare A, B, and D plan. This would allow for a more market-based model, which would help create more options for consumers. The Trump administration is exploring this idea, which based on the International Pricing Index, would create more savings over time.48

The new plan proposed by Trump has the potential to reshape the pharmaceutical industry, from their approach to deciding which kinds of drugs to pursue in R&D, to negotiations in price setting. Any changes in the industry will definitely be met with resistance; it is important to consider the tradeoff between having regulation and a free market when it comes to innovation and access to new drugs and the price that consumers ultimately pay.

  1. Tami Luhby & Lauren Fox, Trump Leans into Midterms with a Pitch to Un-Rig Medicare Drug Prices, CNN (Oct. 25, 2018, 6:18 PM),

  2. Paige Winfield Cunningham, The Health 202: There Will Be a Big Fight over Trump’s New Proposal to Lower Drug Prices, Wash. Post (Oct. 26, 2018),

  3. Luhby & Fox, supra note 1. 

  4. Remarks by President Trump on Prescription Drug Prices, White House (Oct. 25, 2018, 2:14 PM),

  5. Id. 

  6. Berkeley Lovelace Jr., HHS Secretary Warns Big Pharma: Lower Prices, or ‘You’ll Get Whatever Comes at You’, CNBC (Oct. 26, 2018, 12:24 PM),

  7. Cunningham, supra note 2. 

  8. Id. 

  9. Id. 

  10. Id. 

  11. Dartunorro Clark & Brenda Breslauer, Trump Signs Bills Lifting Pharmacist ‘Gag Clauses’ on Drug Prices, NBC News (Oct.  10, 2018, 5:22 PM),

  12. Cunningham, supra note 2. 

  13. Paige Winfield Cunningham, The Health 202: There Will be a Big Fight over Trump’s New Proposal to Lower Drug Prices, Wash Post (Oct. 26, 2018),

  14. Id. 

  15. Avik Roy, Trump’s Dramatic New Proposal To Lower Medicare Drug Prices By Linking To An International Index, Forbes (Oct. 26, 20178, 7:12 AM),

  16. Id. 

  17. Id. 

  18. The Drug Development Process, FDA (Jan. 4, 2018),

  19. Id. 

  20. Roy, supra note 15. 

  21. Id. 

  22. Roy, supra note 15. 

  23. Sarah Kliff, The True Story of America’s Sky-High Prescription Drug Prices, Vox (May 10, 2018, 9:19 AM),

  24. Id. 

  25. Id. 

  26. Roy, supra note 15. 

  27. Id. 

  28. Robert Pear, Trump Proposes to Lower Drug Prices by Basing Them on Other Countries’ Costs, N.Y. Times (Oct. 25, 2018),

  29. Roy, supra note 15. 

  30. Id. 

  31. Sarah Jane Tribble, Trump Wants to Lower Prescription Drug Prices by Basing Some on What Other Countries Pay: Could It Work?, ABC News (Oct . 28, 2018, 2:49 PM),

  32. Pear, supra note 28. 

  33. Lovelace, supra note 6. 

  34. Id. 

  35. Roy, supra note 15. 

  36. Pear, supra note 28. 

  37. Cunningham, supra note 13. 

  38. Pear, supra note 28. 

  39. Id. 

  40. Id. 

  41. Luhby, supra note 1. 

  42. Id. 

  43. Id. 

  44. Tami Luby, Trump Lays Out His Vision for Lower Drug Prices, CNN (May 11, 2018, 7:08 PM),

  45. Tribble, supra note 31. 

  46. Roy, supra note 15. 

  47. Id. 

  48. Id.