That $56,000 Drug? Blame Medicare.

In the endless struggle to rein in high drug prices, one glaring failure has been grabbing the headlines: the exorbitant cost of drugs that need to be administered by physicians.

Such drugs were once a rarity. But they are now more than one-fifth of all Medicare drug spending and growing rapidly, thanks in part to the biotechnology revolution, which has yielded an array of drugs that must be injected, infused or inhaled.

One of them, an Alzheimer’s drug called Aduhelm, was approved by the Food and Drug Administration in June and is being priced by its maker, Biogen, at $56,000 annually. That’s roughly equivalent to the cost of 45 hours of home health care for an Alzheimer’s patient each week for an entire year.

The F.D.A.’s approval of Aduhelm has come under close scrutiny and protest. The agency has already reversed itself, narrowing the drug’s suggested use to those with early symptoms of dementia, as opposed to everyone with Alzheimer’s.

But the F.D.A. isn’t responsible for the sky-high price. The program that bears the blame for that is Medicare.

Medicare bases its payments for physician-administered drugs on their average private market price. This seemingly logical approach has the unfortunate consequence of driving up prices — not only for Medicare but also for private payers.

There is a better way: the one that Medicare uses to pay for the familiar prescription drugs dispensed by pharmacies. By changing its policy, Medicare could bring down the price of the most expensive physician-administered drugs by as much as a third.

New Alzheimer’s Disease Treatment Approved

    • New Drug Approved: The F.D.A. approved the first new Alzheimer’s treatment in 18 years, a drug named Aducanumab. It is the first drug that attacks the disease process.
    • Does New Drug Work?: Patient groups are desperate for new options, but several prominent Alzheimer’s experts and the F.D.A.’s own independent advisory committee objected to Aducanumab’s approval, having raised concerns over lack of sufficient evidence of its effectiveness.
    • Understand Alzheimer’s Disease: Get answers to common questions about the disease, which affects about 30 million people globally.
    • One Face of Alzheimer’s: This profile of a woman in the early stages of the disease shows what it can be like to face the beginning symptoms and to consider the future.

    Here’s a little background.

    When people buy prescription drugs from pharmacies, Medicare heavily subsidizes private insurance coverage and lets the insurers negotiate prices with manufacturers as they see fit. This approach is not perfect, but the economists Mark Duggan and Fiona Scott Morton found that when Medicare introduced it in 2006 when it expanded drug coverage, the result was lower drug prices.

    That’s a stunning finding, because basic economics would suggest the opposite effect. When drugs are covered by insurance, patients’ prescription choices typically become less influenced by drug prices, since insurers are picking up most of the tab. Manufacturers are therefore expected to respond by raising prices.

    But when Medicare expanded coverage, prices dropped because of a stronger, countervailing effect. Private insurers, which had greater leverage and bargaining savvy than individual consumers, were better able to negotiate lower prices with the drug manufacturers.

    For physician-administered drugs, however, Medicare’s policy has raised prices. Medicare has covered such drugs since its inception in 1965, but in the last few decades they have become increasingly important, particularly for treating cancer. For these drugs, Medicare tries to piggyback on the market’s price-setting by matching what other customers pay, plus a little extra for the physician.

    This sounds reasonable enough, but the problem is that Medicare’s patients often account for a major share of the drug’s market. When a large purchaser commits to pay what other customers pay, sellers respond by raising drug prices, the evidence shows.

    Consider that more than 95 percent of the six million Americans afflicted by Alzheimer’s are covered by Medicare. What price might you charge if the major purchaser for your drug has committed to pay whatever “other customers” pay? Biogen, the drug’s manufacturer, came up with a price of $56,000 per year.

    Non-Medicare customers may well balk at the price tag, but so what? By setting a high “market” price, Biogen can earn a lot from Medicare patients — who, in this case, account for almost all of the potential market.

    Medicare has yet to announce which Alzheimer’s patients will be covered for the new drug, which the F.D.A. approved against the recommendation of clinical experts. The annual cost to the federal government is, therefore, not yet known, but it could be extremely high.

    More important, this drug and its pricing are an extreme case of a pervasive problem. Estimates from a few years ago suggest that Medicare patients are, on average, about one-third of the market for the most expensive of the physician-administered drugs. If Medicare abandoned its current policy, prices on these top-selling drugs could come down by as much as one-third. That estimate is based on the drug pricing effects of a similar policy under Medicaid, the government’s health insurance program for low-income people.

    There are continuing, but so far unsuccessful, efforts in Congress to change how Medicare pays for these drugs. It is important to recognize, however, that any policy that substantially lowered drug prices would have the unavoidable effect of decreasing patient access to some drugs.

    One set of proposals would authorize private insurers or other intermediaries to negotiate prices with manufacturers. Physician-administered drugs might, for example, be folded into the current Medicare policy for pharmacy drugs. For this type of approach to be effective, the negotiators must be able to walk away from a drug if the price is too high; otherwise, they lose leverage with manufacturers. Some drugs, therefore, might no longer be covered at all, or have much more limited coverage.

    Under another approach, the U.S. government would impose lower drug prices through direct regulation, as many other countries do. In this case, access to existing drugs would be retained, but, as a large body of evidence shows, pharmaceutical companies would spend less on research and development, and develop fewer new drugs.

    Economists tend to favor letting the private sector set prices, but this requires a well-functioning market. In trying to base its payments on what other customers pay, Medicare has distorted the market for physician-administered drugs beyond reason.

    Amy Finkelstein is the John and Jennie S. MacDonald professor of economics at the Massachusetts Institute of Technology.

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