“May you live in interesting times” is an intriguing Chinese expression that’s seemingly a blessing, but it’s really a curse. The pharmaceutical industry is facing a very tough year as an erratic U.S. president and a public that’s frustrated about drug prices provide motivation for bad solutions. It’s interesting that the Health and Human Services Secretary from the industry, Alex Azar, is now seeking to initiate price controls, albeit as a five year “experiment” rather than properly vetted legislation. Equally interesting is that the public frustration was mainly triggered by a combination of insurance funding concerns for a Hepatitis C cure and exotic price increases for off-patent drugs. This is not to say that the industry goes without blame. Pharma is better known for its lobbying power and erectile dysfunction ads than for its public communications. The pharma business model can’t easily be explained in 140 characters, but we certainly need to try a lot harder.


The Trump administration has recently proposed changes in rules for Medicare Part B drug reimbursement. An advance notice for public comments has already attracted heavy criticism from industry and medical associations, but it may still be implemented. The document is a bit confusing and leaves many aspects open for multiple interpretations, but it essentially introduces a five-year “test” of price control for Medicare Part B drugs in the following way:

  • HHS will reduce payment for Part B drugs over time through a formula that includes an International Price Index (IPI) with prices from (potentially) Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands and the United Kingdom. This is expected to result in a 30% reduction in prices.
  • Procurement and handling will be done by intermediaries, a rejuvenation of the failed Competitive Acquisition Program (CAP). These intermediaries will take on financial risk and as such are likely to require additional margin.
  • HHS intends to replace the ASP+4.3% reimbursement mechanism for Part B drugs with a system that favors prescribing of cheaper options. Details on how HHS will motivate physicians to not prescribe higher-cost drugs are not provided.

The proposals raise several serious concerns:


1. The IPI is introduced to “ensure that the Medicare program pays comparable prices for Part B drugs relative to other economically-similar countries.” As shown in the table below, this is simply not true. On average, per capita income (PCI) in the listed countries is 30% lower than the U.S., the Czech Republic PCI is even 66% lower, according to GDP data from the World Bank


Per Capita Income (2017)




United States












Czech Republic






























United Kingdom




Average IPI



Source: World Bank


In addition, many of those countries are in turn referencing their prices to lower-income countries. Canada, for example, is in the process of changing its basket of reference countries to exclude the U.S. and add more countries that have much lower per-capita incomes than Canada. Referencing lower-income countries that in turn reference even-lower-income ones will cause price spirals until lower-income countries are simply cut off from drug supplies.


2. Forcing drug prices to the average of overwhelmingly lower-income countries does not make economic sense. As I highlighted in an earlier blog, differences in specialist income between countries are very similar to the differences in drug spending. The cost of drug development and commercialization is largely correlated with general medical cost. Is HHS intending to also force physician fees and cost of medical procedures down by 30%? For added credit, can he reference my New York real estate cost and tax rates to Alaska and Wisconsin?


3. In order to circumvent approval from Congress, HHS is changing the rules as a five-year experiment. That seems like an irresponsible way to avoid proper vetting and consensus-building in our democracy. Many of HHS’ experimentation projects fail. What do you do after a failed five-year price control project? Poor experience of starvation with price controls for agricultural products dates back for centuries. The drug industry has painfully survived price controls in European countries, but what is the long-term impact of this “experiment” in the largest global market? Politicians and administrators move on after they claim credit for quick-fix changes; the fallout will be handled by the next generation.


4. Pharmaceutical companies will be faced with tough decisions on whether to engage in clinical trials that are required to obtain reimbursement in international markets, but that will bring down price potential in the U.S. In some cases, it will make more economic sense, particularly for U.S.-based companies, to price Medicare Part B (physician-administered drugs) even higher in the U.S. and forego international markets. This goes counter to the previous HHS policy to reward for value and implementation of value-based payments.


5. HHS will devise ways to encourage prescribing of the cheapest alternative rather than what’s best for the patient. Eliminating incentives for prescriptions of higher-cost drugs may be a laudable goal but going further than that with government incentives for lowest-cost treatment options should make physicians and patients very nervous as many new treatments need time to prove their value in clinical practice.


I realize that it’s easier to reject plans than to come up with good ideas. In the current political environment that lacks communication and collaboration, it’s difficult to tackle complex issues. However, we need to seek durable solutions that foster innovation for the many healthcare challenges that still face us and enables companies to bring high-value innovations such as gene therapies and immune-oncology drugs to patients that need them. Funding of these innovations and limiting patient co-payments is an obvious concern that needs to be addressed. It’s disappointing to see that an HHS secretary with a pharma background isn’t able to overcome the Trump Twitter culture to seek real solutions. Addressing growing healthcare needs and the anticipated high economic consequences of diseases like Alzheimer’s disease and NASH/diabetes, in addition to the ongoing battle with cancer, require a Manhattan-Project-style approach rather than a Twitter-ridden White House and a Congress that’s focused on political games and lacks the backbone to do the right thing.