How much should Medicare pay for drugs?

Area of Science:

• Health economics
• Pharmaceutical policy
• Medicare drug benefit

Background:

• Discussions on the Medicare drug benefit primarily focus on beneficiary costs, not pharmaceutical manufacturer revenue.
• A critical decision involves the extent of Medicare's involvement in setting drug prices.

Purpose of the Study:

• To analyze the implications of Medicare setting pharmaceutical prices.
• To evaluate potential methods for Medicare price regulation.
• To recommend a policy approach for Medicare drug pricing.

Main Methods:

• Analysis of potential Medicare price-setting mechanisms: average wholesale price, international price comparison, cost-based regulation, and rate-of-return regulation.
• Evaluation of the drawbacks associated with each pricing method.

Main Results:

• All discussed methods for Medicare price setting present substantial drawbacks.
• Direct price setting by Medicare is not recommended as an initial strategy.

Conclusions:

• Medicare should not initially attempt to set pharmaceutical prices due to inherent drawbacks in proposed methods.
• Congress should permit consideration of drug costs in Medicare coverage decisions to prevent pricing abuses.