IF YOU had to reduce economic science to a single phrase, it might be this one: Incentives influence behavior. Now the federal government is about to test that proposition in an effort to curb Medicare spending on prescription drugs dispensed by physicians, which grew from $9.5 billion in 2005 to $22 billion in 2015.
Invoking new authority under the Affordable Care Act, the Department of Health and Human Services (HHS) plans a pilot program under which doctors — mainly oncologists, ophthalmologists and arthritis specialists — would get reimbursed in a new way for medications they administer directly to patients, as opposed to those distributed through pharmacies or hospitals. Under current rules, the doctor gets the average price of a particular drug plus 6 percent. This may encourage doctors to use higher-priced drugs instead of lower-priced equivalents, since, well, 6 percent of $1,000 is more than 6 percent of $10. To the extent this artificially increases demand for higher-priced drugs, it enables manufacturers to charge everyone more.
HHS wants to test a system under which physicians would get 2.5 percent of the drug’s cost, plus a flat fee. Importantly, doctors would still be fully reimbursed for the drug’s cost to them; they would just make more for prescribing cheaper drugs than they do now, and a bit less for prescribing expensive ones. Over time, Medicare officials say, this shift in incentives should enable the system to deliver the same level of care at a lower cost. If it doesn’t, Medicare can revert to its previous payment formula after the five-year experiment has run its course.
Opponents, led by private-practice oncologists, protest that their current prescribing decisions are driven purely by medical considerations, so Medicare’s plan is a solution in search of a problem. In the short run, they argue, it will inflict economic damage on small, independent practitioners who tend to pay higher prices for drugs because they lack the bargaining power of large hospitals. The ultimate losers could be these doctors’ patients, it is argued.
No doubt the proposal, like any change to the status quo, would create winners and losers among health-care providers; that’s another basic teaching of economics. Heaven knows Medicare’s current policy is hardly the only source of distortion in health care: a new study by cancer researchers at Memorial Sloan Kettering Cancer Center estimated that the U.S. wastes $3 billion every year on cancer medicines that are thrown out because regulators allow them to be distributed in vials that hold too much for most patients.
It seems plausible, however, that the plan could level the playing field between medically equivalent but differentially priced drugs, eliminating an unfair advantage expensive products now enjoy. Given the potential efficiency gains to Medicare, and the ripple effects on health-care spending generally, the benefits of the HHS plan may justify the risks. Government statistics show that 30 percent of the increase in prescription drug spending from 2010 to 2014 was due to price increases and prescribers’ shifts to higher price products. Anything that pushes against that trend while preserving patient access to necessary treatments is worth a shot.