Politicians and patients are grappling with what to do about high prices for prescription drugs. To identify a solution, it helps to understand the cause of the problem. One critical problem is the way Medicare reimburses health care providers for drugs.
Medicare and other insurers do not purchase drugs directly from manufacturers. Rather, providers act as intermediaries, purchasing drugs from manufacturers and receiving reimbursement from insurers. Private insurers often follow the lead of Medicare, which began using average prices of a drug to determine provider reimbursement amounts in 2005.
HSM Faculty Director David Ridley and his colleague Professor Chung-Ying Lee (a Duke alumnus) show that Medicare’s system of provider reimbursement might be the reason for substantial increases in drug launch prices in the past decade.
Providers know that they will be reimbursed by insurers so they are not sufficiently concerned with manufacturer’s prices. Higher purchasing prices mean higher provider reimbursement. Therefore, manufacturers can charge high prices knowing that providers will remain customers.
Professors Ridley and Lee propose a new system of reimbursement based on the cost-effectiveness of the drug. For some drugs, especially cancer drugs, manufacturers would need to lower prices to align with the value of the drug.
Watch a two-minute video explanation: https://youtu.be/C9EO6Ib7FEE
Read more in “Does Medicare Reimbursement Drive Up Drug Launch Prices?” The Review of Economics and Statistics