Price Controls Can Be Deadly

November 9, 2011
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A 2003 law fixes the price Medicare will pay for injected drugs to an “average sales price” that is at least six months old at any given time. This flawed concept means even if a generic firm raises its price to reflect increased production costs, the new price won’t get paid by Medicare—meaning purchasers would be losing money for months at a time. The result is that generic prices can’t rise to reflect changing demand or the need for bigger investments in manufacturing.

A 2003 law fixes the price Medicare will pay for injected drugs to an “average sales price” that is at least six months old at any given time. This flawed concept means even if a generic firm raises its price to reflect increased production costs, the new price won’t get paid by Medicare—meaning purchasers would be losing money for months at a time. The result is that generic prices can’t rise to reflect changing demand or the need for bigger investments in manufacturing.

To fix this, we should lift existing price controls when it comes to critical injectable drugs that are generic. First, Medicare can be directed to ditch the flawed “average sales price” and reimburse manufacturers for these drugs according to the price that is paid by wholesalers on the open market and already reported to Medicare. Then generic firms could adjust prices to match rising production costs and meet demand.

These drugs should also get a holiday from other Medicaid price-control schemes that serve to distort market prices….  Better still, Medicare can move the reimbursement of these drugs from its price-controlled “Part B” scheme and into its “Part D” drug program, which already pays for the pills that senior citizens get from pharmacies….

Allowing generic injectables to be priced competitively would allow manufacturers to recoup the costs of production and bring shortages to an end.

See Scott Gottleib WSJ editorial. See also our previous posts here, here, here and here.

   

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