Post by Admin on Jul 24, 2021 11:52:33 GMT -6
Originally Posted to FaceBook Nov 22, 2020 with article links (may be dead) - Moved here July 24, 2021
This is a long, article-like post in which I will discuss big government vs. small government, the use of executive orders and the intended effect of such vs. the actual effects of such. The specific topic will be the implementation of executive orders in the last few days for Drug Price reductions and what will likely actually happen. Basic economics (rather than intended economics, which seem to be the driving force for most items out of the Federal government these days) will be discussed and intentions will be weighed against logic for effects/outcomes.
On Nov. 20 the HHS (Dept. for Health and Human Services) issued a couple of press releases on the effects and results of Executive orders issued by the president on lowering drug prices. One was on how the "middle men" are now going to be cut out due to re-definition of what a "discount" actually is on prescription drugs. The other was details on the Most Favored Nation (MFN) status of the US when applied to US drug companies. The links to these releases are below.
The baseline intent of the rules resulting from these orders is to reduce the costs of prescription drugs for the average American as well as reduce the cost burdens of Medicare for taxpayers. On the surface and stated simply, they seem to be very good ideas. As logic, economics and a review of the statements by the implementing agencies are applied though, doubts emerge, at least in my mind.
First to the discount for the middle men. The current rules have to do with the Anti-Kickback Statute (AKS) and safe-harbors to that law. The safe harbors (actions/practices that are defined as “not a violation” of the statute) include negotiations on prices and discounts including rebates, which are basically delayed refunds that were to go to purchasers. Medicare Part D plans and pharmacy benefit managers (PBMs, who are employees of pharmacy retailers or insurance companies) currently negotiate these rebates and tie them to the list price of the drugs. However, often, when the insurance policies are written or rules for costs to the consumer are determined, that price, too, is tied to the list price of the drug.
Thus, we end up with a system where a PBM entity or Part D provider agrees to the drug manufacturer to pay the list price minus the rebate which is a negotiated percentage and they have a separate agreement with the consumer that the consumer will pay a certain portion of the drug list price under the plan and then determine premiums and other items in order to include a profit. Many companies have negotiated either side of this such that they are “on the positive side” of price hikes. In other words, equivalently, they have a 30% rebate from the manufacturer and are only passing along a 20% price reduction to the consumer through direct costs and/or premiums. Note that these are numbers that I created to show the math, not the actual margins.
So, with these items in place, if the drug prices rise, the folks employing the PBMs and the Part D providers make more money (10% of list price, whatever it is, using the numbers above) and the full price increase is on the consumer. Additionally, drug manufacturers have taken the extra step of blocking generics and bio-similars by only offering these rebates on brand name drugs and tying the availability of the rebate to the brand name drug keeping certain levels of market share. Honestly, that’s really insidious right there!! It prevents the introduction of cheaper generics to the market place by further increasing the barriers to entry on the consumer market side, not just the regulatory/approval side.
The new rule, as a result of the executive order, removes the safe harbor for these sorts of rebates by specifically excluding them from the category of allowed discounts. That is, these types of practices will now be a violation of the statute and thus illegal. The only things that will qualify are discounts that are passed on directly to the consumer. That sounds like a great thing, getting rid of this system that entrenches brand names over generics and encourages cost increases because the manufacturers and “middle men” both benefit to the detriment of the consumer . . . but is it really?
This one is honestly a mixed bag for me. I can see how taking away the ability of manufacturers to entrench brand names via this rebate system may lower costs by removing one of the hurdles for lower cost generics to enter the marketplace, but the other side of this is pie-in-the-sky thinking, like the old city ordinances that increased taxes on soda manufacturers for sugar content. The intent was for the manufacturers to bear that cost and keep the prices at the store the same, but you can’t price fix that way and the prices rose and the costs were passed on to consumers as profit margins needed to be maintained. The same thing will happen here. Does the government believe that will happen? No. They issued a direct statement to that effect in the link in the comments. It is included next.
The Department (HHS) believes that Part D plans are likely to choose to cover more generics, improve negotiation with drug companies, and reduce overhead costs in order to hold premiums constant, making savings even greater—as laid out in the President's July Executive Order, which directed that the final rule will not increase premiums.
In other words . . . since the Exec Order required that whatever is implemented cannot increase insurance premiums, we are choosing to believe that companies affected by this rule will choose to reorganize their entire business models in order to comply with the rule AND not increase premiums. Since we believe that will happen and several other government agencies and researchers that we checked in with believe the same thing, that means that we are all in compliance with the terms of the executive order – excessive self-congratulations all around!!
The truth is likely that a couple of small providers may take this tactic because they believe that they can attract a clientele that pays attention to these things. The big companies will simply re-figure their premiums and the percentages offered to consumers based on the list prices and continue to make their profit margins while the American people complain about the new, higher prices of medical care in this country.
This is common sense when viewed from the standpoint of a free market system . . . at least the parts of it that we allow to be free. Count on everyone and every entity to act in their own self-interest, but at the same time to have to survive the supply and demand of the market. The only way that this rule works is if, for some reason, enough companies show that by implementing generics and working lean they can generate the same profits by being more efficient and offering lower prices to the consumer. However, if that system of business worked, wouldn’t it have already been implemented within the market that was slightly freer before this new rule was imposed upon it?
I choose to believe in the innovation and imagination of business people in this country and that if it was a profitable way to go about it, then it would have been done by now. Are there additional government regulations that limit or prohibit formation of new insurance entities into the marketplace that were preventing this system from being used? That would not surprise me in the least and further backs up my small government case.
So the bottom line here is that in order to comply with the executive order’s language, the HHS is implementing a rule change that on the surface looks beneficial, but in reality requires a certain level of delusion on behalf of the government department on how compliance will actually occur. Furthermore, when that delusion is exposed as such, it will result in the exact thing that the executive order says the new rule should prevent - a rise in costs/premiums.
Secondly, there is the Most Favored Nation (MFN) designation. This piece is simpler. US drug manufacturers sell drugs overseas for less than they sell them in the US. That’s a fact. The MFN designation states that with a few exceptions on bulk purchases and certain margins, US drug manufacturers must charge the US markets the same as their lowest priced similar overseas market. In other words, they cannot price drugs in similar overseas markets any lower, anywhere than they do in US markets. Wow! Great!! Drug prices should go down across the country right?
No. Let’s look at why drug prices are so high here first.
Requirements to get to market in the US through the FDA and other entities are the most restrictive in the world. The costs to leap over those hurdles are reflected in the prices that we have to pay for the drugs. Other countries have lower standards and lower barriers to market entry, thus lower drug prices are charged because there are lower costs to market and fewer sunk costs of drugs that fail to get to market at all. All of those costs have to be recouped by the drug manufacturer or they go out of business.
The MFN designation requires that drug manufacturers cannot charge less overseas than what they charge in the US. The government is essentially requiring the cost to market differences to be ignored. So, will the effect be the one intended on the surface of dropping of prices across the US?
Probably not, but why?
The current drug approval process in the US is highly expensive and exclusive. There are several effective drugs that never make it to market because they cannot prove their effectiveness inside the current rules/regulations. Those development costs for such drugs are sunk for the manufacturers, net losses that must be made up by drugs that ARE approved. So, the costs in the US can’t drop and manufacturers remain in business. So, the overseas costs will have to increase to the same levels as those in the US . . . but this reduces the competitiveness of US manufacturers in the international markets where barriers to entry are lower.
Those overseas sales could drop dramatically and cut further into the profits of the drug companies. The truth is that those sales in overseas markets actually help to defray costs of drugs in America. If the drug companies can count on a certain level of overseas market then they can price drugs in the US lower and still hit their required profit margins.
So, what’s the effect of a rise in overseas prices to US levels? Far fewer overseas sales and higher overall prices in the US to keep profit margins in place is most likely. Will there be some tightening of the belts across companies, yes, to a point, but the final outcome is not as simple as lower drug prices across the board. The final result will be, more than likely, the US market having to bear the full brunt of the regulatory requirement of the FDA and the US government where it is currently spread across worldwide markets with dynamic pricing allowed.
This is similar to the widely touted tariffs that the President passed during the trade war with China. It’s the same effect, only in reverse. Regulations require higher cost barriers on foreign manufacturers to get into US markets, but the US manufacturers have not improved their efficiency or their own costs and thus are still offering goods and services at the same prices that were being beaten by foreign competitors before. What is the end result? Sure, incoming sales are redirected from foreign entities to US entities, but to the consumer, the prices at the market have raised across the board. Is this really a better situation overall?
With the drug rules above what is happening is a ceiling on the prices in the US markets that is linked to international markets, but no reduction in the cost requirements to get into the US markets. So the companies are stuck to make a decision of lowering US prices and lowering profits or raising foreign prices and reducing market share. Since the companies are using their foreign market shares to defray the costs to get into the US markets, if those shares go down then the costs have to be made up somewhere and the only other choice is to raise all prices even more.
The possible scenarios are these.
First, that cost increase and market share decrease overseas actually balance out and provide the same net income as they currently do. In that case, US drug prices should remain the same. Secondly, cost increases reduce overseas market share to the level that the net income is decreased. The company will have to decide whether to eat the difference internally (by restructuring, increasing efficiency and reducing required profit margins) or to pass the costs on to the US markets. Finally, it is possible that the increased costs overseas do reduce the market share, but even with that happening, the overall net income from overseas increases and the company has the decision to either run with a higher profit margin or to pass those savings on to the US markets.
Do you believe that in any of those scenarios the price of US drugs will actually decrease? No, expecting companies to act against their own interests because of the intent of some laws and regulations that were put into place is ludicrous!! That’s what our government does over and over again though. When it doesn’t work, they just say, well, we didn’t go far enough so, we need more regulation, more taxpayer funding and more power in the hands of the bureaucracy so we can get the results we intend rather than the results that occurred. They just ignore the basic economics and refuse to understand why intent is not coupled to outcome.
I have used specific instances brought to the public this week as examples of typical government missteps that cause the opposite effects of the intended consequences and why they keep occurring, particularly when having to do with economic impacts of regulations. We have to stop looking to government to solve our issues. They can’t do it even though they promise over and over that they can and will. They are working within the free market as well and constantly acting in their own self-interest. The government’s self-interest is in more centralization of power, not in taking care of the people and doing what’s best.
Politicians are useless, but they must hide their uselessness in a shroud of effectiveness so that they can continue to get elected and pursue their chosen profession. We no longer have citizen-statesmen that take a small break from their regular lives and serve in the government for a short while and then go back home to resume their pursuits. We have professional politicians that are interested in justifying their existence, expanding their power and limiting the ways in which they can be ousted from that power. This dynamic attracts the worst kinds of people to the positions as the only personalities that want to pursue it are the ones most likely to abuse the authority they are given. That, and the ones with the decisions in their hands are often surrounded by sycophants and have very little actual knowledge of the effects of the items they are implementing.
Freedom is the answer. Less regulation, not more. You want lower drug prices? Remove the efficacy requirements from the FDA standards. Make drug companies prove that the drugs are safe (not deadly and few side effects) before they enter the market, but let the free market decide whether the effectiveness of each drug is worth the cost. Companies will be able to get data feedback and use that for advertising while generating some amount of profit without a huge sunk cost up front. It’s a more efficient overall system if the government just gets the hell out of the way! The incremental cost of ramping up pill/serum production is nominal compared to the research and entry to market costs, so reduce those costs by reducing regulations and let the free market do its job.
The answer in most cases is less government, not more. These are just specific examples of such. They are endless when looking at ways that government inefficiency and bureaucracy ruin the intent of some possibly good ideas. With a little deep analysis and knowledge of basic economics, the results can often be easily predicted despite what the intentions are as relayed by politicians.
If you finished this book of a post, thank you for reading. I should probably start something where I can just post things like this and link them of Facebook. Comments and such are welcomed.
Link #1 - www.hhs.gov/about/news/2020/11/20/fact-sheet-trump-administration-finalizes-proposal-to-lower-drug-costs.html
Link #2 - www.hhs.gov/about/news/2020/11/20/trump-administration-announces-prescription-drug-payment-model-to-put-american-patients-first.html
This is a long, article-like post in which I will discuss big government vs. small government, the use of executive orders and the intended effect of such vs. the actual effects of such. The specific topic will be the implementation of executive orders in the last few days for Drug Price reductions and what will likely actually happen. Basic economics (rather than intended economics, which seem to be the driving force for most items out of the Federal government these days) will be discussed and intentions will be weighed against logic for effects/outcomes.
On Nov. 20 the HHS (Dept. for Health and Human Services) issued a couple of press releases on the effects and results of Executive orders issued by the president on lowering drug prices. One was on how the "middle men" are now going to be cut out due to re-definition of what a "discount" actually is on prescription drugs. The other was details on the Most Favored Nation (MFN) status of the US when applied to US drug companies. The links to these releases are below.
The baseline intent of the rules resulting from these orders is to reduce the costs of prescription drugs for the average American as well as reduce the cost burdens of Medicare for taxpayers. On the surface and stated simply, they seem to be very good ideas. As logic, economics and a review of the statements by the implementing agencies are applied though, doubts emerge, at least in my mind.
First to the discount for the middle men. The current rules have to do with the Anti-Kickback Statute (AKS) and safe-harbors to that law. The safe harbors (actions/practices that are defined as “not a violation” of the statute) include negotiations on prices and discounts including rebates, which are basically delayed refunds that were to go to purchasers. Medicare Part D plans and pharmacy benefit managers (PBMs, who are employees of pharmacy retailers or insurance companies) currently negotiate these rebates and tie them to the list price of the drugs. However, often, when the insurance policies are written or rules for costs to the consumer are determined, that price, too, is tied to the list price of the drug.
Thus, we end up with a system where a PBM entity or Part D provider agrees to the drug manufacturer to pay the list price minus the rebate which is a negotiated percentage and they have a separate agreement with the consumer that the consumer will pay a certain portion of the drug list price under the plan and then determine premiums and other items in order to include a profit. Many companies have negotiated either side of this such that they are “on the positive side” of price hikes. In other words, equivalently, they have a 30% rebate from the manufacturer and are only passing along a 20% price reduction to the consumer through direct costs and/or premiums. Note that these are numbers that I created to show the math, not the actual margins.
So, with these items in place, if the drug prices rise, the folks employing the PBMs and the Part D providers make more money (10% of list price, whatever it is, using the numbers above) and the full price increase is on the consumer. Additionally, drug manufacturers have taken the extra step of blocking generics and bio-similars by only offering these rebates on brand name drugs and tying the availability of the rebate to the brand name drug keeping certain levels of market share. Honestly, that’s really insidious right there!! It prevents the introduction of cheaper generics to the market place by further increasing the barriers to entry on the consumer market side, not just the regulatory/approval side.
The new rule, as a result of the executive order, removes the safe harbor for these sorts of rebates by specifically excluding them from the category of allowed discounts. That is, these types of practices will now be a violation of the statute and thus illegal. The only things that will qualify are discounts that are passed on directly to the consumer. That sounds like a great thing, getting rid of this system that entrenches brand names over generics and encourages cost increases because the manufacturers and “middle men” both benefit to the detriment of the consumer . . . but is it really?
This one is honestly a mixed bag for me. I can see how taking away the ability of manufacturers to entrench brand names via this rebate system may lower costs by removing one of the hurdles for lower cost generics to enter the marketplace, but the other side of this is pie-in-the-sky thinking, like the old city ordinances that increased taxes on soda manufacturers for sugar content. The intent was for the manufacturers to bear that cost and keep the prices at the store the same, but you can’t price fix that way and the prices rose and the costs were passed on to consumers as profit margins needed to be maintained. The same thing will happen here. Does the government believe that will happen? No. They issued a direct statement to that effect in the link in the comments. It is included next.
The Department (HHS) believes that Part D plans are likely to choose to cover more generics, improve negotiation with drug companies, and reduce overhead costs in order to hold premiums constant, making savings even greater—as laid out in the President's July Executive Order, which directed that the final rule will not increase premiums.
In other words . . . since the Exec Order required that whatever is implemented cannot increase insurance premiums, we are choosing to believe that companies affected by this rule will choose to reorganize their entire business models in order to comply with the rule AND not increase premiums. Since we believe that will happen and several other government agencies and researchers that we checked in with believe the same thing, that means that we are all in compliance with the terms of the executive order – excessive self-congratulations all around!!
The truth is likely that a couple of small providers may take this tactic because they believe that they can attract a clientele that pays attention to these things. The big companies will simply re-figure their premiums and the percentages offered to consumers based on the list prices and continue to make their profit margins while the American people complain about the new, higher prices of medical care in this country.
This is common sense when viewed from the standpoint of a free market system . . . at least the parts of it that we allow to be free. Count on everyone and every entity to act in their own self-interest, but at the same time to have to survive the supply and demand of the market. The only way that this rule works is if, for some reason, enough companies show that by implementing generics and working lean they can generate the same profits by being more efficient and offering lower prices to the consumer. However, if that system of business worked, wouldn’t it have already been implemented within the market that was slightly freer before this new rule was imposed upon it?
I choose to believe in the innovation and imagination of business people in this country and that if it was a profitable way to go about it, then it would have been done by now. Are there additional government regulations that limit or prohibit formation of new insurance entities into the marketplace that were preventing this system from being used? That would not surprise me in the least and further backs up my small government case.
So the bottom line here is that in order to comply with the executive order’s language, the HHS is implementing a rule change that on the surface looks beneficial, but in reality requires a certain level of delusion on behalf of the government department on how compliance will actually occur. Furthermore, when that delusion is exposed as such, it will result in the exact thing that the executive order says the new rule should prevent - a rise in costs/premiums.
Secondly, there is the Most Favored Nation (MFN) designation. This piece is simpler. US drug manufacturers sell drugs overseas for less than they sell them in the US. That’s a fact. The MFN designation states that with a few exceptions on bulk purchases and certain margins, US drug manufacturers must charge the US markets the same as their lowest priced similar overseas market. In other words, they cannot price drugs in similar overseas markets any lower, anywhere than they do in US markets. Wow! Great!! Drug prices should go down across the country right?
No. Let’s look at why drug prices are so high here first.
Requirements to get to market in the US through the FDA and other entities are the most restrictive in the world. The costs to leap over those hurdles are reflected in the prices that we have to pay for the drugs. Other countries have lower standards and lower barriers to market entry, thus lower drug prices are charged because there are lower costs to market and fewer sunk costs of drugs that fail to get to market at all. All of those costs have to be recouped by the drug manufacturer or they go out of business.
The MFN designation requires that drug manufacturers cannot charge less overseas than what they charge in the US. The government is essentially requiring the cost to market differences to be ignored. So, will the effect be the one intended on the surface of dropping of prices across the US?
Probably not, but why?
The current drug approval process in the US is highly expensive and exclusive. There are several effective drugs that never make it to market because they cannot prove their effectiveness inside the current rules/regulations. Those development costs for such drugs are sunk for the manufacturers, net losses that must be made up by drugs that ARE approved. So, the costs in the US can’t drop and manufacturers remain in business. So, the overseas costs will have to increase to the same levels as those in the US . . . but this reduces the competitiveness of US manufacturers in the international markets where barriers to entry are lower.
Those overseas sales could drop dramatically and cut further into the profits of the drug companies. The truth is that those sales in overseas markets actually help to defray costs of drugs in America. If the drug companies can count on a certain level of overseas market then they can price drugs in the US lower and still hit their required profit margins.
So, what’s the effect of a rise in overseas prices to US levels? Far fewer overseas sales and higher overall prices in the US to keep profit margins in place is most likely. Will there be some tightening of the belts across companies, yes, to a point, but the final outcome is not as simple as lower drug prices across the board. The final result will be, more than likely, the US market having to bear the full brunt of the regulatory requirement of the FDA and the US government where it is currently spread across worldwide markets with dynamic pricing allowed.
This is similar to the widely touted tariffs that the President passed during the trade war with China. It’s the same effect, only in reverse. Regulations require higher cost barriers on foreign manufacturers to get into US markets, but the US manufacturers have not improved their efficiency or their own costs and thus are still offering goods and services at the same prices that were being beaten by foreign competitors before. What is the end result? Sure, incoming sales are redirected from foreign entities to US entities, but to the consumer, the prices at the market have raised across the board. Is this really a better situation overall?
With the drug rules above what is happening is a ceiling on the prices in the US markets that is linked to international markets, but no reduction in the cost requirements to get into the US markets. So the companies are stuck to make a decision of lowering US prices and lowering profits or raising foreign prices and reducing market share. Since the companies are using their foreign market shares to defray the costs to get into the US markets, if those shares go down then the costs have to be made up somewhere and the only other choice is to raise all prices even more.
The possible scenarios are these.
First, that cost increase and market share decrease overseas actually balance out and provide the same net income as they currently do. In that case, US drug prices should remain the same. Secondly, cost increases reduce overseas market share to the level that the net income is decreased. The company will have to decide whether to eat the difference internally (by restructuring, increasing efficiency and reducing required profit margins) or to pass the costs on to the US markets. Finally, it is possible that the increased costs overseas do reduce the market share, but even with that happening, the overall net income from overseas increases and the company has the decision to either run with a higher profit margin or to pass those savings on to the US markets.
Do you believe that in any of those scenarios the price of US drugs will actually decrease? No, expecting companies to act against their own interests because of the intent of some laws and regulations that were put into place is ludicrous!! That’s what our government does over and over again though. When it doesn’t work, they just say, well, we didn’t go far enough so, we need more regulation, more taxpayer funding and more power in the hands of the bureaucracy so we can get the results we intend rather than the results that occurred. They just ignore the basic economics and refuse to understand why intent is not coupled to outcome.
I have used specific instances brought to the public this week as examples of typical government missteps that cause the opposite effects of the intended consequences and why they keep occurring, particularly when having to do with economic impacts of regulations. We have to stop looking to government to solve our issues. They can’t do it even though they promise over and over that they can and will. They are working within the free market as well and constantly acting in their own self-interest. The government’s self-interest is in more centralization of power, not in taking care of the people and doing what’s best.
Politicians are useless, but they must hide their uselessness in a shroud of effectiveness so that they can continue to get elected and pursue their chosen profession. We no longer have citizen-statesmen that take a small break from their regular lives and serve in the government for a short while and then go back home to resume their pursuits. We have professional politicians that are interested in justifying their existence, expanding their power and limiting the ways in which they can be ousted from that power. This dynamic attracts the worst kinds of people to the positions as the only personalities that want to pursue it are the ones most likely to abuse the authority they are given. That, and the ones with the decisions in their hands are often surrounded by sycophants and have very little actual knowledge of the effects of the items they are implementing.
Freedom is the answer. Less regulation, not more. You want lower drug prices? Remove the efficacy requirements from the FDA standards. Make drug companies prove that the drugs are safe (not deadly and few side effects) before they enter the market, but let the free market decide whether the effectiveness of each drug is worth the cost. Companies will be able to get data feedback and use that for advertising while generating some amount of profit without a huge sunk cost up front. It’s a more efficient overall system if the government just gets the hell out of the way! The incremental cost of ramping up pill/serum production is nominal compared to the research and entry to market costs, so reduce those costs by reducing regulations and let the free market do its job.
The answer in most cases is less government, not more. These are just specific examples of such. They are endless when looking at ways that government inefficiency and bureaucracy ruin the intent of some possibly good ideas. With a little deep analysis and knowledge of basic economics, the results can often be easily predicted despite what the intentions are as relayed by politicians.
If you finished this book of a post, thank you for reading. I should probably start something where I can just post things like this and link them of Facebook. Comments and such are welcomed.
Link #1 - www.hhs.gov/about/news/2020/11/20/fact-sheet-trump-administration-finalizes-proposal-to-lower-drug-costs.html
Link #2 - www.hhs.gov/about/news/2020/11/20/trump-administration-announces-prescription-drug-payment-model-to-put-american-patients-first.html