The prescription drug market struggles with spending, price, and affordability due to lack of competition. Medicare Part D rules pit private plans against monopolistic companies that deliver drugs through pharmacies. At the same time, Medicare Part B must accept industry prices for clinician-administered drugs. This has caused Part B  drug spending to grow by 9% since 2009, and Part D to grow at an annual rate of 7.3% since 2006  well above the recent rate of overall Medicare spending.

In the New England Journal of Medicine, Margaret T. Morris Professor of Health Economics Richard G. Frank, PhD, and Director of the Center for Health Policy Research and Ethics and Professor of Health Policy at George Mason University Len M. Nichols, PhD, suggest negotiation to increase competition.

Between 2010-2015, 63% of the Medicare Part D spending growth was attributed to new specialty drugs. These drugs are high-cost, aimed at small patient populations, and require clinical supervision. They are delivered through pharmacies and often have to few to no competitors as they are frequently biologic and lack generic substitutes.

Frank and Nichols suggest a targeted bargaining strategy that allows the government to negotiate on behalf of Medicare and other drug buyers that have weak bargaining power. They believe that this could lower prices, even if the parts of the market where competition works reasonably well are left alone.

These negotiations must target specialty drugs that lack competition and establish references prices to guide the negotiations. The results should provide enough Medicare savings to justify their administrative burden. Medicare will be able to refuse to pay exorbitant prices and taxpayers will be protected from poor government bargaining through upper limit on possible prices. Industry incentives to innovate would be protected by a lower limit based on development costs and the therapeutic impact of the drug. In cases where a bargaining impasse is reached, a third-party arbitrator could neutrally evaluate the prices proposals from both sides and choose the plan that best balances innovation incentives and affordable access to care.

The authors argue that negotiation for a limited number of drugs is administratively feasible and will not disrupt the overall market. They can lead to solving many of the prescription drug market issues.