Government policies and programs like Medicare and Medicaid are dampening competition and artificially driving up the prices of prescription medicines, the White House argued in a new report.

The Trump administration said it was focused on correcting policies that hinder drug price competition.

"Reducing the drug prices that Americans pay means recognizing that many artificially high prices result from government policies that prevent, rather than foster, healthy price competition," the White House said in its Feb. 21 "Economic Report of the President."

Medicaid provides health coverage for eligible low-income Americans, while Medicare covers seniors and people with disabilities.

Under the Medicaid drug rebate program, participating drugmakers who want their products covered by the federal government must offer states a price that includes a minimum rebate or, if lower, the best price the manufacturers provide to private-sector purchasers, like hospitals.

Congress created the Medicaid drug rebate program nearly 30 years ago as a way to leverage the large volume of medicines the government purchases on behalf of low-income beneficiaries to obtain price concessions from biopharmaceutical companies.

The practice of tying public prices to private ones is partly beneficial, because it allows the private market to set prices based on value and competition, which then get imported into the government reimbursement process, the White House acknowledged.

But it said the program could create artificially high prices in the private sector under certain conditions.

For instance, if a large share of a given drug's market, like HIV, is enrolled in the government program, a biopharmaceutical company has an incentive to inflate its prices in the private sector so that it can collect higher post-rebate prices from its large Medicaid customer base, the White House said.

"Similarly, the mandated price discrimination implicit in this program prevents price discounts for lower-income patients in the private sector," it said.

The White House suggested that certain reforms could help prevent inflated private-sector prices, while at the same time allowing the government to use companies' pricing information to determine value.

The administration has proposed letting five states obtain waivers to allow their Medicaid programs to test using competitive drug formularies and negotiate prices.

Medicare's 'perverse' incentives

The cost-plus reimbursement environment for Medicare's Part B program, which covers medicines administered in doctor's offices and other outpatient facilities, "mutes the incentive for providers to prescribe cheaper drugs and, therefore, for manufacturers to engage in price competition," the White House said.

Medicare Part B pays providers the average sales prices plus a markup of 6% — an incentive the Trump administration called "perverse."

The White House has proposed letting the secretary of health and human services move certain therapies currently covered under Medicare Part B into the government's Part D prescription drug program, where the administration thinks pharmacy benefit managers could get a better bargain for beneficiaries.

Ending the "gaming" in reporting drug price data could also control prices, the administration said.

"This is important because not all drugmakers are required to report data on all the price concessions they offer, which results in Medicare setting payment rates higher than would otherwise apply under statute," the White House said.

For new drugs that do not have much sales data, the provider's payment could be cut to attenuate the incentives, the administration suggested.

The White House said there were several other provisions in the Medicare Part D program that artificially raise drug costs.

It noted that the government has previously interpreted the Social Security Act's requirement to include drugs within each therapeutic category and class to mean the inclusion of at least two medicines.

But that requirement eliminates Part D plan sponsors' ability to negotiate for lower prices when there are only two medicines on the market, because drugmakers know that the federal government must cover both, the White House argued.

Changing that requirement could lower prices for taxpayers and patients, it said.

The White House also asserted that Medicare overprices low-value drugs under the Part D program.

The prohibition on the use of formulary tier-based cost-sharing for low-income enrollees eliminates the ability of plan sponsors to price and discount drugs according to their value to patients, the administration said.

It said the three-phase payment liability structure for Medicare Part D also incentivizes beneficiaries to use expensive brand-name drugs over lower-cost generics.

Part D also creates "perverse incentives" for plan sponsors, which often receive large discounts from brand-name drugmakers, to generate formularies that favor high-price, high-rebate medicines that speed patients through the early phases of the benefit structure where plans are most liable for costs, the White House argued.

It suggested eliminating the manufacturer discounts from the calculation of the beneficiaries' true out-of-pocket costs to fix the "misaligned incentive." Increasing Part D plan sponsors' liability in the catastrophic phase from 15% to 80% also would provide the appropriate incentives for those companies and pharmacy benefit managers to manage beneficiary drug costs throughout the entirety of the benefit, the White House said.