The launch prices for new drugs have doubled since 2005, in part because of the way Medicare reimburses physicians and other providers for Medicare Part B drugs, according to an analysis from Durham, N.C.-based Duke University's Fuqua School of Business.
The research, published in June, links the high launch prices to a change that took place in 2005 to the way Medicare reimburses for Part B drugs, which are drugs delivered in outpatient settings.
Starting in 2005, Medicare began paying providers back based on a drug's past sales prices, plus 4 percent to 6 percent. Before, reimbursement was based on a drug's average wholesale price. The 2005 change was an effort to correct flaws in the previous reimbursement policy.
But as long as Medicare reimburses providers based on cost, costs will continue to rise, and taxpayer dollars will be wasted, David Ridley, PhD, a health economist and Fuqua strategy professor who co-authored the research, said in a news release.
Because Medicare will reimburse for a Medicare Part B drug regardless of the price, providers may be less concerned about high costs, Dr. Ridley said. And drugmakers know they can charge high prices for provider-administered drugs, since Medicare picks up the costs.
The researchers suggested the way Medicare Part B reimburses also encourages drugmakers to have high launch prices to get higher reimbursements for providers, as this prompts higher demand and willingness to pay in the future, Dr. Ridley said.
The issue of high launch prices will likely grow as drugs that have launched since 2005 comprise a larger share of the drugs on the market, according to Dr. Ridley.
The researchers suggested switching to a reimbursement model based on a fixed, per-unit price to curb rising drug prices.
"Providers would be more sensitive to the price, and manufacturers would have less incentive to choose a high launch price to drive up future prices," Mr. Ridley said.
Read the full news release here.