Jack Hoadley of Georgetown University discusses how pricing and markets work in relation to pharmaceuticals, explaining that pricing varies substantially by payer and by whether drugs are under patent protection. He also explores how government-sponsored programs, such as the Veterans Administration and Medicaid, price drugs differently than privately insured health plans (including those that deliver the Medicare drug benefit) or than pharmaceutical companies for uninsured purchasers. He additionally reviews research demonstrating that brand-name drugs are twice as expensive in the United States as in other countries while generic drugs are less expensive domestically. Hoadley ultimately concludes that, while a price reduction of even 5 percent in brand-name drug prices could save $9 billion a year, the potential is unclear, partially because pharmaceutical spending is driven not only by prices, but also by physicians’ prescribing decisions and patients’ decisions whether to comply with their prescriptions. While Hoadley cautions that this estimate is only illustrative, as no obvious standard for an optimal drug price is available, he also explains that additional consideration of the impact price alterations could have on research and development and innovation is necessary.

According to Thomas J. Hoerger of RTI (Research Triangle Institute) International and Mark E. Wynn of the Centers for Medicare & Medicaid Services, evidence from competitive bidding demonstration projects demonstrates that the market for durable medical equipment (DME) inflates prices by approximately 20 to 25 percent. Care as to the interpretation of the amount of savings achievable is suggested by Hoerger because, while his savings estimate is based on competitive bidding results from the 1999-2002 demonstration projects and the 2008 national program, Medicare fees for DME have since been reduced. Hoerger also discusses how generous insurance coverage and demand created by pressing medical needs can promote higher prices for DME in excess of those that would occur in a perfectively competitive market. Although Medicare has used administered fee schedules in an effort to control these excess prices, Hoerger argues that these schedules may not be responsive to the usual market forces of supply and demand, entry and exit, and technological change. Wynn suggests that well-defined products, such as durable medical equipment, are the best candidates for competitive bidding. Yet, despite the potential for competitive bidding to lower the prices for DME, he urges consideration of the political context, describing how Congress delayed a DME bidding program for 18 months given formidable political backlash.

Lastly, Jeffrey C. Lerner of ECRI Institute concludes this session discussing price-setting practices and market practices for medical devices. He examines some of the most common purchasing processes in hospitals and discusses how efficiency can be improved. Building on the premise that the large and artificial asymmetry between information and market power existing between buyers and sellers creates inefficiencies, he suggests that



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