Doctors Hold the Key to Lower Drug Prices

Doctors know that more tightly managed drug spending can help lower costs. Those in risk-based payment models (in which payment is no longer just based on how much care is provided) tend to take a different approach than under fee-for-service. When the doctors themselves are at least partially on the hook, they prescribe lower-cost drugs when possible; use expensive drugs only when they are most likely to work; insist that patients take expensive drugs as prescribed; achieve the maximal clinical benefits by adjusting dosages more rapidly; and evaluate drugs based on the total return on investment over a year. These steps help boost the likelihood that the benefit of the drug is worth the cost.

Although these models hold great promise for obtaining better value from drugs, they also raise knotty challenges. In particular, doctors manage drugs differently under risk-based contracts because, unless the medicine works, every dollar of additional drug cost is a dollar less income for doctors. That has complex consequences: These payment models diminish the market for low-value medications and instead reward manufacturers of medicines that produce lower health care costs. But they may also lead to underinvestment in innovations that make medicines more convenient for patients or have other benefits but don't lower total medical cost. More importantly, they increase the risk that doctors may stint on necessary prescriptions.

For example, in a Medicare Advantage contract in which the physician is paid a fixed amount per year for all the care the patient needs, the doctor typically earns on average $8,500 a patient. Since many drugs can cost more than that, patients who turn out to need expensive medicines can lead to big financial losses for doctors. Risk-based payment models all attempt to protect doctors to some degree from these financial exposures through steps such as carving out certain classes of drugs (cancer medications or biologic medicines) and offering stop-loss insurance for patients who exceed benchmarks (such as covering expenses above $100,000 a year for Medicare Accountable Care Organization patients). Unfortunately, all these interventions are imperfect and doctors can be left with strong incentives to limit use of expensive medicines even when they are warranted.

As a result, regulators and patient advocates need to be vigilant about protecting patients from doctors who unethically limit access to effective but expensive medicines. Current malpractice laws offer some protection against doctors stinting on care, but few patients or families ever go through the cumbersome process of engaging this system. A better approach will ultimately involve using electronic health records to develop systems to monitor and intervene rapidly in cases where doctors unethically limit access to care.

Despite these challenges, risk-based payment models are likely to continue to spread, and it seems likely that that they will lead to more competitive drug markets and lower drug prices than the more commonly debated options. Neither Congress nor pharmaceutical manufacturers seem focused on this trend, but we may be on the verge of a value-based pricing era driven by other forces that could constrain drug pricing far beyond the current imagination of payors, PBMs, and policy makers.

— For more columns from Bloomberg View, visit http://www.bloomberg.com/opinion.

Bob Kocher, MD, is a partner at the venture-capital firm Venrock Associates, adjunct professor at Stanford Medical School, and senior fellow at the Schaeffer Center for Health Policy and Economics at the University of Southern California.  He was special assistant to President Barack Obama for health care and economic policy from 2009 to 2010.

Peter R. Orszag is a Bloomberg Opinion columnist. He is a vice chairman of investment banking at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.