The current “cost-plus” Medicare drug pricing scheme has controlled costs, but due to the system’s conflicting incentives, many manufacturers have stopped making low-cost, generic injectable drugs rather than increase their prices. Medicare sets reimbursement based on the ASP for all drugs within a general category of drugs, rather than individually, so manufacturers benefit more if they offer the lowest price. American Enterprise Institute Resident Fellow Scott Gottlieb describes this as a “race to the bottom.” This sort of behavior is beneficial to consumers as long as prices can increase again, which is necessary to keep drugs on the market if demand or production costs increase. But as Gottlieb explains, “even if a single manufacturer raises its price, this price increase will be diluted once it gets averaged into the prices charged by competitors.”

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