While true, wouldn't the point of such a rule be to provide a framework for fighting against exactly that? Without the rule they don't even need to try to manipulate the books, so there's even less to find as evidence that might be used to either improve the rule or enforce it differently.
Of course, market pressure is much simpler if one manufacturer just decides to do it according to a consistent and justifiable method and stick with it.
> Without the rule they don't even need to try to manipulate the books
Screwing with cost plus doesn't require manipulating books. If you're passing on your costs, you have no incentive to find cheaper suppliers. Need to hire a bunch of people? Meh. Guy didn't show up to work for two weeks? Not your payroll, really.
Enabling new entrants where possible, and regulating where not, is a simpler and more-scalable solution. Pharmaceuticals manufacturing seems to be light on the former.
Thank you for the explanation, I do agree that such a system does discourage you from using less expensive suppliers... assuming a lack of competition which you rightly point out is the bigger issue.
Of course, if there were sufficient honest competition it wouldn't need to be cost plus either, it could just be an honest competitive market price.
As long as they are actually manufacturing it the main pressure would be when they inevitably internally question why they are selling it for less than market price. I have seen that discussion, there's a big difference between "we can sell it profitably for this much" and "we can sell it for this much and make this much money".
So how do you provide that internal pressure? One honest competitor that publishes transparent methods for estimating the cost of manufacturing the drug along with case studies making it easy to do in other cases, and commit to using that process.
Or medicare of course, I don't see any reason it needs to be a private company. If they could estimate the true manufacturing cost in a vacuum I would certainly hope they could negotiate better but maybe they just don't know how because they aren't the manufacturer.
Of course, market pressure is much simpler if one manufacturer just decides to do it according to a consistent and justifiable method and stick with it.