- How Trump’s Prescription Drug Executive Orders Reduce Costs For Seniors & Taxpayers
- Medicare incentivizes drug companies to raise prices
- Trump’s International Pricing Index gets stalled
- Reducing the cost of insulin and epinephrine
- The U.S. prescription drug system is not a market
- High Drug Prices & Monopoly — Open Markets Institute
- ~ ~ ~
- ← BACK TO ANTI-MONOPOLY BASICS
- 3 Actions Congress Can Take to Reduce Drug Prices
- Link innovation-friendly policies to price concessions.
- Revamp how long and how thoroughly new drugs enjoy monopoly protection.
- Remove obstacles to competition from generics.
- How Government Policy Promotes High Drug Prices
- Market Distortion
- Where Does Industry Invest?
- Looking Ahead
- Reduce The Scope And Length Of Monopolies
- Paying For Value
- Get A Better Return On Public Investment In Biomedical Research
How Trump’s Prescription Drug Executive Orders Reduce Costs For Seniors & Taxpayers
WASHINGTON, DC – JULY 24: U.S. President Donald Trump signs executive orders on prescription drug … [+] prices in the South Court Auditorium at the White House on July 24, 2020 in Washington, DC. President Trump signed a series of four executive orders aimed at lowering prices that for prescription drugs in the United States. (Photo by Drew Angerer/Getty Images)
Americans have long complained about the fact that drug companies overcharge U.S. patients for medicines that cost much less elsewhere. A quartet of executive orders from President Trump, issued today, will change that.
“We are putting patients over lobbyists, senior citizens before special interests, and we’re putting America first,” said Trump.
Medicare incentivizes drug companies to raise prices
The most important of the orders concerns what Medicare pays drug companies for drugs administered in physician offices, those requiring an intravenous infusion.
First, some background. Today, Medicare Part B—our single-payer program for seniors’ visits to doctors’ offices—has a crazy way for paying for such drugs, called “ASP plus 6,” which stands for “average selling price plus 6 percent.” Doctors get a 6 percent commission—technically, now a 4.3 percent commission—on any drug they administer to a patient in their offices.
When Congress designed this provision of the Medicare program, it effectively turned doctors into glorified real estate brokers. Just as a real estate broker is incentivized to sell you a bigger house, so he can get a bigger commission, doctors are now incentivized to prescribe you the costliest medication, even if a more effective, lower-cost option is available.
The existence of this perverse incentive is an open secret in the biotechnology and pharmaceutical industries. Manufacturers know that if they develop a drug that needs to be infused intravenously, and is primarily used by Medicare patients, they can generally charge whatever they want, and force taxpayers and seniors to pay the bill.
Trump’s International Pricing Index gets stalled
In an effort to reform the broken system for Medicare Part B drugs, in 2018 President Trump proposed benchmarking Medicare’s reimbursement rates for physician-administered drugs to an International Pricing Index: the average price paid by a group of industrialized countries.
As you would expect, the drug lobby and its allies attacked the proposed rule, claiming that it was “socialist” to reduce federal subsidies to drug companies.
The administration estimated that the plan could reduce Medicare Part B spending by $17 billion over five years. Even though that sum represents less than 1 percent of all U.S.
pharmaceutical spending, the drug lobby histrionically claimed the rule would threaten their business model.
That doesn’t mean the proposed International Pricing Index is perfect. As I noted in Forbes at the time, the index “leaves out the more market-oriented health care systems in Europe, and includes more single-payer oriented systems Canada and the U.K.
” A market-based benchmark that focused on countries with private health insurance, instead of those with single-payer systems, would be more philosophically consistent with the Trump administration’s approach to health reform, while being just as effective at reducing Medicare drug costs.
The debate, until now, has been theoretical, because progress on the IPI had been stalled within the White House.
Trump has reportedly expressed frustration at the lack of progress on his drug pricing reform agenda, due in part to internal disagreements among his staffers. And that leads us to today’s news, in which the President has issued four executive orders—in effect, direct and explicit instructions to his subordinates—to implement drug pricing reform.
“It is the policy of the United States that the Medicare Program should not pay more for costly Part B prescription drugs or biological products than the most-favored-nation price,” Trump declares in a draft version of the executive order that I obtained from a source close to the White House. That price, he says, “shall mean the lowest price, after adjusting for volume and differences in national gross domestic product, for a [drug] in a member country, with a comparable per-capita gross domestic product, of the Organization for Economic Cooperation and development.”
The order instructs the Health and Human Services Secretary, Alex Azar, to come up with a plan to test wither such a rule would reduce costs and improve outcomes. The order will be effective on August 24th, unless the drug industry comes up with a “better plan” that Congress can enact.
This is, in effect, a turbocharged version of the International Pricing Index. Instead of Medicare paying drug companies at the average price of a group of industrialized countries, Medicare would pay the lowest price among comparably wealthy nations.
(According to the FREOPP World Index of Healthcare Innovation, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland, and the United Kingdom are OECD-member countries whose GDP per capita are within 60 percent of the United States’.)
The move from an average price of the group to the lowest price makes eminent sense. In any normal market, the biggest purchaser of a product is able to negotiate the lowest bulk price for that product.
In the bizarro world of Medicare drug spending, taxpayers are forced to pay the highest price even though they represent, on the whole, the largest market in the world for prescription medicines.
Most importantly, the most-favored-nation approach will do the most to reduce seniors’ out-of-pocket costs, and the most to reduce entitlement spending and thereby the deficit.
The new MFN rule continues to use single-payer countries as components of its benchmark, such as Australia, Canada, Finland, New Zealand, Sweden, and the United Kingdom. But that isn’t necessary to achieve the desired goal of reducing seniors’ and taxpayers’ costs, as I point out above. A benchmark composed solely of the non-single-payer countries would save just as much.
Having said that, the Trump administration makes a legitimate argument for considering single-payer countries’ drug prices. Contrary to the assertions of the drug lobby, single-payer countries don’t “impose” their prices on manufacturers.
If, say, the U.K. were to pay zero dollars for Gilead’s hepatitis C treatment Sovaldi, Gilead would be fully within its rights to pull the U.K. market. The U.K. government knows this, and tries to come up with—you might even say “negotiate”—a price that keeps Gilead at the table, while also minimizing the fiscal burden to taxpayers.
In this way, the prices that Gilead accepts from the various European countries are a kind of market price, in the same way that a seller of any product that involves major bulk purchasers is generating a market price.
It is certainly true, though, that Medicare could generate a more market-oriented price by focusing on countries with the most market-oriented health care systems. As Trump officials develop their new rule, they would be well-served to keep this in mind.
In early 2019, the Trump administration proposed changing the way that prescription drug rebates work in the Medicare Part D program, which helps seniors afford the medicines they buy at the retail pharmacy counter.
(Rebates are the payments that drug companies make to pharmacy benefit managers, or PBMs, in order to incentivize more patients to use their drugs. In Medicare Part D, rebates amount to around $30 billion a year.
The proposed reform would require PBMs in Medicare Part D to pass their discounts directly to the patients using those drugs, in ways that would improve the efficiency of the prescription drug market and lower costs for seniors.
Unfortunately, in July of 2019, after heavy pushback from PBMs and others, the administration withdrew the rule.
The President appears to have reconsidered. Today, the second of his four executive orders revives the rebate rule, directing Sec. Azar to “complete the rule making process he commenced” to pass rebates back to patients.
The industry isn’t sitting still. According to Adam Cancryn and Sarah Owermohle of Politico, the White House is set to receive “massive blowback” from PBMs, who are preparing “a major ad campaign against any effort to eliminate rebates…in several swing states ahead of November.”
Reducing the cost of insulin and epinephrine
The two other orders are targeted at reducing the cost of specific drugs, insulin for diabetics and epinephrine for those with certain severe allergies.
One order enables states to create programs for the importation of low-cost drugs from other countries, “provided such importation poses no additional risk to public safety and results in lower costs to American patients,” and specifically authorizes “the re-importation of insulin products upon a finding by the [HHS] Secretary that it is required for emergency medical care.”
Importing drugs from other countries might help some patients, at the margin, access lower-priced treatments. But a lot of people don’t realize that Canada’s drug prices are the second-highest in the world, just behind those of the U.S.
And drug companies have become quite sophisticated at managing their inventories in order to prevent drugs from flowing across borders.
Nonetheless, the order could provide an escape valve for those who struggle to afford the medicines they need.
The fourth and final order focuses on insulin and epinephrine prices at Federally Qualified Health Centers, or FQHCs.
FQHCs are federally subsidized primary care clinics that serve low-income or rural populations. 28 million patients visit FQHCs each year.
FQHCs commonly participate in a prescription drug purchasing program known as 340B, under which providers can purchase drugs at deeply discounted rates.
The problem is that many providers—especially hospitals—take advantage of the 340B program to buy drugs at low prices, and then administer them to patients at high prices, pocketing the difference as profit. President Trump’s fourth order ends this practice at FQHCs, by ensuring that the prices charged to low-income uninsured patients align “with the cost at which the FQHC acquired the medication.”
The U.S. prescription drug system is not a market
Along with the drug lobby, there are a number of otherwise conservative organs that have criticized Trump’s efforts to reduce the cost of prescription drugs to patients and taxpayers. Their argument is that the present system is a “free market,” and that Trump’s moves would undermine market forces.
This is plainly ridiculous.
First: Branded drugs in the U.S. are protected by government-imposed and government-enforced monopolies, often—but not always—through the patent system. Monopolies, whatever their merits, are not markets.
And drug companies have become adept at convincing the U.S.
Patent and Trademark Office to grant them patents for trivial and non-innovative modifications to their drugs, extending their monopolies and allowing them to continue raising their prices.
Second: The U.S. health care system makes it easy for drug companies to charge whatever they want. The tax exclusion for employer-sponsored insurance prevents patients from shopping for the coverage and care that serves them best.
Insurance mandates force coverage of certain drugs regardless of their cost.
And government programs Medicare Part B, today, effectively write blank checks to drug companies to charge whatever they think they can without causing excessive reputational damage.
Conservatives talk a good game about reducing government spending and reforming entitlements. But in practice, too many are selective in applying that philosophy: opposing aid for low-income patients, while ardently defending tens of billions in subsidies to multinational drug companies.
President Trump has many faults, but he deserves credit for tearing up this stale ideological loaf. His executive orders could save tens of billions in taxpayer funds, and help millions of low- and middle-income Americans better afford their medicines.
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High Drug Prices & Monopoly — Open Markets Institute
Americans must pay the highest drug prices in the world because of the high cost of innovation, or so say lobbyists for big pharmaceutical companies.
If the United States adopted policies to bring its drug prices in line with those in other advanced nations, they warn, drug companies would be forced to cut their spending on research and development, resulting in fewer cancer drugs, treatments for Alzheimer’s, and the .
Yet there is a problem with this argument. In recent years, the prices Americans pay for drugs have only soared higher, even as innovation in the pharmaceutical industry slackens. The average number of new drugs approved each year has declined since the 1960s. The drop-off has been particularly steep since 1996, when 54 new drugs came on line, compared to only 30 in recent years.
Moreover, today’s new pills typically have only modest, if any, proven therapeutic value over existing treatments. As a study in the Journal of the American Medical Association found, nearly half of the drugs approved by the Food and Drug Administration between 2005 and 2011 lacked any tangible health benefits, such as prolonging life or relieving symptoms.
How is America managing to get the worst of all worlds when it comes to drugs? Many explanations trace to public policy changes that have led to the monopolization of the drug industry over the last generation.
From the end of the WWII through the 1960s, Americans benefitted from an unprecedented parade of wonder drugs, from broad-spectrum antibiotics, steroids and antihistamines, to the first chemotherapies, and the oral contraceptive known as “the pill.” Though there were complaints about affordability, most of these wonder drugs were reasonably priced by today’s standards.
This was largely the result of government policies that allowed for a comparatively open and efficient pharmaceutical market. These policies enforced standards for safety and effectiveness, provided funding for basic research, and critically, limited patent monopolies and mergers between drug-makers.
But the U.S. has since largely abandoned the policies it previously used to foster healthy competition. The result is a highly dysfunctional pharmaceutical market that produces high prices and less and less innovation.
~ ~ ~
The government’s role in structuring the pharmaceutical marketplace dates to the early 1900s when unproven, deceptively marketed patent medicines harmed public health and eroded consumer confidence.
Due to these concerns, Congress and President Theodore Roosevelt passed the Food and Drugs Act of 1906, creating the Bureau of Chemistry—the precursor to the Food and Drug Administration.
In one infamous case, the bureau successfully fined Clark Stanley for “falsely and fraudulently” marketing his “snake oil liniment.”
This was also, however, the era in which politicians in both parties first embraced the importance of “trust-busting.” In keeping with the wide, bi-partisan opposition to monopoly that lasted up until the 1960s, policymakers did not allow drug companies to combine or abuse their powers in ways that threatened competition.
Government policies, for example, fostered competition by limiting the length of patent monopolies. In other instances, regulators forced drug companies to license their patents when they gained too much market share. Meanwhile, the threat of both civil and criminal antitrust suits kept drug companies from combining or colluding in ways that would significantly reduce competition.
The market for antibiotics illustrates this regulatory regime’s success. After the World War II, many companies competed to sell Penicillin, and the market became less and less dominated by any one player. This helped drive down Penicillin’s price––from $3,995 a pound in 1945 to $282 a pound in 1950.
The next decade saw industry efforts to drive prices back up through monopoly. In 1958, the Federal Trade Commission (FTC) authored a report on the antibiotics industry in which it found that a handful of companies had cornered the market and kept prices high for tetracycline, a broadly useful antibiotic.
But these cartels were rolled back by protracted government countermeasures. After the report’s release, the FTC charged five drug companies with blocking new competitors and fixing prices for tetracycline.
Though the FTC could never prove price-fixing in court, the FTC forced the companies to license out tetracycline at a low price.
In so doing, the agency broke apart the emerging cartel and ensured a more competitive market for the new and powerful drug.
But beginning in the 1980s, the U.S. started to move away from the policies that had fostered an open market for pharmaceuticals during the wonder drug era. One change was a retreat from antitrust enforcement, which eventually led to a much more concentrated industry. Between 1995 and 2015, 60 pharmaceutical companies merged into just 10.
Congress and the courts also made several changes to patent law that similarly encouraged monopolization, higher prices, and less innovation. These changes have made it easier for drug companies to patent minor variations in drugs, thereby enhancing the power of patent monopolies to suppress competition.
Other changes and loopholes in patent law allow drug companies to pay other firms to keep competing drugs off the market, prolonging their drugs’ exclusive position.
The FTC has successfully prosecuted some of these “pay-for-delay” schemes, but drug companies have responded by trading valuables besides cash to achieve the same anti-competitive effects.
In addition, companies with branded drugs will stop generic drugs from coming to market by refusing to hand over the samples and safety protocols needed to produce a generic drug. This tactic artificially extends drug companies’ patents and cuts against Congress’s intent to encourage generic drugs.
Other policy changes have had similar effects. In 1980, Congress passed the Bayh-Dole Act, which allowed non-profit institutions to claim patents on discoveries funded by government research.
This legislation allowed universities and research institutions to privatize and profit from public investment, closing off others’ access to the fruits of public spending and raising the price of drugs that would be markedly cheaper if they weren’t patented.
Because this law encourages more researchers to patent more discoveries, Bayh-Dole also means that more drugs, and more research tools, are covered by patents today. That makes it even more difficult for underfunded researchers or small companies to begin developing new drugs, as more materials are locked away by big firms.
These policy changes have resulted in many negative effects, starting with monopoly pricing. In the drug industry, as with any industry, consolidation facilitates collusion.
When a few companies control a market, it becomes easier to maintain an effective cartel because no member can step the agreement without being quickly detected by the others. The market for insulin may be a case in point.
Since 2010, the three American manufacturers of the drug have all raised their prices by 168 percent, 169 percent, and 325 percent, respectively.
Even without forming cartels, monopolistic companies have a greater ability to raise prices because they don’t face the full pressure of a competitive market.
Mylan Pharmaceuticals could raise the price of its Epipen by 450 percent precisely because it held about 90 percent of the market. And this applies to all kinds of drugs, branded and generic a.
Between 2010 and 2015, for instance, nearly a quarter of all generic drugs saw at least one price increase of 100 percent or more, and some saw increases of 1,000 percent or more.
Monopolization also tends to discourage research spending and depress innovation. One reason: merging companies tend to cut research spending. Both Pfizer and Valeant Pharmaceuticals, for example, cut their R&D spending after acquisitions.
Academic studies confirm that mergers tend to depress innovation among drug companies.
Indeed, many drug companies have turned to mergers and acquisitions to make up for their lack of innovation—acquiring firms with promising or profitable drugs rather than developing such drugs in house.
These developments and tactics have created the current American pharmaceutical landscape. Drug companies grow larger, pursue more mergers and acquisitions, and raise prices. Nearly all Americans have felt the effects of this skewed and unequal market.
← BACK TO ANTI-MONOPOLY BASICS
3 Actions Congress Can Take to Reduce Drug Prices
The high prices Americans pay for drugs has emerged as a major health policy concern.
A majority of voters in both the Democratic and Republican parties want the government to take action to lower prices, and lawmakers in both houses of Congress have introduced bills aimed at doing so.
Drug companies, meanwhile, argue (as they long have) that negotiating or regulating prices would cripple research budgets, stifle innovation, and lead to fewer treatments in the future.
In a new article in the New England Journal of Medicine, we describe the three-stage journey that every successful drug makes during its life cycle and how adjusting the incentives during each period and tying them to price concessions could achieve the best of both worlds: stimulate innovation and lower prices.
First comes the “innovation period,” during which new products are developed, tested, and prepared to be submitted to the Food and Drug Administration for its approval.
If they win FDA approval (most don’t), drugs enter a “monopoly period” and are protected from competition through patents and by the FDA.
When these protections end, the “competitive period” starts: Other companies can now make and sell copies of the brand-name drug.
Policies — laws passed by Congress and regulations enforced by presidential administrations — strongly influence how long these periods last and how much profit or loss companies experience in each. The ability to charge high prices is only one part of the risk-reward calculus for drug manufacturers. Conceptualizing the market as a whole opens up other avenues for reform.
To help patients, lawmakers should take three actions.
Link innovation-friendly policies to price concessions.
The process of drug development is uncertain and expensive, but there are many ways to reduce both the risk of failure and the cost of innovation that don’t require allowing drug companies to charge exorbitant prices.
In 1981, for example, Congress created tax credits to offset research costs, and in 2000, Medicare began covering medical expenses for patients in clinical trials. More recently, regulations have been introduced to speed drugs through the FDA’s review process, which can save companies hundreds of millions of dollars.
These innovation-friendly policies have never been linked to explicit price concessions from drug companies, but in the future, they should be.
Revamp how long and how thoroughly new drugs enjoy monopoly protection.
New drugs enjoy two types of monopoly protection: one through patents, the other through market exclusivity granted by the FDA.
The FDA generally gives companies five to 12 years of exclusive rights to sell a new drug after approval, but patent protections can last decades because manufacturers often patent not just the original molecule but also minor changes to the drug its coating or how it can be given.
Enbrel, which is used to treat inflammatory conditions rheumatoid arthritis, was developed in the 1990s, but it’s thicket of patents runs more than 100 deep and doesn’t run out until 2029. Meanwhile, the drug costs nearly $70,000 a year.
Reducing the number and types of patents available to drug manufacturers would limit how long patients and taxpayers are exposed to those price tags. Absent action that limits the duration of drug monopolies, money that should be encouraging the development of new drugs will continue to flow to companies that are best at blocking competitors to older drugs.
In addition to guaranteed monopolies, policymakers often hamstring insurers from using their market muscle to obtain price concessions.
For example, not only is Medicare prohibited from negotiating drug prices, it is also required to cover every FDA-approved drug across six “protected” classes — regardless of how effective a drug is.
Allowing Medicare and other payers to exclude some drugs from their formularies would improve their bargaining leverage and could lower prices. Both the Obama and Trump administrations considered this approach, but their efforts eventually stalled.
Remove obstacles to competition from generics.
Competition is a sacred American ideal — and a central mechanism through which drug prices ultimately fall — but policymakers have been slow to remove the barriers generic drugs face when trying to enter the market.
Most people are familiar with “pay-for-delay” tactics through which companies pay would-be competitors not to bring generics to market, but they also use other tricks to smother competition before it begins.
By citing safety concerns, for example, some companies refuse to provide the samples that generic manufacturers need to prove that their products are equivalent to branded drugs. The CREATES Act, which was signed into law in December, could put an end to some of these shenanigans, but other competitive challenges remain.
Some pharmaceutical companies use a technique known as “evergreening” or “product hopping” to extend monopoly prices and prevent the use of generic drugs.
A company product hops when shortly before the expiration of monopoly protection, it introduces minor changes to a branded drug — tablet to film administration, for example, or twice-daily to once-a-day dosing — and removes the original product from the market, thereby delaying generic drug approvals and substitutions. The Federal Trade Commission could more aggressively enforce antitrust laws against such tactics, and the FDA should not grant cosmetically different products market exclusivity immediately before branded products are set to lose monopoly protection. In some drug classes biologic drugs, where competitors are simply hard to make, lawmakers may ultimately have to regulate prices if they can’t make the market work.
Today, the United States has a system that has allowed the prices for drugs to skyrocket, often outstripping the value they offer patients. But by reforming the whole system and not just focusing on prices alone, lawmakers can bring down the cost of drugs and stimulate the development of new therapies.
How Government Policy Promotes High Drug Prices
It is a bedrock principle of capitalism that as competition erodes profits on established products, enterprises will invest in innovation to earn higher profits from new products.
US law governing prescription pharmaceutical markets abandons that principle and gives every new drug a long-term monopoly that prohibits competition. It also discourages competition between medicines comparative price or effectiveness.
High prices and slow innovation cycles are the inevitable result and will remain so unless Congress makes fundamental changes in existing law.
According to the Pharmaceutical Manufacturers Association, it takes at least 10 years to develop a new drug. It is no surprise that the typical monopoly period on an existing drug is also 10-12 years. Why rush to bring a new product to market when a monopoly makes it possible to raise the price of the old one with impunity?
Patents covering products other than drugs rarely provide the ability to charge any price. They are normally limited to a specific innovation and do not prevent competition from similar products. There are always many computers, TVs, and smartphones to choose between.
Patent litigation also takes years to complete and the vast majority of cases are ultimately settled because the pace of new innovations is often faster than the time it takes to acquire or enforce a patent on an existing innovation.
The iPhone supplanted the Blackberry in far less than the 20 year life of Blackberry’s patents.
In contrast, Federal law prohibits the Food and Drug Administration (FDA) from approving a copy of a new drug for a period of seven to 12 years even if there are no patents.
The FDA is also prohibited from approving a generic drug anytime a claim of patent infringement is alleged – a policy that has encouraged many frivolous patent claims just to delay competition.
Drug patents also get extensions of up to five years and then an additional six-month extension for conducting studies of the new drug’s suitability for use in children. Collectively, all of these special monopolies prevent competition and keep prices high.
Competition between the many medicines that are usually available to treat the same medical condition could help bring down the price of a new drug that has insignificant value over an old one.
A rational consumer would not pay $10 for a medication when their affliction could be relieved for 10 cents.
Unfortunately, once a medication is prescribed by a physician, only that medication or an approved generic copy can be legally dispensed even if a lower cost alternative medicine exists.
In a 1979 study recommending that States enact generic drug substitution laws as a means of lowering prescription drug costs, the Federal Trade Commission stated “the forces of competition do not work well in a market where the consumer who pays does not choose and the physician who chooses does not pay.” The situation is worse today because most patients have drug insurance that pays.
The pharmaceutical industry exploits this market distortion to avoid price competition, spending tens of billions every year on promotions and payments to physicians to convince them that minor differences between drugs are clinically significant.
And it spends billions more in direct-to-consumer advertising and on coupons that cover copays, to stoke demand for high-priced, low-value drugs.
Medicare wasted over $4 billion in 2013 on Nexium and Crestor for which equivalent therapeutic alternatives are available at a tiny fraction of their cost.
Ultimately, it is the payer and not the patient who must negotiate the price it is willing to pay and most countries actually do so. To get the best price, many rely on rigorous scientific studies that examine the comparative clinical and cost effectiveness of new drugs and will simply refuse to purchase a new drug that is not fairly priced relative to its value.
In other cases health systems may limit insurance reimbursement to a reference price that reflects such value leaving patients to pay the difference when they choose a high-priced, low-value medicine.
European health systems have prescription drug costs that are as much as 50 percent lower than the $1,000 per capita cost incurred in the US by using their purchasing power to extract value.
In stark contrast, US lawmakers have succumbed to the absurd argument that direct price negotiations by the government is akin to price controls and have prohibited Medicare from directly negotiating prices.
US government efforts to conduct and use comparative effectiveness research to hold down drug costs have been a failure.
Patient groups, largely financed by the pharmaceutical industry, persistently lobby against restricted formularies that could limit the use of high-priced, low-value medicines by falsely claiming that the government is trying to ration health care to save money at the expense of health outcomes.
As a result, the Patient Centered Outcomes Research Institute (PCORI), created by the Affordable Care Act to conduct studies comparing two or more existing treatments, has not yet completed a single such study after five years and the commitment of over a billion dollars. Pharmacy benefit managers use comparative effectiveness research to extract rebates from drug manufacturers but due to a lack of transparency regarding drug prices appear to keep a sizeable share of any savings as profit.
Why does Congress, in the face of outrageous drug prices, continue to advance laws the 21st Century Cures Act which bestow even more monopolies on the pharmaceutical industry? Quite simply, the pharmaceutical lobby has used its money and influence to sell the false notion that high drug prices and monopolies are necessary to support the high cost of research. Yet public financial data shows that high drug prices simply produce high profits!
For decades, the pharmaceutical industry has been one of the most profitable industries in America enjoying a median return on assets which is two to three times higher than the median return for all Fortune 500 companies.
In 1984, when the Hatch-Waxman Act enabled an expedited FDA approval process for generic drugs, the market capitalizations of Merck & Pfizer were each less than $7 billion-$16 billion in 2015 inflation-adjusted dollars.
Their market capitalizations are now more than 10 times that amount.
Where Does Industry Invest?
Annual industry expenditures on research have averaged less than 15 percent of sales and have less impact than that on profit because of the tax benefits associated with research spending. The industry’s enormous profits are what remains after all of its research and marketing expenses which is why the industry is awash in cash.
Pfizer now holds $74 billion in unrepatriated profits overseas and Merck holds $60 billion – enough to fund their respective annual research budgets for 10 years. Meanwhile, taxpayers are spending $30 billion a year on basic biomedical research the benefit from which flows to the pharmaceutical industry free of charge.
Under current law, ownership of the patents on drugs discovered with taxpayer money is given away to the academic institutions that discover them.
They license those patents to the pharmaceutical industry in exchange for the payment of a royalty which the public actually pays since the royalty increases the price charged for a drug.
Federal law essentially socializes the cost of drug discovery while privatizing the profits since it does nothing to limit the prices that can be charged or the profits that can be earned from drugs discovered at public expense.
In 1984, I represented the Generic Pharmaceutical Industry Association in the negotiations with Congress and PhRMA which sought to strike a balance between the pharmaceutical industry’s demand for greater incentives to invest in innovation and the public’s need for low-cost medicines. The deal which was struck then has not withstood the test of time. The monopolies created by Hatch-Waxman and subsequent legislation providing 12 years of exclusivity for biologic drugs clearly went too far in compensating the pharmaceutical industry at the public’s expense.
For decades, Congress has simply been transferring wealth from ordinary citizens to the pharmaceutical industry. While claiming to believe in free market capitalism, it has created a web of monopolies which cause the United States to pay the world’s highest prices for drugs even though it is the largest purchaser.
The US would save $80 billion annually if its per capita drug costs were only 50 percent higher ($750 per capita), rather than 100 percent higher, than those of other developed countries.
Investing some of those savings to accelerate the development of cures for our most costly diseases could eventually reduce health care costs and justify a high price for life-saving medicines.
What specific changes to US law could create that virtuous cycle? Here are some specific recommendations:
Reduce The Scope And Length Of Monopolies
Granting special monopolies to pharmaceutical companies that are not the patent law is a costly and inefficient way to induce investment in research.
The five year exclusivity for small molecules; 12 year exclusivity for biologics; six-month pediatric exclusivity and all other similar non-patent monopolies are now being granted without any regard for the investment required or value produced.
A drug which provides little or no incremental value over existing products gets the same ability to charge a monopoly price for an extended period of time as a life-saving breakthrough that required 10 times the risk and investment to discover. The current system of exclusivities should be repealed and replaced by a system which reasonably rewards research that produces drugs of high therapeutic value and little or no reward to low-risk research that produces “me too” drugs.
Paying For Value
As the largest payer for prescription drugs, the US government is entitled to the best price. It can achieve that price in one of two ways.
It can modify existing law to assure that Medicare, Medicaid, and other public programs utilize the full array of tools for evaluating the value of each new drug and allow government programs to directly negotiate drug prices using those tools, including restricted formularies, reference pricing, and the , just as it is now done by other developed nations and by pharmacy benefit managers.
In the short term, it can modify existing rebate laws so as to base rebates on the lowest price being charged for a drug in one or more OECD countries having a comparable standard of living rather than basing it on the inflated price charged in the US market.
Get A Better Return On Public Investment In Biomedical Research
The pharmaceutical industry is becoming more and more dependent on the US to conduct and pay for the basic biomedical research as the starting point for its investment in the development of new drugs.
The government must stop the practice of giving away the patents resulting from that research and mange those rights in a manner that assures that drugs developed with public support produce public economic benefit and not just private profits.
That benefit should take the form of reasonable prices, shorter monopoly periods, or both.