President, National Coalition on Health Care
The price of pharmaceuticals has been a top policy issue in the U.S., especially since the introduction of the $1000 per pill Hep C drug Sovaldi in 2017. Drug prices are a top concern for Americans going into the fall elections. The issue is driven by the impact of expensive drugs on out-of-pocket costs. While there have been several proposals in Congress to reform drug pricing, none have moved forward to date. This article will discuss the elements of the U.S. debate and then compare leading proposals to the experience in Germany.
Price Trends for U.S. Pharmaceuticals
In general, drug pricing is often opaque due to nature of U.S. patent law and the commercial distribution agreements between manufacturers, pharmacy benefit managers (PBMs), and other distributors. U.S. patent law gives manufacturers of brand name drugs a monopoly over a product for several years, meaning there is often little market competition to influence prices. The manufacturer sets list prices based on what the market will bear, not on any objective measure of value or comparison to comparable treatments. Further, list prices usually do not reflect prices actually paid by purchasers due to discounts, rebates, coupons, and other mechanisms. There are indirect measures of prices paid by purchasers, however, and they are the most reliable indicators of a true “price”.
The situation is further complicated by the fragmented employer-based health insurance system in the U.S. Even the largest employers lack market power to negotiate drug prices on their own, so they use PBMs to negotiate on their behalf. PBMs use formularies that play one drug against others in the same class, and either structure cost sharing or deny coverage altogether as a way to manage utilization. PBMs do not disclose the results of these negotiations.
Employers have also resorted to high-deductible insurance plans in an effort to manage costs. However, very high deductibles often exceed family savings, creating very serious access issues even for those with insurance.
There are three distinct price trends that make generalizations about prices difficult.
First, the generic market in the U.S. dominates the volume of prescribed drugs, but not costs. Generics are, for the most part, inexpensive, and the market is relatively competitive. Generics make up 90% of prescribed drugs, yet only account for 22% of total pharmaceutical costs. Over the past 10 years, average prices for generic drugs have actually decreased.
Second, there are branded drugs under patent protection. They may be subject to competition from other drugs for the same condition. The price for a brand drug is often discounted once other brand drugs for the same condition are introduced. Brand drugs as a class are subject to price changes as popular drugs go off-patent and open up to generic competitors. As a category, the costs for brand drugs have risen slightly faster than inflation.
The third category of drugs is the newest and by far the most expensive – the biologics and specialty drugs. Because of their influence on out-of-pocket costs especially, they are the focus of the current debate. These drugs can only be administered by a physician via injection – they are not pills. Most of the recently introduced biologics are cancer therapies, with prices in excess of $100,000 U.S. per year (€89,114). The category now also includes gene therapies that have tremendous promise to cure some childhood genetic conditions, but which have been priced at over $1,000,000 for a treatment. These drugs are still rarely used, but their price tags have generated concern as they become more widely used and produced. As of 2017, specialty medicines approached 50% of spending across institutional and retail settings and represented the largest proportion of new medicines launched in the preceding 5 years.
Public Concerns Over Drug Prices
U.S. consumers pay a relatively high proportion of the cost of drugs out-of-pocket, although how much varies widely according to the insurance coverage a person has. What a person pays out-of-pocket is the major factor driving the politics of pharmaceutical pricing. Press coverage of people who are having severe difficulty paying for needed medications is distressing to most Americans, who believe that no one should be denied life-saving treatments. The challenges of those who cannot afford insulin for their diabetes, for example, is a frequent subject of media coverage and congressional hearings.
The result is a historically high level of demand for change among almost all segments of the U.S. population. Even with the pandemic, concern for the cost of treatments continues to be high – among the top priorities as people look to government for solutions. Recent public opinion polls are indicative of the persistent concern that most Americans have about the cost of pharmaceuticals.
State and Private Proposals to Address Drug Pricing
The political power of the pharmaceutical industry has succeeded to date in delaying effective measures designed to control costs. That power is based on a combination of very substantial campaign contributions to political candidates, literally hundreds of paid lobbyists, industry disease groups that push for cures and defend manufacturers, and the concern that price restraints might impair the research and development investments that the industry claims are the keys to future therapeutic breakthroughs. Of course, the pandemic only reinforces the industry message that price restrictions could slow the efforts to develop a vaccine for COVID-19 or even cures for it. I will not analyze these claims here, but simply note that they have been effective in blocking effective legislative action to date.
Given the lack of congressional action, many of the states have moved to address pharmaceutical pricing. Even large states have only weak purchasing leverage on prices. They are precluded by federal law from direct price regulation, so they have been limited to various initiatives to require transparency by manufacturers. As of last year, a total of 33 states have enacted measures to address pricing and access issues. They range from authorizing the importation of drugs from Canada to establishing oversight boards to review the prices the state will pay for certain drugs. The most typical state legislation is to require drug manufacturers to disclose the basis for pricing decisions, such as the cost of development for the drug or the comparative effectiveness calculation that could justify a high launch price. The industry has challenged most of these efforts in court, and evidence of effectiveness in terms of price impact is so far missing.
Private-sector employers carry the most direct cost burden for pharmaceuticals, given the employer-based health coverage system in the U.S. Employers have not been aggressive, however, despite the rising price tags they face for drugs. Most importantly, even the largest businesses have only a small share of any given market and thus no real bargaining power. They also have been reluctant to limit coverage of certain drugs due to employee resistance. Even legislative advocacy has been muted because most are ideologically opposed to greater regulation (in general). The business community is not united behind any particular policy remedy, and they have other priorities for their advocacy efforts.
The most visible effort to generate evidence-based comparative effectiveness and affordability data is the Institute for Clinical and Economic Review (ICER). ICER reviews the comparative effectiveness of new and expensive drugs and assesses their affordability to the health system. Their work is attacked by the industry because ICER uses Quality Adjusted Life Years (QALYs) as a measure of affordability, even though ICER uses a very generous standard of $200,000 per QALY to assess affordability. Industry has succeeded in prohibiting federal health and research agencies from doing comparative effectiveness analysis, and therefore ICER is funded entirely by philanthropy. The federal Food and Drug Administration (FDA) can consider only safety and effectiveness, not affordability, in approving new drugs.
Federal Legislative Proposals
Given the ineffectiveness of competition, state, or private efforts to address unaffordable drug prices, federal legislation is clearly necessary. Last year, two comprehensive measures were introduced, one in the House and one in the Senate, that have become the focus of debate. The measures share some components, and they each share some with the White House’s statements about elements it would support.
The chart below illustrates these overlaps.
The House proposal, H.R. 3, is the most comprehensive. It was passed by the House on December 11, 2019, on a largely party-line vote. The bill would require the Secretary of Health and Human Services to set prices for the costliest drugs on the basis of an international reference price standard. It would enforce these prices by using the tax code, thereby ensuring that prices would be effectively constrained for all purchasers, both public and private.
The bill proposes that the Secretary “negotiate” prices for the most expensive 25 drugs to Medicare in the first year, based on their price and volume. The second year, up to 50 drugs would be subject to negotiations. Eventually, up to 250 of the costliest drugs would be subject to price negotiations each year. The starting point for negotiation would be a price no higher than 1.2 times the average price of the same drug in six other advanced countries (Australia, Canada, France, Germany, Japan, and the UK).
An international reference proposal replaced the original final offer arbitration proposal backed by the Speaker, as progressive Democrats did not trust that process to be either timely or as effective. Commercial arbitration has a generally poor reputation among the progressive Democrats for consumer redress for defective products or unfair practices. Out-of-pocket costs for Medicare beneficiaries would be limited, as would year over year price increases to no more than general inflation. According to cost estimates from the Congressional Budget Office, this bill would save about $450 billion in drug spending. It would finance the addition of dental, hearing, and vision benefits to Medicare beneficiaries.
The House bill has been opposed by the White House and has no chance of being considered in the Senate this year. However, it will be a strong basis for Democratic candidates to campaign on this fall. If former Vice President Biden is elected and the Democrats take the Senate, presumably this would be a top priority for early action in 2021.
In contrast, the Senate bipartisan proposal is more limited. Senators Grassley and Wyden, the Chair and Ranking Member of the Senate Finance Committee, introduced the Prescription Drug Pricing Reduction Act of 2019. This bill was reported from the Finance Committee in July 2019 with bipartisan support, although a majority of Republican members opposed certain elements. Republicans are particularly wary of the limits on year over year price increases. However, unlike the House bill, the Senate proposal limits year-to-year price increases only for drugs in the Medicare program. It requires rebates back to Medicare from manufacturers for any price increases that exceed inflation. It does not address either the initial launch price of a drug, or the prices paid by commercial purchasers. It would cap out of pocket costs for Medicare beneficiaries and restructure the Part D drug benefit to make it more affordable.
According to the Congressional Budget Office, initial estimates of this legislation would lower out of pocket costs by $72b over 10 years, lower insurance premiums by $1b, and lower federal spending by $95b. Despite support from the President, various consumer and employer groups, and some Republican senators, the legislation lacks majority support within the Republican caucus. The Majority Leader, Sen. McConnell, who controls which measures are brought forward, has refused to bring it to the floor for consideration by the full Senate without that support.
Prospects for Action in Coming Months
The pandemic has created uncertainty in every aspect of life, including the functioning of Congress. Nonetheless, the Senate bill could move later this year as an amendment to other “must pass” legislation. There are obvious political benefits to supporting a drug pricing bill just before elections, and concerns about the potential expenses associated with the pandemic may well add to the public demand for action. Further, Gilead, the manufacturer that produces remdesivir, released a statement on the pricing arrangement of the drug. Remdesivir is a live-saving, anti-viral treatment for COVID-19, and the Coalition stands strongly against the high price of the drug.
However, bipartisan cooperation is rare just before an important election. More likely, legislators will await the outcome of the election, when presumably a stronger Democratic majority can push some version through to enactment. Partisan considerations are least important immediately following an election, making early 2021 the most likely time for legislative action.
With drug prices in the U.S. so much higher than the rest of the world, and with very strong public demand for action, it seems inevitable that Congress will act. As the overlapping graphic showed earlier, there are common elements to the proposals already on the table, and compromise seems quite possible. Ideas from successful efforts in other countries, such as comparative effectiveness studies and arbitration, could play an important role in the final negotiations.
The politics of health policy in the U.S. have typically led to incremental, step-by-step reforms designed to avoid strong opposition from powerful stakeholders. Truly comprehensive reform is thus difficult and rarely achieved absent the perception of a crisis.
Comparisons to the German System
Germany has many important similarities to the U.S. health insurance system. It has multiple private sector health insurance plans and is seen as a successful model that avoids a heavy-handed government role. Germany prioritizes patient choice and availability of innovative drugs. Pharmaceutical prices in Germany are considerably lower than U.S. prices, without restricting the availability of new therapies. The U.S. spends $1,011 per capita on drugs compared to $686 in Germany. Finally, the German system seems to have gained acceptance among the pharmaceutical industry and other key stakeholders as one that promotes innovation and works well for patients.
To move forward with a similar approach, the U.S. would need to address several barriers. We lack certain key elements that are the basis for the German system. First, the U.S. has no public agency that assesses comparative effectiveness of new drugs compared to existing therapies. Second, the U.S. lacks broad familiarity with final offer arbitration outside of professional baseball salary negotiations. Consumers and their advocates are suspicious of arbitration. Finally, policy makers lack the credibility to make difficult trade-offs on behalf of all Americans, as the current response to the pandemic has demonstrated.
Nonetheless, I believe the success of the German system provides a constructive model for Congress as it inevitably confronts the need to take action on drug prices. The challenge is great, but it is primarily a political one. Greater efforts are needed to explain the German system to Congress and health advocates. If key stakeholders can see the German system as one and they can accept, then it will be important model for the compromises that must be made in the name of innovation and affordability.