By: John Rother
The problem of unaffordable prescription drug prices is not a simple on, nor is there a single policy that addresses the full range of issues. We need to fix the current broken system to make drugs more affordable while maintaining incentives to discover important new cures. There are seven “deadly sins” that now characterize the broken market for pharmaceuticals in the U.S. There are practical solutions for each.
1. Extremely high launch prices
Problem: new medicines are sometimes priced out of reach for those who need them, even if the drug is effective. For example, Sovaldi, an extremely effective and important cure for millions with Hepatitis C, was initially priced at $1000 per pill at launch, for a total cost of over $100,000 per treatment episode. This proved unaffordable for most people who need treatment. New biologic drug treatments, such as those for cancer, are also frequently priced above $100,000 per treatment episode, even when the drug adds just a few days to life expectancy. Luxturna, the new gene therapy for a rare form of blindness, is priced at a jaw dropping $850,000. Such prices, combined with high insurance deductibles and limitations mean that out of pocket costs too often bankrupt families. Thousands of lives are lost due to unaffordable prices.
Solution: Base prices on comparative effectiveness and affordability, as determined by an objective, independent third party. Insurers would negotiate to pay at this level, and patients could not be charged more. Very high prices could be subject to arbitration where both manufacturer and purchaser submit a bid based on evidence of effectiveness. Separately, we should cap out of pocket costs for patients who need high-priced drugs.
2. Regular annual or twice yearly increases which compound prices over time.
Problem: Initial prices, even those based on value, escalate when manufacturers raise prices at frequent intervals, quickly resulting in prices divorced from value. Pfizer announced arbitrary price increases for over 40 drugs last week, on top of previous regular increases. Insulin has tripled in price since 2003 even though it was first discovered almost 100 years ago. The three leading insulin manufacturers have “shadowed priced” regular price increases in lockstep so as to defeat any competition based on prices. Epipen, which many schoolchildren need to treat asthma, has been increased in price 500% since it was first introduced.
Solution: Limit price increases that are not based on demonstrated changes in effectiveness. Insurers would pay no more than increases reflecting general inflation without evidence of increased effectiveness. Increases above this level would trigger tax penalties.
3. Lack of transparency
Problem: purchasers and consumers don’t know what the basis for the asking price is or what its value is. Comparative effectiveness studies, which compare the new drug to existing therapies, are not disclosed. When only one party has the relevant information, the price reflects market power, not value. Rebates to certain purchasers hide true prices and are not public, making any true price comparisons impossible. Rebates based on a percent of list price actually create an incentive to increase list prices so that the rebate is also increased.
Solution: require disclosure of comparative effectiveness information when the drug is first launched, or track effectiveness and adjust price after one year based on documented impact. Require justification for high prices and price increases as a condition of coverage. Purchasers should move away from reliance on secret rebates in favor of discounts to achieve a more transparent and open competitive marketplace.
4. Anticompetitive actions to delay generic competition
Problem: brand manufacturers sometimes exploit legal and market mechanisms to delay generic competitors, using such tactics as refusing to provide samples, pay for delay, orphan drug status, etc.
Solution: Enact the CREATES legislation to ensure availability of samples for generic competitors, prohibit pay for delay, and tighten orphan drug approvals. Eliminate practices that reward legal gamesmanship instead of a more predictable path to affordably priced generics. FDA Commissioner Gottleib is working to limit such abuses, but his authority is limited. Congress must act to strengthen the competitive marketplace and promote the ability of generic drugs to lower prices on a predictable schedule.
5. Sole manufacturer price gouging
Problem: a single remaining generic manufacturer can hike prices without restraint. Most notoriously, Martin Shkreli bought the patent rights to Daraprim when there was only a single manufacturer left for it, then increased the price per pill overnight by over 500%. There are 120 generic drugs listed as recently or currently facing manufacturing shortages – one third of those had price increases as manufacturers took advantage.
Solution: Permit importation of such drugs when excessive price abuses occur. The FDA can also expedite approval of another generic competitor. A coalition of hospitals has launched a nonprofit drug company – Civica Rx– to fight price increases resulting from generic drug shortages.
6. Patent abuses
Problem: generic competition delayed for years by small changes designed to get new patent extensions. This defeats the balance established by the 1973 Hatch/Waxman legislative framework to assure innovation is balanced with affordability. Humira, currently the best-selling brand drug in the US, has filed over 300 patent extensions that have the effect of protecting the manufacturer’s monopoly well beyond the intended 7 year patent life established in law. The effect is to freeze out generic competition even when much less expensive generics become available in other countries.
Solution: Enact patent reforms for prescription drugs to establish a date certain for generic competition to begin, as was the original intent behind the Hatch-Waxman reforms that balanced the twin goals of affordability and innovation. Tighten the standards for patent extensions so only significant improvements result in extended monopoly protections.
7. Drug companies spend more on stock buybacks and TV ads than R&D
Problem: High prices generate revenue that goes first to other uses beyond research and development. TV ads drive unnecessary use of expensive drugs, driving up costs. Almost all physician organizations, including the American Medical Association, have long opposed direct to consumer drug advertising because it tends to override the physician’s professional judgment. Nexium is a prominent example, where ads drove patients to request the brand drug even when a much less expensive generic made by the same company was available. On stock buybacks, Pfizer spent $139 billion on buybacks and dividends over the past decade compared to a total of only $82 billion on R&D. Major drug companies now spend much more on marketing and other business expenses than on developing new therapies.
Solution: change the business tax deduction for drug advertising, or limit direct to consumer advertising entirely as almost all other countries do. Lower the rewards for “me too” drugs by price negotiations based on what works best for the most serious conditions in order to refocus innovation on our most important health care needs. Establish rewards other than high prices for truly innovative drugs that make significant contributions to public health.
With the American public now demanding effective action, it’s important that Congress doesn’t miss the opportunity to address each of “the seven sins” above. The goal is to make the market work by rebalancing the mutually important goals of innovation and affordability. New drugs are only effective when patients can afford them. It’s time to take a big picture look at the ways the prescription drug market is broken and bring it forward into the 21st Century.