On Tuesday, the Senate Finance Committee will hold a hearing on the high cost of prescription drugs in the U.S., not unlike Senate hearings on the same topic held in 1959 and 1960.
As we await the latest event, it’s a good time to consider the environment in which it’s taking place. First, note that the price of these same prescription drugs is not outrageous anywhere else in the developed world.
And, as observed by Daniel Keyles, from 2008 to 2016 the price of new prescription drugs in the U.S. doubled, while the prices of older drugs moved up. Exhortations from President Trump have done nothing to slow the trend. On the campaign trail, however, he happened on the solution, which he conspicuously has not proposed. More about that in a bit.
A Slow Increase, At Least Initially
To understand our way forward, however, we must know whence we came.
There was a time, within living memory, when drugs were available at reasonable prices here. Indeed, the men who discovered penicillin in the 1940’s and figured out how to manufacture it in quantity declined to apply for a patent: penicillin was the original miracle drug, and they wanted it to benefit all mankind.
Prices subsequently began to rise, at first gradually, then faster and faster in the last 40 years.
As early as the 1980’s, Congress realized it needed to deal with two conflicting priorities. The way to make sure drug innovation continued at a brisk pace, lawmakers decided, was to improve patent-type protections for new drugs by awarding “exclusivity” periods after patents expired. These were essentially grants of monopoly, during which the manufacturer could charge whatever the market would bear.
On the other hand, in free-market America, we believe in free, competitive markets to keep products affordable: this is particularly important for life-saving drugs like insulin, antibiotics, and now anti-cancer drugs, among others. In the early days, generic drugs — bioequivalent, with identical active ingredients as the originals — did bring down prices, particularly as states and private insurance companies encouraged or required patients to take generics instead of brand-name drugs when generics were available.
In 1984, Congress tried to balance these two policies in the Hatch-Waxman Act, authorizing the exclusivity periods for new branded drugs, while simplifying and streamlining the process of FDA approval for generics.
An Unbalanced Market
However, the situation quickly became unbalanced. The wealthy and powerful pharmaceutical industry has found legal ways to manipulate various provisions of the patent system, the 1984 law, and FDA regulations to extend monopolies of brand name drugs far beyond what was intended. Drugmakers will change the dose, change the method of administration of a drug, or combine it with a generic drug to create a “fixed combination,” starting a new patent period.
Or they will get approval for an “orphan drug” indication (for a serious but rare disease), which comes with a 7-year exclusivity period (the longest), set a high price because the market is so small, then find that (surprise!) the drug was, in fact, useful for more common diseases — but they still maintain the high price. Manufacturers also aggressively sue generic manufacturers for patent infringement, then settle by paying the generic manufacturer to delay the launch of their product (“pay for delay”). Moreover, companies often don’t develop generics for small markets, or drop out of larger markets where the profit is deemed too low, or combine with market leaders if their market share is too small.
The most notorious example of rising drug prices is the Epipen, vital for people with allergies causing anaphylactic shock, which, unless quickly reversed by a shot of epinephrine, can be fatal. The first Epipen was marketed in the U.S. in the 1980’s; they cost about $30 apiece to manufacture. Using the above techniques and others, Mylan cornered the market in 2007, and raised the price annually for a packet of two Epipens from $100 to $600 in 2015 and, despite the ensuing uproar, basically refused to back down.
But there’s more. The road from drug manufacturer to patient is complex. The manufacturer sets a “list price”, which, like the chargemaster in a hospital, is a bargaining position — no one actually pays it (except the unfortunate uninsured patient). The manufacturer sells its drug to a pharmacy benefit manager (PBM), who negotiates on behalf of an insurer, who helps the patient pay for her prescription. The PBM receives ‘rebates’ from the manufacturer, as well as presumably compensation from the insurer for its services. The insurer also pays the pharmacy something for the prescription.
What Does the “Price” Really Mean?
The list price is designed to profit each company along the way, whose share is based on market power. But it’s the “price” which determines the consumer’s copay or co-insurance: the consumer is the only party to the transaction with no market power. For generic drugs, it is ridiculous: I take a generic medication, manufactured by several different companies. On my receipt, the “price” for 60 pills a month (which costs pennies to produce) is listed as “$44.99”. My co-pay? Sixty-one cents. Of course the manufacturer was not paid $45.60 — the “price” plus my co-pay — for a dollar’s worth of pills.
Here is more proof that the prescription drug market is dysfunctional: when a new drug is launched, often more expensive than older similar drugs, the prices of the older drugs move up. Thalidomide, which was reintroduced to the market to treat multiple myeloma (a blood cancer) costs $197.11 per pill.
There is one more factor driving outrageous drug prices: Wall Street. After 1980, encouraged by economist and Nobel laureate Milton Friedman, PhD, corporate ethics shifted. The sole purpose of a corporation, he said, should be to maximize shareholder value. So now analysts check in regularly with pharmaceutical companies to determine if they will hit their ambitious financial targets, even if that requires price hikes, off-label marketing, aggressive patent protection, takeover of competitors, whatever. Underperforming companies become takeover targets.
In the old days, pharmaceutical manufacturers defended their prices as necessary for research and development. Then, they defended prices based on the “value” of their product: a drug which cures hepatitis C at $85,000 per treatment is less expensive than a liver transplant. But think: if water were priced according to its value, it would be expensive and people would die. Now, some executives are just blunt about the reasons for the higher prices: for instance, Heather Bresch, CEO of Mylan, said she priced Epipens at $600 because “I am a for-profit business. I am not hiding from that.”
Health and Human Services Secretary Alex Azar recently proposed a solution — no rebates to PBMs, only to the patient. I don’t think so. This market is a balloon: squeeze it in one place, it bulges in another. The professionals who built this elaborate, inscrutable, profitable system can easily game a few new regulations.
Trump’s original idea was better: allow patients to import drugs from Canada and Western Europe if the U.S. price is much higher than the foreign price. Many of the drugs in those countries, including the newest drugs, are manufactured by the same companies, produced in the same plants, and supported by the same studies as those they sell here; all that prevents importing today is the FDA, which hasn’t approved the “foreign” products to be safe and effective, and the labels may be different from the U.S. version. But they are the same drugs. All that should be necessary is for the FDA to find that the foreign regulators are trustworthy, so their approvals are reliable, and perhaps that the companies, manufacturing plants, etc. are the same.
Let the executives and lawyers figure out how to get down to the Canadian price. Medicare could negotiate prices, like the Europeans do, but why reinvent the wheel? Let the companies figure out how to get prices down to the new limits.
We may not end up with exactly that, but it’s a great place to start.
Caroline Poplin, MD, JD, is an attorney and internist in Bethesda, Maryland. She is a former staff internist for the National Naval Medical Center, and currently practices medicine part-time at the Arlington Free Clinic in Virginia. She also consults for law firms on Medicare and Medicaid fraud.