Can Drug Prices be Lowered?

Lowering the consumer price for a drug is in the public interest, provided that its sales margin recovers its development cost.  Pharmaceuticals do not spontaneously emerge like weeds in a field.  They are complex chemical or biological agents that are painstakingly designed and extensively tested for safety and efficacy.   That said, there are steps worth considering that benefit both consumers and drug makers.

The development cost for a new drug runs in the hundreds of millions of dollars, and there is no guarantee that a prospective drug will make all the way to market.   Pricing is not about the marginal cost of making one pill.  At any point during the development process, the new drug can “fail” – either in efficacy or in safety.  Successful or not, the drug maker has no alternative but to recover the cost of development for a specific drug from its sales or from the margins of other drugs in the drug maker’s portfolio.   That approach to cost recovery is not just the right way, it is the only way a drug maker can survive to produce worthwhile drugs and develop new ones.

Assuming that drug makers are not dumping in foreign countries (i.e. selling below cost), consumers benefit from re-importation of drugs when they are priced lower in a foreign country than in the US.   Since the drugs are not being dumped, the drug maker earns a positive margin even when a US consumer buys a drug from a foreign retailer.   The margin may not be as juicy as the drug maker hopes for, but through its global pricing strategy, the drug maker has influence over how much margin to expect.

Currently some rules for pricing drugs overcharge consumers on Medicare because government negotiation of prices is banned.  On the other hand, consumers benefit from Medicaid’s authority to negotiate prices on their behalf.  If it’s not too complex to negotiate for Medicaid, it’s not too complex to negotiate for Medicare.  The injustice of banning negotiations harms elderly consumers, many of whom are in low income strata.  All consumers should be allowed to benefit from meaningful drug price negotiations at the retail level, be it through a government program or through their commercial health care plan.

Drug prices seldom remain static, and price increases have raised the hackles of consumers and politicians alike.  In California, a law “requires pharmaceutical companies to notify insurers and government health plans at least 60 days before planned price increases of more than 16% during a two-year period”.  The advance notice allows consumers and government to publicly jawbone the pharmaceuticals maker, and perhaps achieve a respite from price increases.    Roche, Bayer and Merck backed away from planned price increases as a result of aggressive badmouthing from President Trump.

Public shaming is an odious technique for achieving public policy goals, but when firms block access to meaningful data on a public health topic, a big stick is useful.  The net price that consumers pay at the retail pharmacy is a result of largely undisclosed contracts and money flows between the retail pharmacist, the insurer, the pharmacy benefit manager (PBM), and the drug manufacturer (maker).

PBMs negotiate rebates from makers and they pay some of the rebates to insurers ($89 billion in 2016).  What the PBMs retain is undisclosed.  Insurers claim they use the rebates to keep premiums and co-pays in check.  The makers give rebates to arrange for retail prices that induce consumers to select that cheaper brand name medication over a competitor’s version. Everyone claims to operate in the consumer’s best interest – but in the absence of hard data, whom should a confirmed cynic believe?

Within the pharmaceutical marketplace some hardball tactics are used to prevent or slow the emergence of lower cost generic and bio-similar drugs.  One bullying behavior is to deny competitors access to sufficient samples of the competing drug (as the FDA requires in its testing).  The CREATES Act is making its way through Congress to halt such anti-consumer tactics.  When signed, the law will expedite access to samples so that new competition can benefit consumers, quicker and cheaper.

A similar ploy to slowing the emergence of competitive alternatives is the patent thicket tactic that erects a dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize a new drug.  The tactic is also used by incumbents in other industries.  It slows innovation and denies consumers those benefits – but thicket owners could care less.  It’s unclear what remedy could address patent thickets.

To help consumers enjoy the full potential of biosimilar and generics competition, regulators should emphasize the timely review of applications and physician education on new product cost advantages, efficacy and safety.  The pharmaceutical industry would work better for consumers if there were cleaner data on the flow of drug rebates, permitted drug price negotiations, lawful re-importation, and allowing buyers/insurers to demand advance notice of planned drug price increases.   There is no panacea for out of control drug prices, but there are some reasonable pro consumer steps we can take.