A New Cause du Jour: Beating Up “Big Pharma”
Beating up pharmaceutical companies is the new “cause du jour.” Even though pharmaceuticals are only 10 percent of all healthcare costs, they tend to make easy targets because it is difficult to understand why such a small pill should cost so much money.
One reason for their costs is that the pharmaceutical companies are among the most tightly-regulated industries. It takes at least 10 years on average of research and carefully-controlled clinical trials on thousands of patients to get the scientific and medical information necessary to bring a new drug application to the Food and Drug Administration (FDA) for approval. According to a November 2014 analysis by the Tufts Center for the Study of Drug Development, for every 8.5 drugs that make it into clinical development, only one will get FDA approval, or less than 12 percent. All of this occurs during the drug’s 20-year patent protection window, leaving whatever time is left to recoup the company’s investment, which is on average $2.6 billion.
The latest hit came on April 27, 2016, when “The Campaign for Sustainable Rx Pricing,” an organization composed of some insurers, health professional trade associations, unions, AARP, and WalMart announced its “market-based” proposals to stop drug price increases. Market-based solutions are certainly in the eye of the beholder, and these proposals rely heavily on government intervention. The bilious term “sustainable” should always make one take pause, as it can lead to stagnancy or being outdated. In fact, many of the proposals are not new, and if adopted would stifle innovation, as some are de facto price controls. Throughout history, price controls have always ended up disrupting and destroying vibrant markets. Unfortunately, in the end, it is consumers that get hurt.
The campaign calls for three overall reforms: increasing transparency, providing value, and promoting competition. While these goals sound reasonable, the policies proposed to achieve them would be destructive.
Transparency is often useful but it depends on the type of openness one wishes to reveal. For example, the group wants a pharmaceutical company to release details of a drug’s price before it is even approved by the FDA. But that invites government coercion with bureaucrats demanding a certain price they deem appropriate before the drug is approved. Such a requirement would deem investing in biopharmaceuticals far more risky than it already is and capital would soon dry up.
The group is fixated on list prices and calls for drug companies to report any planned increases but list prices are not what insurance companies, pharmacy benefit managers, or pharmacies generally pay. In free markets, prices will vary depending on many variables, including volume and the contractual deals between the negotiating parties. The campaign states that other health sectors, such as insurers, release similar information. But several pricing and transparency rules were implemented for health insurers under the Affordable Care Act, or Obamacare, such as implementing the medical loss ratio or requiring them to release reams of data on enrollment, rating practices and other details that have not made the marketplace more competitive. Obamacare, like the creature from the movie Alien, has inserted its parasitic larvae into all facets of healthcare. The result has caused insurance premiums and deductibles to climb, often outpacing wage increases, rather than decreasing prices as promised by President Obama.
The campaign also calls for disclosing research and development costs, but that information can already be found in companies’ annual reports. In addition, R&D costs are reported to the Securities and Exchange Commission, where they can be scrutinized, and if the information is misleading, companies can be fined.
Most importantly, it can be difficult to quantify exactly how much is spent to create a particular drug. Pharmaceutical companies spend tens of millions of dollars testing thousands of different compounds, many of which end up being discarded or shelved because they do not work or are unsafe. Researchers still need to be paid even if a compound they are working on never makes it to human clinical trials. Other compounds may be successful, but not for the originally intended indication. Much of the information the campaign would like to have exposed is very sensitive and proprietary and if done, would likely cause prices to increase because of the interference in a competitive market.
The campaign is playing off a general malaise in regard to pharmaceutical direct-to-consumer advertising because they claim it leads to over-utilization of drugs. They call for more “policy makers,” which means asking bureaucrats who may have little knowledge of how the industry functions to evaluate the best way to get information to consumers. And this proposal is superfluous and would waste taxpayers’ money, because the FDA regulates pharmaceutical ads and studies have shown the ads provide valuable information to consumers.
The group also calls for “value-based” pricing by requiring drug companies to do cost and comparative effectiveness research (CER) on their drugs and prove they are better than another drug. They state that countries with government-run healthcare systems utilize similar requirements and the U.S should do the same. But patients in countries that utilize CER will often not have access to innovative treatments. Furthermore, is not uncommon for one treatment to work well with many patients, but not for others, and CER proposals consider what is best for “the masses,” not the individual. Besides, Obamacare already created the Patient-Centered Outcomes Research Institute, which has doled out millions to fund CER activities, with disappointing results. That is what happens when the government gets involved in making decisions on the value of goods in the marketplace.
Indeed, the private sector is already entering into “value-based” pricing agreements. For example, on May 11, 2016, the Wall Street Journal reported Cigna announced it had entered into the first value-based contracts for a new class of cholesterol drugs. This new type of payment model will require changes to current laws so drug companies and payers can discuss the benefits of a drug and the affected population before it is approved, thus allow pricing contracts and budgeting to occur in advance. Other laws make it difficult for a drug company to offer rebates to a payer if their drug does not work as intended for some patients but be paid full price for where it does work. The private sector is in the process of sorting out how value-based payments can work and should be allowed to do so without the heavy hand of government overlords.
Competition is certainly the answer to lowering drug prices; for example new competitors have sharply lowered the costs of hepatitis C drugs. These new drugs cure people of the disease, allowing them to lead productive lives by keeping them out of long, expensive hospital stays or having a liver transplant.
In regard to the outrage over pharmaceutical companies Turing and Valeant raising the price of their drugs by several hundred percentage points, that issue may have been avoidable if FDA approval of generic drugs was timely and less burdensome. Currently, the FDA has a backlog of approximately 4,000 generic drug applications and the campaign’s solution is to throw more money at the FDA bureaucracy. But generic and brand-name companies already spend millions in user fees in an attempt to get their drugs approved in a timely fashion. In 2016, brand-name companies had to pay $2.3 million for each new drug application, while generic firms paid $76,000 for each abbreviated new drug application. Both industries also pay hundreds of thousands in establishment fees, supplement applications fees, and more to the FDA. The brand-name industry has been paying user fees since 1992 and the generic industry has been paying them since 2013, yet the slow pace of drug approvals, which is a result of bureaucratic inefficiency and inertia, not funding, continues to be a major complaint.
One way to fix the problem is to pass the “21st Century’s Cure Act” (H.R. 6) that is being considered in Congress, which includes more modern methodologies to be used to speed up drug approvals such as surrogate endpoints that prove the drug is working. Policy makers should continue to look for ways to reduce the regulatory burden and require the FDA to become focused on its core principles of approving a drug to be safe and effective for its indication and not demand additional data, for example, on how a product might be used off-label, and get patients more involved in the approval process to help determine risk vs. benefit determinations.
The campaign also calls for the government to have more oversight in patent settlement agreements between brand-name and generic companies, claiming they are anti-competitive and prevent generics from entering the market in a timely fashion. But limiting what brand-name and generic companies can do to reach an agreement in a patent dispute would likely lead to fewer generics entering the market. Patent settlements help keep companies from expensive court actions, where long litigation often leads to a disappointing result: Generic companies lose more than 50 percent of the cases and their legal fees eat up a much higher percentage of their resources than brand-name companies. Generic companies, which have every incentive to get their lower-priced products into the marketplace before a patent expires, do not want government restrictions that stifle their ability to settle their disputes out of court.
More transparency, competition, and value is needed but that will come with less, not more government intervention in a healthcare system that is truly based on market-driven principles. Remaking the healthcare system by putting the purchasing power in the hands of consumers will allow them to shop around for the best deal, whether it comes to getting health insurance, a healthcare product, or a particular medication. The proposals from the Campaign for Sustainable Rx Pricing would not only fail to achieve those objectives, they would also be disruptive and unhelpful and make the current problems we have even worse.
