Drug Prices – The Council of Economic Advisers and Trump Administration Weigh In

Last Friday, on February 9, 2018, the White House Council of Economic Advisers released a 30-page report on, “Reforming Biopharmaceutical Pricing at Home and Abroad.”  There is enough in the report to please or give heartburn to all the players in the pharmaceutical distribution chain but, there are many significant ideas that policy makers should and will consider.  President Trump’s administration has already done so for its 2019 budget proposal, which will be discussed briefly in this blog.

We were particularly pleased to see that the report extensively discussed the numerous problems that occur when price controls are utilized, both internationally and domestically and how government regulation, through the Food and Drug Administration (FDA), has hampered drug approvals and slowed competition.

U.S. politicians often talk about how much less expensive pharmaceuticals are in Canada and European countries and demand that our nation adopt their policies.  The report points out that while other countries utilize prices controls to keep both U.S. and their domestically-developed drug costs low, foreign governments are perfectly willing to have U.S. citizens and taxpayers pay for their research and development.  The report goes into detail how foreign pharmaceutical companies use American dollars to finance more than 70 percent of their profits.  Simply put, because the U.S. does not utilize price controls, at least within the private-sector market, the world rides on biopharmaceutical research that we pay for.

The U.S. is “the engine of worldwide pharmaceutical innovation, accounting for an estimated 46 percent of OECD [Organization for Economic Co-operation and Development] patented pharmaceutical sales.”  The report further points out that the world is fortunate we have not used price controls because if “the United States had adopted the centralized drug pricing policy in other developed nations twenty years ago, then the world may not have highly valuable treatments for diseases that required significant investment.”

The Council states, “Meaningful reforms would address the root of the problem: foreign, developed nations, that can afford to pay for novel drugs, free-ride by setting drug prices at unfairly low levels, leaving American patients to pay for the innovation that foreign patients enjoy.”  The Council suggests these reforms could be addressed through trade policies or by tying public reimbursements in the U.S. to prices paid by foreign governments that free-ride.

The report also discusses in detail how Medicaid rebates, a price control mechanism based on the “best price” manufacturers provide, distorts the U.S. market.  CAGW was pleased to see the Council focused on how the 340B drug discount program, created in 1992 as a repercussion from the faulty Medicaid rebate law, has been used inappropriately by certain hospitals to make hefty profits instead of helping the indigent patients the program was intended to serve.  CAGW has been critical of the discount program, which was expanded under the Patient Protection and Affordable Care Act or Obamacare, and has grown enormously since 2010, further disrupting the pharmaceutical and healthcare marketplace.

The Council also looked at the FDA’s role in drug pricing and asserted the cost of innovation could be reduced through changes made within the agency’s approval process.  The report pointed out, “The fixed costs of developing and bringing a drug to market are typically large compared to the small marginal costs of producing additional pills or doses.  Thus, the incentive to innovate is driven by whether expected profits exceed these fixed R&D costs, and government policies have a major influence on the size of these fixed costs” and that, “There are very few markets outside of biopharmaceutical in which it takes more than a decade, on average, from idea to market.”

The Council noted the FDA already has programs to expedite the drug development and approval process: Priority Review; Accelerated Approval; Fast Track Designation; and, Breakthrough Therapy Designation but that there is room for improvement in these areas.  Other tools, such as biomarkers and surrogate endpoints, should be further encouraged to speed up clinical trials.

The Council also stressed the importance of having the FDA speed up the approval of generic drugs to create more competition and help drive down prices.

As noted above, the Trump administration has adopted or will consider some of the Council’s recommended policy changes in its 2019 budget proposal.  The administration continues to reform the 340B program by modifying how payments are made to hospitals for drugs they acquire under the discount plan by rewarding those that provide a lot of charity care while reducing payments to hospitals that provide little charity care.  In addition, the Department of Health and Human Services will issue regulations on how it intends to audit hospitals on their use of the savings obtained through the 340B drug discount program.

The administration is also considering changes that are intended to bring down drug prices in Medicaid and Medicare Part D programs.  Some of the proposals have not yet been fully formulated and others have raised some concerns in that they may interfere with successful private-sector negotiations.  We urge policy makers to carefully analyze the proposals once fully articulated to make sure they will work as intended.