The following essay is reprinted with permission from The Conversation, an online publication covering the latest research.
Martin Shkreli. Valeant Pharmaceuticals. Mylan. These names have become big news, but just a year ago, most Americans devoted little time and attention to the question of pharmaceutical pricing. Now, a Kaiser Health Tracking Poll released Oct. 27 suggests many people care more about the increasing prices of drugs than they do about any other aspect of health care reform.
Nearly three in four, or 74 percent of respondents, said that making sure that high-cost drugs for chronic conditions are affordable for patients should be a top priority for the next president and Congress. And 63 percent similarly said that government action to lower prescription drug prices should be a top priority.
This poll comes on the heels of highly publicized scandals involving individuals and companies who hike the prices of products like the EpiPen, a life-saving anaphylaxis treatment whose price roughly quintupled in five years, to more than US$600, or Daraprim, a drug used to treat parasitic infections whose price increased by 5,000 percent overnight.
Many drug makers and their CEOs have raised the prices of their products with impunity. As prices have risen, so has the level of outrage among consumers. Policymakers are taking note.
We simultaneously want to reward companies who come up with new, innovative cures for chronic conditions while preventing companies from raising the price of older generic drugs without good reason. Coming up with policy interventions that would target only the latter activity while at the same time providing certainty of profit potential to innovators up front can be challenging.
At the same time, policymaking around drug prices is politically difficult. Strong pharmaceutical interest groups oppose seemingly any action in this space, arguing that even actions targeted at generic drugs would decrease innovator companies’ incentives to invest in new cures. Although I and others have argued that this concern is oversimplified, it nonetheless has had a significant impact on the debate.
Despite this opposition, the growing appetite among the public for doing something, anything, about high drug prices has led to a proliferation of policy proposals on the subject. These proposals would affect different drugs and would act on different institutions within the drug pricing ecosystem. As we approach Election Day, it is worth thinking about which of these actions would be implemented at different levels of government. Given the different proposals and the concerns that people have expressed over high drug prices, it’s worth looking at possible solutions.
Reforms at the federal level
Many of the most commonly discussed reforms would take place at the federal level. Although there are greater political challenges to enacting change at the federal level, the potential effects are also much broader than for reforms enacted at the state level.
Allowing Medicare to negotiate drug prices. The most commonly proposed drug pricing reform would give Medicare the authority to negotiate drug prices. The thinking is that because Medicare has such purchasing power, it will be able to demand discounts for the tens of millions of Americans covered by its plans. This solution is so popular that it has been praised by both Secretary Clinton and Donald Trump. And yet, it wouldn’t work on its own.
Here’s the problem: Not only is Medicare itself legally prohibited from negotiating drug prices, but it is also legally required to cover certain prescription drugs. Medicare can’t get up and walk away from the bargaining table if it doesn’t like the price the pharmaceutical company is offering, which significantly limits its ability to demand discounts from companies.
If Medicare were given the authority to decline to cover a drug if its manufacturer did not provide a discount, that would improve its bargaining power—but that would also prevent Medicare beneficiaries from accessing the drug in question, which is highly unpopular. Although some scholars have proposed creative ways around this problem, none has yet made it into the political discussion.
Constrain price increases. Much of the public outrage accompanying high drug prices has come in response to companies that raise the prices of old drugs, seemingly only to increase their profits. As such, a number of proposals would constrain the ability of drug companies to increase their prices over time. In fact, one of these even became law in the wake of Martin Shkreli’s activities around Daraprim, enabling Medicaid to recoup additional rebates on a generic drug if its price rose faster than inflation.
Recently, Secretary Clinton has put forth a plan that would prevent such price hikes more broadly, outside of just the Medicaid program. At the same time, Secretary Clinton’s proposal would account for the reasons behind the price increase, allowing increases where they’re needed to address situations like manufacturing problems. Because this proposal is limited to older drugs, it may face less political opposition, although its passage will surely not be easy.
Reforms at the state level
The federal government is not the only entity interested in curbing high drug prices. Many states are currently considering other measures that would take effect only within their borders, although some might have follow-on effects more broadly.
State drug price cap laws. California and Ohio are currently considering ballot initiatives to cap what drug manufacturers can charge to public payers in the state (such as Medicaid) at the price the VA pays for them.
Because these initiatives don’t distinguish between different kinds of drugs, affecting both new, highly effective products as well as older or more marginal ones, we should carefully consider their real-world impact, and there are persuasive arguments on either side. My bigger concern, however, is that these initiatives would not actually work to accomplish their stated purpose.
Not only are the prices the VA pays often confidential, but as with Medicare, state Medicaid agencies must cover most FDA-approved drugs and do not generally have the ability to demand price concessions in favor of coverage. Removing these two legal obstacles would have additional policy consequences not contemplated within the current policy discussion of these initiatives.
Transparency laws. Several states are considering bills which would require pharmaceutical companies to report information on their research and development costs, marketing and advertising costs, and prices charged to a number of different purchasers. Vermont is the first state to have officially enacted such a law. Different states have crafted their bills in different ways, to apply to different classes of drugs at different times and to require the disclosure of different pieces of information.
These bills themselves do not directly constrain drug prices. However, they may serve to enable states to gather information that they can use to make such policy going forward. Alternatively, states like Vermont, which require justification for price increases, may use the laws to serve a “naming and shaming” function which has been demonstrated to hold down prices at least to some degree.
These are just a few of the many proposals that have been discussed with the potential to curb high drug prices. Others would tackle the issue indirectly, by attempting to speed FDA approval of competitor products or by limiting consumers’ out-of-pocket expenditures.
In addition, the private sector is taking action on its own to encourage different types of value-based pricing for pharmaceuticals, with groups like the Institute for Clinical and Economic Review analyzing and providing critical public information on the value of many new products. But in the near term, these four proposals have the greatest possibility of becoming law and deserve our attention going forward.