Concerns about the cost of prescription drugs have driven a great deal of coverage of the pharmaceutical industry for years. With the arrival of a large batch of new leaders in Congress, it appears that the time to discuss the numbers surrounding big pharma prescription drugs has arrived, too. Pharma execs can expect to spend much of the new term of Congress providing documents and testimony to members of the House of Representatives and Senate and to investigators. These questions will include concerns about whether price fixing and deliberate price hikes factored into the cost of specific drugs.
If the situation sounds familiar, you might recall that a similar wave of investigations in the 1990s ended up blowing the lid off of Big Tobacco’s attempts to hide its dirty laundry. Evidence showed that companies were hiding information they had regarding the adverse health effects of tobacco.
One executive during a 1994 hearing went so far to assert that tobacco was not addictive. Not only has that assertion been disproved, but the evidence at the time showed that the companies knew it. We now know that the nicotine contained in tobacco is one of the most addictive drugs on the planet, often cited as being similarly difficult to kick as street drugs like heroin and cocaine.
We know that large corporations that sell drugs have had bad moments in front of Congress before. What’s in store when we pull back the curtain on big pharma prescription drugs? It may be enlightening to take a look at how we got to this point and some of the other issues that may come up as investigations press forward.
What Drives Prescription Drug Prices?
One argument for why drug prices constantly move upward on an annual basis is that producing drugs is a highly involved process. Companies will state that they need to invest in:
- Regulatory compliance
- Patent costs
- Legal filing fees
There is also an argument that providing drugs to treat increasingly specific disorders and diseases means that companies have to get more from any given market in order to offset their costs bringing new drugs to market.
At first blush, this argument seems to hold water. From 2008 through 2016, oral specialty drugs increased in price by 9.2 percent annually. Injectable specialty drugs went up 15.1 percent per year.
More concerning, however, is that the prices of existing drugs have continued to go up at rates well ahead of inflation. Oral generics rose in price by 4.4 percent per year while injectable generics rose 7.3 percent per year. These are the drugs we think of as old and common; this class of big pharma prescription drugs includes widely used products meant to treat:
- Chest pain
What’s concerning about those types of increases is that they violate basic principles of economics. Generally speaking, the larger the market for a product is, the easier it should be for manufacturers to achieve economies of scale. This means that a company should be able to reduce its costs and its price structure by simply selling to many people.
Instead, what we have witnessed are trends like the one with vials of insulin where a single vial has gone from $200 a decade prior to $1,500 now. Likewise, the cost of a drug overseas rarely corresponds much with its cost in the U.S. For example, British citizens can expect to pay $350 for a month’s supply of Actimmune while Americans can expect to pay $26,000 for the same supply. Even accounting for differences in the two countries’ healthcare systems, that simply does not add up.
Also concerning is that the cost of bringing big pharma prescription drugs to market is largely front-loaded. Yes, there’s a lot of research that goes into making a drug, but that has already been recouped several times over by the time a drug becomes generic.
It does take time for applications to produce generic versions of existing drugs to be processed to the point that new products hit the market. During this time, it is common for companies that manufacturer both brand-name and generic items to set their generic prices very close to their brand-name ones.
There has been speculation that corporations see their generic drugs as profit centers. Simply put, why lower the price of a product when someone desperately needs it? Beyond that point, there are questions about:
- Price fixing
- Cartel-style collusion
- Arbitrary and unnecessary price hikes
Companies have tried to answer these concerns by offering rebates. Unfortunately, rebate structures aren’t allowed to be applied to Medicare drug coverage unless they have been cleared, such as occurs with Medicate Part D plans. What you don’t see, however, are proposals from the pharmaceutical businesses to get the cost of drugs under control.
Figuring out how to address the situation is one of the main goals that members of Congress have in mind as they move forward with hearings. Proposals have come from across the political spectrum. Some states have already taken action, passing laws allowing the importation of drugs from Canada.
Other proposals include solutions like:
- Demanding greater transparency about drug prices
- Putting drug prices in TV ads
- Setting rates via legislation
- Imposing anti-price gouging restrictions
- Encouraging more rebate options for people on programs like Medicare and Medicaid
- More aggressive bargaining of prescription drug prices through government agencies
A solution that many other nations utilize is stricter approval processes for expensive drugs. For example, Australia makes a point to reject applications to sell big pharma prescription drugs that are going to be prohibitively expensive for its citizens. The U.K., Australia, and Canada also have regulations in place that treat prescription drug companies in a similar manner as utilities. This means there are limitations imposed on their pricing structures because their products and services are seen as essential to the public good. One big advantage of this approach is that it prevents doctors steering patients toward drugs that are highly expensive while only providing minimal benefits over alternatives.
The main complaint that drug companies have with this approach is that it may deter innovation. As previously mentioned, however, a significant amount of the overall increase in drug prices comes from widely used generic drugs that only a few companies produced. This occurs even though there should be plenty of incentive for competition.
Another suggestion is capping the profits of the companies that produce the drugs. For example, the recent round of healthcare reform under the Affordable Care Act in the U.S. installed a cap on the profits and administrative costs that insurance companies could take. Depending upon certain circumstances, there is a 15- to 20-percent cap on insurer profits in the health industry.
It’s possible that such a hard cap could be utilized in the drug industry. If companies wanted to increase their profits, they could expand their offerings. This has the potential to drive the release of more generics and research into new drugs.
One further solution may be to limit runaway patent processes on drugs. For example, the drug Humira is defended by nearly 250 patents. That’s a massive amount of administrative and legal overhead just to sell a pill.
Amazingly, 89 percent of the patents for Humira were submitted after the manufacturer had gotten FDA approval. This suggests that patent filings serve more as anti-competitive measures than protective ones. The goal appears to be to limit entry into the market by establishing grounds to sue. Ultimately, this buys a company years of no competition with patent exclusivity sometimes reaching nearly 50 years. This is even though molecular compounds have historically only earned 13.8 years of exclusivity. To this end, allowing greater competition from biosimilar drugs may help bring down drug prices.
Unfortunately, during the February 2019 hearings before Congress, many of the execs from big pharma sought to deflect blame to other parties within the healthcare systems. They singled out pharmacy benefits managers and insurance companies as culprits. In particular, the pharma companies complained that rebates they issued to PBMs and insurers have not been passed along to their customers.
It has been suggested that the rebate system may need to be replaced with a flat-fee structure to encourage managers and insurers to focus on helping their customers. At present, the rebate system is tied to the list price of drugs that are sold. There are concerns that this close relationship between incentives and prices may foster rate hikes by attracting insurers to cover the drugs that offer the best returns.
Executives at hearings in March 2019 indicated interest in legislation that would prevent the use of samples as part of anti-competitive practices. The idea in this method of curbing competition is that companies prefer to give out samples to people in need rather than making them aware of more competitively priced alternatives.
Confronting the Opioid Crisis
Pharma execs will be expected to answer for more than just the growing cost of drugs as hearings continue with the new Congress. Another issue will be the pharmaceutical industry’s own contributions to the opioid crisis in America. During the initial February 2019 hearings, opioid issues were raised in between longer discussions of the drug price crisis.
In particular, there were questions about the pharmaceutical industry’s practices. These include:
- Aggressive marketing of painkillers to doctors
- Turning a blind eye to evidence of patients abusing the drugs
- Placing an emphasis on maximizing sales
While executives have defended their actions and the industry’s response to the crisis, a number of states have moved ahead with lawsuits. Purdue Pharma, a company many consider to have been at ground zero for the opioid crisis, has hinted that it may file for bankruptcy protection in order to try to survive the effects of such lawsuits. The lawsuits allege that the company:
- Misled doctors and patients about addiction risks
- Made deceptive consumer claims
- Employed pharmaceutical sales reps who had little or no training regarding substance abuse
One question Congress will have to confront is whether opioid prescribing guidelines need to be revised. The CDC last made revisions in 2016. There aren’t currently any limits included in the guidelines.
The Road Ahead
It remains to be seen whether a Congress divided in control between the two major political parties will be able to drive action on the cost of prescription drugs and the opioid crisis. At present, both branches of Congress are currently conducting hearings. Numerous committees have conducted sessions, and more are scheduled throughout the spring of 2019. Time will tell whether big pharma will be held accountable for decisions made with profits in mind instead of the public good.