Drug Prices and Unintended Consequences
Who isn’t angry about high drug prices? Complaints to pharmaceutical companies often produce tone-deaf defenses. And when a $56,000 annual price for the newly approved dementia drug aducanumab (the brand name is Aduhelm) was described by its maker last week as reasonable, rational thought became more difficult.
The clarity of these views about high drug prices, however, does not extend to clear solutions. Health care abounds with complex balancing acts. Plug one hole in the dike and others may appear, causing more damage than the original hole. Nowhere is this more true than with drugs.
One thing that is clear is that what we know about drug prices from news stories, talking heads, and Washington critics is just the tip of the proverbial iceberg. Understanding what those solutions should be will require a level of open and thorough analysis that would be difficult at any time but most likely impossible in today’s dysfunctional legislative environment.
There is no question that U.S. drug prices are the highest in the world. But to what degree have they also spurred pharmaceutical companies to spend hundreds of billions of dollars to research, develop, and test marvelous new medications we all want? I don’t know and I’m not willing to gamble on the unknown. The stakes are too high.
Would cutting these prices reduce the financial incentives for companies to pursue new and improved medications? Yes, but I have no idea by how much.
Was there a relationship between lucrative drug prices and the amazing work by these companies to produce highly effective COVID-19 vaccines in record time? I’m sure there was one, but, again, I can’t quantify it.
This leads me to two conclusions that are hardly brilliant or original.
The first is that drug prices are awesomely complicated and changing them will trigger unintended consequences that, like the phrase implies, can’t be known for sure in advance.
The second is that tackling drug prices needs to be an international effort, not something that U.S. lawmakers can accomplish successfully on their own.
If you want to dig into the way drugs are regulated in this country, spend some time with the source documents presented below.
A recent study of how drugs are sold by pharmacy benefit managers (PBMs), for example, illustrates the complexity of the system set up by drug companies, with oversight by government regulators who often are overmatched by their private-sector counterparts.
Kaiser Family Foundation’s assessment of the impact on Medicare of paying for Aduhelm describes how paying for this single drug could overwhelm program finances.
A New York Times story and three related research studies illustrate how we are literally hooked on prescription medicines and how pharmaceutical companies have gamed the system. By offering co-pay programs and other subsidies to younger consumers and families, they maintain an otherwise unsustainable marketplace.
Their payoff comes from Medicare beneficiaries covered by Part D drug programs. Part D rules prohibit the use of private co-pay subsidies, and Medicare also is legally prevented from using its market clout to negotiate lower drug prices. This permits drug companies to sell drugs at inflated prices. Under Part D rules, consumers are limited to paying only part of these prices but taxpayers are socked with 80 percent of the bill. This is a good deal for no one but the pharmaceutical companies.
The major legislative effort already put forward in the new Congress and introduced earlier by House Democrats – the Elijah E. Cummings Lower Drug Costs Act – was analyzed by the Congressional Budget Office in 2019. The savings are huge but so are the possible impacts on financial incentives for Big Pharma.
If you spend 30 or 40 hours reading these documents, you can become a card-carrying member of nerds who understand how hard it will be for the U.S. to combat high drug prices. Until recently, I would have said fashioning a global approach to drug prices was impossible.
However, Treasury Sec. Janet Yellen’s successful efforts to get major nations to agree to tackle low corporate tax rates provides a framework that deserves scrutiny by pharmaceutical-industry critics. By agreeing on a minimal tax rate that private companies should pay, Sec. Yellen’s initiative could reduce the incentives of companies to squirrel away their profits in low-tax nations.
Likewise, agreeing that nations should be unified on drug prices could reduce U.S. prices without destroying financial incentives that drug companies say they need for their development efforts.
Convincing the rest of the developed world to raise the prices they pay for drugs is a non-starter on its face. But combined with other things the U.S. does, particularly its massive international military presence, provides the Biden administration with leverage for developed nations to support a global system for drug pricing.
This may seem far-fetched today. But the inventory of new drugs will increasingly be populated with more Aduhelms, creating unsustainable pricing burdens on the U.S.
As always, I look forward to your informed views of how to get a handle on runaway drug pricing.
National Bureau of Economic Research
Common Agent or Double Agent? Pharmacy Benefit Managers in the Prescription Drug Market
“In 2018, three PBMs (Express Scripts, CVS Health/Caremark, and OptumRX) accounted for 80 percent of prescription drug volume and six PBMs account for 95 percent of the prescription drug market (Fein, 2019; Feldman, 2020). The CVS-Health/Caremark PBM alone reports nearly 90 million members in its PBM business—and so negotiates on behalf of a customer population larger than the population of Germany.”
Kaiser Family Foundation
Juliette Cubanski and Tricia Neuman
FDA’s Approval of Biogen’s New Alzheimer’s Drug Has Huge Cost Implications for Medicare and Beneficiaries
“It is hard to know exactly how many Medicare beneficiaries will take Aduhelm, but even a conservative estimate would lead to a substantial increase in Medicare spending. In 2017, nearly 2 million Medicare beneficiaries used one or more of the currently-available Alzheimer’s treatments covered under Part D, based on our analysis of Medicare Part D claims data. If just one-quarter of these beneficiaries are prescribed Aduhelm, or 500,000 beneficiaries, and Medicare pays 103% of $56,000 in the near term, total spending for Aduhelm in one year alone would be nearly $29 billion, paid by Medicare and the patients who use this drug – an amount that far exceeds spending on any other drug covered under Medicare Part B or Part D, based on 2019 spending. To put this $29 billion amount in context, total Medicare spending for all Part B drugs was $37 billion in 2019.”
Medicare copays for new Alzheimer’s drug could reach $11,500
Government Accountability Office
Drug Pricing Program: HHS Uses Multiple Mechanisms to Help Ensure Compliance with 340B Requirements
The New York Times
Looking to Tackle Prescription Overload
Ultra-Expensive Drugs And Medicare Part D
“It is not coincidental that the recent growth in Medicare Part D catastrophic coverage spending coincides with the rapidly increasing share of ultra-expensive drugs.7 For many users of ultra-expensive drugs, the beneficiary enters the catastrophic phase simply by filling a single prescription. . . . Although increased spending for one or two ultra-expensive drugs can be absorbed by the health care system, the growing number of ultra-expensive drugs and patients receiving them is affecting Medicare Part D as well as other insurers and, most important, the patients faced with high cost sharing for these drugs.”
Journals of the American Medical Association (JAMA)
Prescription Drug Out-of-Pocket Cost Reduction Programs: Incentives and Implications
“Research has consistently shown that manufacturer copayment coupons used to induce demand for higher-cost drugs when lower-cost alternatives are available are inefficient and that this practice should be banned.”
Congressional Budget Office
Budgetary Effects of H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act