RACHNA SHAH, PUSHING FORWARD
In 2015, well-known ‘Pharma Bro’ Martin Shkreli raised the price of Daraprim, a lifesaving drug for HIV patients, by 5000 percent. He convinced investors to invest millions of dollars into his hedge funds; being inexperienced, he subsequently lost most of their money. On Friday, a federal jury found him to be guilty on “three counts of securities fraud — but acquitted him of five other criminal counts related to hedge funds investors and a drug company he founded.” The recent trial of Martin Shkreli is incredibly timely. In the midst of the healthcare debate on Capitol Hill, congressmen from across the political spectrum seek compromise and collaboration. Fighting drug price gouging and corruption in the pharmaceutical industry is both widely accepted and tremendously beneficial for American health, health care, and health outcomes. It must be an element of healthcare reform for all those invested in our nation’s short-term and long-term future prosperity.
The pharmaceutical distribution system retains 1 in 5 dollars of spending on prescription drugs in profits. The Affordable Care Act closed the ‘donut hole’, also known as the Medicare Part D coverage gap, for prescription drugs for senior citizens. Yet consumption for prescription drugs rises with age. One in five people who are nearing retirement age have saved nothing. Pharmaceuticals, like medicine, should be focused on providing care and treatments to the patients – not preoccupied with profits.
In 1984, generic drugs made up 13% of all prescriptions. The bipartisan Drug Price Competition and Patent Term Restoration Act (1984) aimed to encourage generic drugs. However, a flood of generics into the market resulted in the Generic Drug Scandal, a time period marked by fraud and distrust. Under the bipartisan 340B drug pricing program, introduced in 1992, “covered entities” – specific non-profit hospitals and clinics – receive discounted drugs. This program for low-income individuals is funded by the pharmaceutical industry.
Today, distribution of generic drugs is at an all time high. According to a 2014 analysis by the Generic Pharmaceutical Association, generic drugs comprise 88% of all prescriptions filled in the US. Spending on specialty medicines was responsible for 73 percent of overall medicine spending growth over the past five years. Nonetheless, one must admit that the most expensive drugs in America are not those that treat rare diseases, but tobacco, alcohol, and painkillers—largely due to advertising. One cannot even begin to cover the effects of synthetic drugs (e.g. synthetic marijuana, also known as spice or K2) are often labeled “not for human consumption,” which allows them to sideline the complete FDA regulations. They can be bought at the gas station, next to coffee and chips.
One may perceive that there is an exorbitant number of intermediaries in the drug distribution chain. For every 100 dollars spent on retail drugs, approximately 41 dollars goes to the distribution chain – insurers, wholesalers, pharmacies, pharmacy benefit managers (PBM). The top three pharmacy benefit managers make up 66% of the market of pharmacy benefit managers. The top 3 wholesalers make up 85% of their respective market. This has a toxic effect on consumers. Due to the high cost of prescription drugs, 23.1% of Americans did not follow their doctor’s prescription instructions due to the drugs’ cost, as compared to 8% of Canadians, as of a 2007 study.
Reverse payment agreements, also known as pay-to-delay, as between AstraZeneca and Ranbaxy in 2008, encourage drug monopolies rather than competition. Negotiations for setting drug prices largely occur between insurance companies and pharmaceutical companies. According to Aaron Kesselheim, an Associate Professor of Medicine at Harvard Medical School, brand-name drugs make up 12% of the prescription drugs sold in America but approximately 80% of the country’s total spending on drugs. Prescription drugs sold in retail pharmacies accounted for 10% of total healthcare costs in 2015. In the same year, the average list price of branded drugs rose 12.4%. The most expensive drugs in the US, for the most part, are treatments for rare diseases. Improving and encouraging generic drugs will aid in reducing rising health care costs.
As of February 2017, President Trump signaled his support for Medicare to negotiate for lower prescription drug prices. A Carleton University study from 2015 showed that Medicare pays 80 percent more than the U.S. Department of Veterans Affairs, which has the power to negotiate drug prices, for brand-name drugs. Medicaid can negotiate drug prices. Medicare cannot. This is more of a political than a drug pricing problem. Price gouging is real. It appears that the federal government is unable to make progress on the matter due to the strength of the pharmaceutical lobbying industry.
According to the FDA, generic drugs are “therapeutically equivalent” to the brand product. Yet, the markets for generic drugs and brand-name drugs are remarkably different due to varying levels of competition in each. Maximum allowable cost (MAC) refers to the maximum price that a PBM will pay for a generic and brand name drug. However, there is no standardization for each PBM’s MAC lists. There is no equivalent to the UK’s Pharmaceutical Price Regulation Scheme or Canada’s Patented Medicine Prices Review Board to determine the cost-effective price for a drug. In the US, drug reimbursement is determined by pharmacy benefit managers before the drug is added to the formulary. However, while PBMs have a good sense of what the price of the drug truly is, the health plans themselves often do not. Moreover, despite the fact that the average sales price of drugs is public, the average manufacturer price remains confidential. Incremental steps must continue in a direction towards price transparency for all parties involved. An unpopular trend, the rise in high-deductible insurance plans will expose patients to the true costs of the drugs that they purchase. Rather than examining this as a crisis, we can analyze the American pharmaceutical industry and its current state as an opportunity.
When the government is the largest purchaser in the market, it can be an altogether stronger negotiator. From modifying the FDA approval process to improving drug price transparency during pricing, there are several areas for improvement. Patients should be informed of cost-effective treatments and similar drugs, particularly for drugs that have a potential for abuse, addiction, and overdose.
Fighting price gouging and high drug costs is ultimately a bipartisan issue. Price hikes are not a new trend in America. For instance, in 2001, the price of Gleevec, which treated chronic myeloid leukemia, quadrupled to $120,000. Yet it was only in April 2017 that Maryland became the first state to grant the state attorney general “powers to sue drug manufacturers that dramatically raise prices.” Improving competition and encouraging generic drugs is included a bill that currently has bipartisan support. In addition, bill H.R.749, introduced earlier this year, would expedite the FDA’s approval and introduction of generic drugs into markets where they have little competition in order to increase competition. It is currently in committee. If pay for performance is considered more logical than unbundled services, it should also be extended to the pharmaceutical industry. Price per dose, the current system, is akin to fee per service. Transitioning to outcome based pricing requires discouraging Medicare’s best-price rules. The rise of generic drugs has resulted in Medicaid savings of $479 per enrollee. Strong patent protection is often sought out in order to make up for the costs of research & development (R&D). Yet the profit during the period of market exclusivity exceeds the costs of R&D. We cannot wait for patent cliffs. Moreover, as the patent cliff approaches, many pharmaceutical companies slightly rebrand the drug to have the patent, and their profits, be extended.
As of July 2016, the FDA’s generic drug application backlog included 4,036 drugs. The European equivalent had 24. The Association for Accessible Medicines shows that since the Generic Drug User Fee Act (GDUFA) has been implemented – requiring “all firms that manufacture human generic drug products” rather than only firms submitting new drug applications – the median time it takes for the FDA to approve a generic drug is 47 months. If a drug hasn’t been formerly approved in the US, the FDA considers it as a new drug. Expanding the market to increase the supply with generic drugs, such as importing foreign drugs from approved locations under the “import relief law” of the Medicare Modernization Act of 2003, which empowers the FDA to import drugs if they are safe and cost-effective, will encourage drug companies to lower their prices.
While the FDA cannot currently determine prices for drugs, it is a dilemma that the US spends the most on pharmaceutical products in the world. According to a 2015 report from the Organization for Economic Cooperation and Development, the United States spends over $1000 per year per person. In comparison, France spends $596 and Australia $590. Drug companies charge American consumers higher prices for the same drugs than consumers in foreign markets. We need to focus more on people than on profits. Laws in the European Union prohibit “unfair prices.” Setting reference prices for not only drugs but other treatments, such as therapies, as in Europe, would promote cost-effective innovation. A certain percentage over the cost of the price of a drug should be the maximum price for a drug. If price controls are shown to stifle innovation, subsidies to pharmaceutical companies who manufacture cost-effective drugs and treatments as well as distribution methods is an alternative.
Martin Shkreli was temporarily the most hated man in America. At the same time, we should and cannot forget that he is only one man of many, a fish in the sea, the tip of the iceberg. Corruption in the pharmaceutical must be stopped and it must be an effort from all of us – as liberals, as conservatives, as libertarians – as humans.