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Trump Can Reduce Drug Prices Without Price Controls

2017-01-17 | Robert Goldberg
President-elect Trump once again made it clear that he wants to make good on his promise to reduce drug prices. Drug stocks tumbled as investors understood Mr. Trump’s assertion that "we're the largest buyer of drugs in the world and we are going to bid properly” as code for price controls. 
 
Price controls would kill innovation, which would kill people just as rent controls in New York City hurt development.  What Trump wrote in The Art of the Deal about rent control applies to government limits on drug prices.  (Rent control) forced landlords to subsidize tenants. The costs of fuel, labor, and maintenance rose steadily, but the city refused to let landlords raise their rents to keep pace with inflation, much less the market itself. When landlords simply couldn’t make ends meet anymore, they began abandoning—or torching—their buildings. Between 1960 and 1976, approximately 300,000 housing units in New York were abandoned. Whole neighborhoods in the South Bronx and Brooklyn turned into ghost towns. The city, in turn, lost hundreds of millions of dollars in real-estate taxes.
 
Price controls would create a similar wasteland in our healthcare system.  And contrary to claims that drug companies can charge the government whatever they want,  Medicare, Medicaid (including ACA enrollment), VA, the Public Health Service have negotiated an average reduction in list drug prices by up to 60 percent.   Unfortunately, for the most part, these discounts are not passed onto consumers.
 
However, it is possible to reduce what Americans pay for medicines now and in the future by changing the way new drugs are created and financed.
 
First, cash rebates that drug companies give to discount products are now pocketed by insurance companies or used to subsidize other line items should go directly to patients.  Rebates now make up 30 percent ($115 billion) of total drug spending.  Indeed, 77 percent of the retail price increase in drugs since 2006 goes to rebates.
 
When auto companies offer new car rebates, the cash is applied to reduce the price of the car in the dealership.  In our health care system, the cash rebates go to the insurance companies and pharmacy benefit management firms.  And when we pay for our prescription at the drug store, we are charged the list price.  
 
That’s because PBMs and insurance companies use their control over our drug choices to maximize rebates and discounts. Most of the rebates are generated by medicines for about 5 percent of Americans (including seniors fighting cancer, multiple sclerosis, Parkinson’s and other complex diseases).   Most, if not all, Obamacare and Medicare drug plans place most or all drugs that treat such patients on the highest cost formulary tier.  So the sickest patients wind up paying up to 50 percent of the retail price of the drugs they depend on even as billions of rebate dollars are being racked in. This targeting is profitable, but it is also discriminatory.
 
 President Trump could sign an executive order banning such discrimination and allow companies to directly pass through rebates and out of pocket assistance to patients for any drug doctors prescribe as part of a broader.  The goal should be to eliminate cost sharing completely and encourage health plans to compete on the quality of care. The over $100 billion in rebates and discounts could be used to make this possible.
 
Second, he can encourage different ways to pay for medicines.  Many new medicines generate value and reduce spending over a long period of time.  Yet much of the cost is either upfront or recurring.   To address this problem drugs could be financed as are cars, college education, homes and construction projects, etc.   Drug companies could use cash flow to set up such long-term financing or create financial instruments backed by profits and savings generated by medicines to increase liquidity. 
 
Third, drug discounts the government negotiates on behalf of hospitals in poor communities are pocketed by the institutions instead of going directly to those in need.  These discounts (called 340 B discounts for the section of the law creating the program) are as high as 60 percent.   Hospitals now receive these 340B discounts on almost half of their drug purchases. In turn these institutions markup drug prices and pocket the profit.  The 340B statute doesn’t require that the discounts go directly to their customers.  That must change.
 
Finally, Mr. Trump should remove reduce barriers that limit competition between companies.  During his press conference, Trump noted “We have to get our drug industry coming back. Our drug industry has been disastrous. They're leaving left and right. They supply our drugs, but they don't make them here, to a large extent. “Nearly $350 billion in biopharma profits are held overseas because the 35 percent US corporate tax rate can be five times higher than elsewhere. 
 
That’s in part because pharmaceutical research and development efficiency, measured by the number of new drugs brought to market, has declined compared to the amount of money invested.  Thanks to regulation, the cost and time needed to developed new medicines have climbed to $1.5 billion over a decade.  And a Deloitte study concludes that the pharmaceutical industry's return on its current portfolio of approved products has declined from 10.1 percent in 2010 to 3.7 percent in 2016.   The industry's cost of capital is about 8.4 percent.  That is not sustainable. 
 
Fracking reduced the time and cost of discovering and safely producing new sources of energy.  New biomedical tools and technologies can yield the same benefits in biomedical innovation.  He can encourage the return of profits and investment with regulatory reforms of the Food and Drug Administration needed to unleash such potential.
 
Without new medicines, our lives would be shorter, more painful, less productive.  Our economy would be smaller, and health care would be less efficient and more expensive.  We need to produce more medical innovations more quickly and at a lower cost.  Price controls won’t make it happen.  Instead, the way medicines are developed and paid for has to be changed.  

The question for companies is not whether they must do so, but when and how.    The rebate system is rigged against consumers.  The FDA cannot keep up with the geometric pace of change.  Failure to address these challenges will, I'm afraid, will lead to the kind of regulation that will undermine innovation.