Avik Roy wants congressional Republicans to enact free market policies to reduce drug prices. So do I. Unfortunately, Roy begins with a misleading case against drug companies and ends up endorsing Bernie Sanders proposals to regulate the industry.
Let’s start with his statement that spending on medications is closer to 20 percent of health spending instead of 10 percent. So what? I wish it were 100 percent, as with polio, measles, hepatitis B, etc. Spending more on drugs means less spending on other costlier services.
If we were treating heart disease and cancer with the services available even 20 years ago, we’d be spending a lot less on drugs but spending twice the amount we are now with less effective treatments.
Instead of recognizing that most of the increase in drug spending is due to more use and longer life, he claims it’s all due to drug companies charging whatever they want. He dismisses the claim that price increases in part reflect the rising cost of drug development:
“But it doesn’t follow that high R&D costs should lead to infinite pricing power. For example, Gilead didn’t discover its blockbuster hepatitis drug, Sovaldi. Instead, Gilead purchased the company that did—Pharmasset—for $11 billion, after key clinical trials had been completed, and then proceeded to charge unprecedented sums to insurers and patients in order to recoup their acquisition costs. An even better example is Avonex, a multiple sclerosis drug from Biogen that was launched in 1996 for less than $10,000 per patient per year. In 2015, Biogen was charging $60,000 for exactly the same drug, even though numerous, more effective medicines had been launched in the intervening two decades.”
“If Apple today charged $10,000 for a 20-year-old computer, or Samsung $6,000 for a 20-year-old TV, citing the “high cost of innovation,” they’d be laughed out of Best Buy. And not because their costs of innovation aren’t high—but because it’s understood that consumers, in a free market, have no need to accept unaffordable prices.”
“One thing you hear from defenders of the status quo is that drug companies need to charge high prices in order to continue to produce innovation. Well that’s not true in the rest of the economy. Google and Facebook charge nothing for the core products—search engines and social networks—and yet they are two of the most innovative companies in the world.”
These are truly ignorant assertions. First, it’s not just the cost of innovation, it is the cost of innovation given the risk of regulatory uncertainty and clinical results. I daresay that if it took Apple an average of 10 years to bring a new product to market knowing that only 1 out of 10 they invested in would make it to consumers, it wouldn’t have to worry about being laughed out of Best Buy: Apple would still be selling Newton's and first generation Macs. Imaging if fracking companies had to conduct randomized clinical trials each and every time the were going to drill.
Second, as Derek Lowe points out, comparing the development of apps and social media to drug development ignores the fact that engineering and pharmaceutical R&D require fundamentally different processes. Upgrading the core technology of a computer is a hell of a lot easier than developing an anti-body and modifying it to adapt to rapidly mutating cancer cells..
As Derek Lowe has pointed out “medical research is different than semiconductor research. It’s harder. Ever seen one of those huge blow-ups of a chip’s architecture? It’s awe-inspiring, the amount of detail that’s crammed into such a small space. And guess what – it’s nothing, it’s the instructions on the back of a shampoo bottle compared to the complexity of a living system.”
Even more troubling is Roy’s claim that “prices for drugs that do not reflect what their value would be in a truly free market.” That is quite an assertion and suggests that Roy can tell us what that value would be or how that would be communicated through pricing information.
My guess is, based on his article, he has no clue. Take his claim that drug companies engage in “infinite’ pricing. He points out that the retail price of the multiple sclerosis (MS) drug Avonex increased from 1996 to 2015 by 500 percent. True, but over the same period of time Avonex revenues and global market share actually fell by 100 percent as newer drugs were introduced. Meanwhile, the aggregate cost of MS hospitalization increased 372 percent even as the number of hospitalizations remained essentially flat. Which of these two trends reflect a truly free market? The one where competition eats away at revenues or the one where you increase revenues by providing a service that is increasingly obsolete?
Roy calls the price of drugs like Sovadli, that cure hepatitis C Sovaldi’s price unprecedented because Gilead bought the company that developed the drug instead of creating it, itself. Apparently, free market principles have two separate rules about pricing: one if you acquire a company and another if you spend the same money to make a product. That is sort of like President Obama telling entrepreneurs “you didn’t build that.”
In any event, Roy fails to consider that the price of drugs does reflect their value relative to current treatments. With regard to Sovaldi:
“Although the cost of antiviral treatment increased with the availability of new therapies, the cost per survival (SVR) has decreased. As shown in Figure 2, the cost of treating HCV genotype 1 with peginterferon-ribavirin, first-generation protease inhibitors, and sofosbuvir-ledipasvir (at wholesale acquisition cost) increased from $43,000 to $103,000 per patient. However, the corresponding costs per SVR decreased from $213,000 to $108,000. After applying the recent discounts (46%), the cost of treatment decreased to $56,000, which is less expensive than boceprevir- and telaprevir-based therapies, and the cost per SVR decreased to $58,000.” Moreover, in addition to reducing what it costs to save a life, drugs like Sovaldi will eliminate the risk of premature death for people with HCV.
To create a free market Roy suggests “ending federal and state prohibitions on the ability of private insurers to jointly negotiate drug reimbursement rates. And they can eliminate regulations, like those in Obamacare, that force insurers to pay for expensive branded drugs even when more cost-effective alternatives are available.”
In essence, Roy wants to create a government led cartel to control drug prices. Indeed, his proposals come straight out of the Bernie Sanders campaign. Three large pharmacy benefit companies (Express Scripts, CVS Caremark and OptumRx ) control about 80 percent of all prescriptions in both private and public health plans. Consolidating this control through a government cartel would reduce drug prices, but not for patients.
That’s because, in the price regulated world of pharmaceuticals, rebates reduce what pharmacy benefit management companies, insurers and hospitals pay for medicines. Patients wind up overpaying and find their choice of medicines restricted.
All told, about 30 percent of the cost of medicines – about $135 billion – goes directly into the pockets of other health care business.
Hence, even as drug prices decreased, the rebate-loaded prices – the one’s consumers are stuck with – surged. Net drug prices (paid to PBMs and insurers) declined 200 percent between 2011 and 2015. The rebate-loaded price increase by 33 percent over the same time period
Data source: Medicines Use and Spending in the U.S. – A Review of 2015 and Outlook to 2020
And as the chart above shows over time rebates as a share of price increases has soared from 6.5% in 2011 to 77% in 2015.
And very little if any of that rebate went to patients. Rather, as a recent lawsuit against Express Scripts and Anthem reveals, Anthem used an additional $5 billion in rebates generated by raising retail prices to fund stock buybacks in 2009 and 2010 “during the low watermark” of Anthem’s stock price, which ultimately enriched Anthem’s stockholders and management. Anthem could have passed this money on to plan participants in the form of reduced drug pricing, but chose not to do so. “
In fact, the percent of patients facing cost sharing of up to 40 percent of a retail price has soared even as rebate revenue increased. And the number of drugs with the highest cost sharing amount also generate the most rebates. Roy calls PBMs collecting rebates market competition. I think it’s government sanctioned extortion.
Further, Roy’s assertion that Obamacare forces insurers to pay for expensive brand drugs is wrong. Just the opposite has taken place: PBMs and insurers are using cost sharing and rationing to discourage using new medicines.
Insurers – with help from the PBMs that design drug formularies are increasing the use of step therapy, prior authorization, cost sharing to limit access. As the chart below shows, the private companies Roy trusts to create a free market are increasing what consumers pay for a growing number of important drugs:
In 2016, that trend continues: A just published Avalere report finds that nearly 35% of Obamacare health plans use prior authorization and step-therapy for single-source drugs, a 5% increase in utilization management from 2015. From 2015 to 2016, Obamcare plans increased utilization management of hepatitis and mental health medications by more than 15% and oncology and immune medications by more than 10%.
The high cost of drugs is the result of such practices. Republicans could provide immediate relief to consumers by capping cost sharing and allowing drug companies to provide rebates directly to people to use them to reduce the upfront cost of new medicines. Instead, Roy would double down on policies that encourage overcharging and rationing by giving government and the three biggest pharmacy benefit companies even more power over the price of and access to new medicines.
Does he really think that a government created cartel would make medicines affordable instead of enriching the syndicate members? How does that create a freer affordable market? His whole approach -- uninformed and pseudo populist – suggests Roy is motivated by political opportunity to join the anti-pharma bandwagon than in truly free markets.