Prescription drug prices in the United States are about 2-6 times higher than in other high income countries, causing serious affordability and access issues including skipped doses and unfilled prescriptions. High prices also cause insurance companies to raise premium prices to cover their own costs. Here’s why the US drug industry needs fundamental reform.
“What [the drug companies] are doing to Americans is price-gouging us and they are holding us hostage. And people are dying. People are being forced to go to emergency rooms. People are having their legs amputated. They are going blind. They are having heart disease, liver damage. When does it stop?”
-Quinn Nystrom, Diabetes Activist
Virtually any drug you are prescribed in the U.S., chances are, you’re paying more for it than you would any other country. If this frustrates you, you’re not alone. Profiteering in the U.S. drug market is becoming a top issue for the American public, but meaningful reform remains elusive and complicated by decades of work in the opposite direction. There are three main reasons that the U.S. pharmaceutical market is failing its consumers.
First, the government is prohibited by law from negotiating directly with the manufacturers. Instead, insurance companies contract with private pharmacy-benefit managers (PBMs) to negotiate prices on their behalf. PBMs collect their own high fees for their services and strike exclusivity deals with the pharmaceutical companies, which discourages the production of generics.
Second, there is a concerning lack of competition for many drugs. Most major drugs have only one or two manufacturers producing a product, allowing those companies to charge exorbitant prices. Why? PBMs and manufacturers strike under-the-table exclusivity deals, making it so that patients and insurers don’t get the choice between different companies and prices.
Third, there is an egregious lack of transparency in the industry. Manufacturing and research costs, clinical success, PBM negotiations, and other expenses like advertising and marketing all remain behind closed doors. This makes it difficult for insurance companies, the government, or consumers to understand the real cost or merit of a drug, and results in an inability to regulate.
The resulting status quo for the pharmaceutical industry is a complex system with very little oversight or regulation. The powerful lobbying capacity of the pharmaceutical industry has created fear that regulation will stifle innovation and diminish the incentive to research and produce new drugs. However, as more consumers become aware of the price exploitation taking place in the industry, the possibility of meaningful reform becomes more of a reality.
Policy Proposals to Lower Drug Prices
Drug Importation: The Trump Administration recently enacted a policy to allow states to pass legislation to import certain drugs from Canada. This concept could also be implemented on a federal scale in conjunction with other policies, and federal guidelines could loosen to allow importation from more countries.
Feasible? Yes. Effective? Not really. Experts agree that this is a bandaid on a much bigger problem. The potential benefit to price levels would be dampened by the costs of importation. There would also be significant start-up costs to creating an infrastructure to ensure the quality of imported drugs.
Value-Based System: This is a system that sets prices based on risk, benefit, and effectiveness of each drug entering the market–basically a “grading” system to determine a fair price. A value-based pricing system would have to begin with transparency measures, so that the government and the public can better understand the true costs of producing a drug. This understanding would serve as a basis for the government to set price ceilings via a review board.
A value-based system could prove very difficult to navigate politically, however. Congress is hesitant to introduce transparency measures because the pharmaceutical companies target lobbying efforts against them. This would also be a complex system to implement, most likely with significant start-up costs.
Direct Government Negotiation: With this system, the government would look at two factors: a value based price and an international index, which averages the prices a drug is sold for in other countries. They would then directly negotiate with the drug manufacturer to set a price ceiling, above which they would incur a penalty. Any price increases would be reviewed.
However, this option would likely be even more difficult to accomplish politically. Although there is public support for regulations, Congress is unlikely to pass a sweeping reform to the system due to heavy pressure from the pharmaceutical lobby. This would also involve significant start-up costs, as well as more money and infrastructure to maintain a review board to constantly review and negotiate for more affordable drugs.
Shorter exclusivity periods: This would allow more competition in a quicker timeframe once a drug is introduced. Most drugs have an exclusivity period of 5 or 7 years, after which a generic can be produced. Reducing this period to 3 years would allow generics to be produced earlier, incentivizing lower prices because of competition.
However, this would only apply to new drugs, and few generics are produced even after the waiting period under the current system. Shortening these exclusivity periods would also be difficult politically as the manufacturers lobby heavily against it, but it would likely be more palatable than more sweeping reform like direct negotiation or pricing systems. It would be simple, easy and cheap to implement, and more feasible than other options, but would not have a profound effect in isolation.
Recommendation
Here’s what I believe we need in order to make real changes to the industry: A system of direct government negotiation, using value-based pricing and an international pricing index, combined with a shorter exclusivity period.
In combination, these policies would incentivize competition and transparency while preserving the incentive to innovate. Getting these policies passed will be difficult politically, but the issue is salient enough to garner public support, and state action on the issue will serve as important models to spur action on the federal level.
NM Health Policy by Rivera 