Ethical Issues & Free Market: Pharmaceutical Drug Pricing

ethical issues in economics.- Topic: Pharmaceutical Drug pricingIn this assignment, you will write a research paper about social problems where the freemarkets are not allowed to function, which includes the market for a particular illegal good or service, a regulated market, etc.Markets are mechanisms for coordinating the set of connections of production operations that are distributed throughout the whole economic system. Thus, the market is the predominant and determining link between producers of goods and services and consumers. Accordingly, markets, as an exchange of goods and services that takes place as a result of buyers and sellers interactions, are generally considered the most efficient allocator of resources in the market economy.However, free markets are unable to solve many social problems, and they make others worse. One such social problem is illegal drugs. Another example is environmental issues such as pollution. For one example of a social problem where supply and demand is not allowed to function freely, conduct basic research on markets for human organs. There are black markets (underground economies) for human organs in some countries. But a trade in human organs, based on supply and demand, raises enormous and troubling ethical issues and shows that free markets are clearly limited in their ability to provide answers to social problems.Directions:Your research should be about social problems where the free markets are not allowed to function, which includes the market for a particular illegal good or service, a regulated market, etc.Select a social problem where free markets are not allowed to function, and conduct research on the social problem.Describe how free-market features could be introduced to help alleviate the social problem through free market operations of supply and demand.Discuss the risks of introducing market mechanisms of supply and demand in situations where ethical issues are present.Explain the roles of the government in maintaining ethical business practices. Free Market, Better Medicine
The solution to our drug pricing problem involves less government,
more transparency.
By Tom Coburn Opinion contributor Feb. 15, 2018, at 3:31 p.m
https://www.usnews.com/opinion/articles/2018-02-15/rely-on-the-freemarket-to-address-drug-prices-and-foster-innovation
Two things happened after the FDA approved a novel new treatment for
hereditary blindness in December, neither of which was surprising. First the
company that makes the drug announced they would charge nearly a million
dollars for it. Next, the uproar began. No one asked what the costs research
and regulation were, but it didn’t matter: No matter what, the price was going
to be too high.
Drug prices have become so contentious, it’s practically impossible to announce the
price of a new drug without facing widespread public outcry. Ultimately, I think this is a
good thing: It means that the American people are engaged in one of the major public
policy debates of our time. More and more people are coming to realize that the system
is broken and are demanding a change.
While I am glad to see this kind of citizen engagement, I am disheartened by how many
people think that the way to make drugs more affordable is to increase government
control of the economy. Nothing could be further from the truth. The fact is we do need
to fix the way we pay for prescription drugs. But the solution to our drug pricing problem
involves less government, not more – and much more transparency.
The problem with drug prices – especially for the coming wave of innovative cures and
personalized, precision medicines – is not that they start out expensive, but that they
stay expensive for years after they have been on the market. The main culprit here is the
regulatory environment that limits the creation of a free, functioning and competitive
market for prescription drugs. To illustrate this point, consider how differently things
work when other high tech products come to market with a high list price.
When the first iPod was released in 2001, it cost $399 and could hold 1,000 songs. Over
the next three years, as more alternatives came to market, Apple felt the competition
and created an iPod that held four times as many songs as the original and cost $170
less. These days, when 77 percent of Americans own a smartphone, the idea of a $400
dollar iPod seems ridiculous. Competition spurred innovation, which drove down prices.
That is what free markets do when unencumbered.
Of course, prescriptions drugs are different than iPods, and having access to portable
music is much less important than having access to affordable medicine. As a patient
and a physician, a father and a grandfather, I am personally interested in solving our
drug pricing problem. But this kind of concern is no reason to treat drugs differently, in
an economic sense, than any other product on the market.
Right now, the federal government prevents competition by impeding how many new
drugs get approved, and how they are paid for when they come to market. Fortunately,
there are ways to produce safe, effective and affordable drugs while decreasing
government regulation.
First, we need to increase the number of generic drugs available, and be able to know
their prices offered before we buy. This is called price transparency – and economical
markets need price transparency. In 2016, patients paid an average of $5.54 out of
pocket for generic drugs and $28.31 for branded equivalents. In addition to providing a
cheap alternative for patients, generic competition is crucial to lowering prices. After
multiple generics are approved, prices fall by 80 percent across the board, saving
money for everyone. Fortunately, under Commissioner Scott Gottlieb, the FDA is taking
steps to streamline generic drug approvals, putting us on a path to a more robust
generic drug market. In fact, we have already seen the results of the efforts as the FDA
approved a record number of generic drugs in 2017.
Additionally, we need to ensure that the list prices of these drugs are displayed front
and center for the consumer to see at the point of sale. This kind of price transparency
is crucial for the functioning of an open market, and will help encourage patients to opt
for cheaper alternatives whenever they can.
Once we increase the number of new drugs on the market, we need to find new ways of
paying for them. This is especially important for those new drugs that come with high
price tags. I have a personal interest in ensuring that we solve the payment issues for
these personalized medicines. I have stage-four prostate cancer, which is close to
remission, and my doctors have already engineered a personalized medicine to give me
next. This is truly a new frontier in medicine – using our own cells to cure cancer – but I
am awaiting the sticker shock associated with it. This is why our real concern should be
developing ways to pay for precision medicine that won’t bankrupt patients.
One way, which is much talked about, is to pay for medicine based on outcomes instead
of by dose or injection, which federal regulations now inhibit. If we rolled back these
regulations and instead let market forces allocate the costs down and the competition
up, we will see costs brought down without jeopardizing safety or efficacy. Rather than
raging against a high initial price, we should accept that precision drugs will cost a lot
initially, but also that they should be priced based on outcomes. With market forces
restored, the initial list price won’t matter, as prices fall and everyone can afford
precision medicine.
The actions we take to address drug prices over the next 10 years will affect how we
develop, approve and pay for medicine for a generation. Rather than doubling down on
government regulation, we should rely on the free market, which is the best way to
allocate these scarce resources, increase competition, lower prices and continue to
foster medical innovation for years to come.
A Free Market Solution to
Prescription Drug Crises
Dean Baker
Both at home and abroad, the rapidly rising cost of new
drugs is one of the most important issues the country
will face in coming decades. How can we reduce prices?
Remove the patents that protect monopolies, argues this
economist. The patent process is inefficient, he says, and
there are other, more direct ways to support research.
I
N RECENT YEARS, prescription drugs have become an enormous
political issue both nationally and internationally. In a national context, Congress has struggled to produce a Medicare prescription drug benefit that will make drugs affordable
to senior citizens. Projections from the Congressional Budget
Office show that prescription drug expenditures will exceed $300
billion annually by 2013, an average of more than $6,000 for each
person over age sixty-five. While few seniors will be able to afford this expense, the current budget environment limits the extent to which the government will be able to alleviate the burden.
Internationally, there is an ongoing battle over the World Trade
Organization (WTO) rules governing the Trade-Related Intellectual Property Rights (TRIPS) agreement. These rules could
DEAN BAKER is the codirector of the Center for Economic and Policy Research in Washington,
DC. This article draws extensively from a longer paper, Dean Baker and Noriko Chatani, “Promoting Good Ideas on Drugs: The Relative Efficiency of Patent and Publicly Supported Research”
(Washington, DC: Center for Economic and Policy Research, 2002) (www.cepr.net/promoting_
good_ideas_on_drugs.htm). Full references can be found in this paper.
Challenge, vol. 46, no. 5, September/October 2003, pp. 76-89.
© 2003 M.E. Sharpe, Inc. All rights reserved.
76
Challenge/September-October 2003
ISSN 0577-5132/2003 $9.50+ 0.00.
Free Market Solution to Preseription Drug Crises
force developing nations to pay patent-protected prices for many
essential medicines, making them unaffordable to hundreds of
millions of people in developing nations. Recent trade negotiations have centered on which categories of medicines and which
groups of countries may be excluded from the strict patent rules
that the rich countries seek to impose.
Both these issues are incredibly important to the lives and wellbeing of tens or hundreds of millions of people. Yet the solution
to both may be remarkably simple—let drugs be sold in a free
market, without a government-imposed monopoly (i.e., patent
protection). In the absence of patent protection, drug prices
would fall by an average of 70 to 80 percent, and in some cases
considerably more. With few exceptions, drugs are cheap to produce. The reason they are expensive to consumers is that the
government provides patent holders with a monopoly under
which drug companies can charge whatever price they choose,
without any threat of competition. If drug patents did not exist,
then drug prices would not be an issue.
Of course, there is a rationale for drug patents. The pharmaceutical industry claims that it supports nearly $30 billion in biomedical research each year. Patent monopolies allow it to recoup
these research costs. If the industry could not count on a period
of patent protection, then it would not be profitable for the industry to undertake this research, and it would stop developing
new drugs.
However, patents are not the only way in which to support
biomedical research. At present, nearly as much research is supported outside the patent system, either directly by the government through the National Institutes of Health (NIH), or by
universities, foundations, and other not-for-profit institutions.
The appropriate question for economists and society is whether
patents are the best way to finance biomedical research. A cursory examination of the evidence suggests that they are not.
Cballenge/Seplewber-Oclobnr 2003 77
Baker
The Inefficiencies of the Drug Patent System
Economic theory suggests that drug patents, as an interference in a free market, will lead to a variety of inefficiencies.
Patent protection for drugs leads to market distortions and
waste in the same way as trade restrictions such as tariffs or
quotas. It leads to both static losses that result from having
drug prices exceed the marginal cost of production and dynamic losses attributable to rent-seeking behavior by drug
companies.
However, the magnitude of these distortions is considerably
larger in the case of drug patents than is generally true with
trade barriers. While tariffs or quotas rarely raise the price of
goods by more than 20-30 percent, drug patents typically raise
the price of drugs by 300-400 percent above the competitive
market price. As a result, the waste and inefficiency associated
with patent protection is far greater than would be the case with
most forms of trade protection.
This waste takes a variety of different forms, implying both
static and dynamic losses to the economy and society:
1. deadweight loss due to the fact that many people who
would be willing to pay the competitive market price for
drugs are unwilling or unable to pay the patent-protected
price
2. the research and development of copycat drugs—in a
world with patent protection, copycat drugs can reduce
prices by providing competition. However, in the absence
of patent protection, most of this research would serve little
purpose, since there would be little benefit from developing second and third drugs when a first one has already
been shown to be effective
3. advertising and sales promotion—patent rents provide
firms with a large incentive to try to persuade doctors and
78
Cballenge/September-Oetober 2003
Free Market Solution to Preseription Drug Crises
patients to use their drugs. According to PhRMA—the drug
industry’s trade association—pharmaceutical companies
employ nearly twice as many people in sales and marketing as in research and development
4. restricting the dissemination of research findings or falsifying research results—the industry has strong financial
incentives to prevent the disclosure of its research findings until it has filed for all the patents that could prove
profitable. This slows scientific progress. There is also evidence that the industry has on occasion attempted to keep
secret research findings that suggest its products are ineffective or possibly harmful
5. legal costs associated with filing and protecting patents—
the industry employs large numbers of lawyers to secure
and enforce its patents. These costs can also include side
payments to generic producers to keep competition out of
the market
6. political lobbying for the protection and extension of patent
monopolies—the pharmaceutical industry typically ranks
near the top in campaign contributions. It has also begun
financing “grassroots” lobbying efforts by people afflicted
with specific diseases and their friends and relatives
7. the production of gray market drugs, which may not meet
safety standards—the existence of large patent markups
provides a strong incentive for the production of unauthorized versions of drugs (sometimes abroad), just as is
the case with illegal drugs like marijuana or cocaine
8. the misdirection of research toward areas likely to lead to
patentable products. Drug companies will not pursue potentially fruitful areas of research into cures or prevention
of diseases, such as diet, exercise, or even the use of drugs
whose patents have expired, since they will have no means
of profiting from the findings.
Cballenge/September-Oetober 2003 79
Baker
Static Deadweight Losses
The United States will spend close to $180 billion in 2003 on
patent-protected prescription drugs. Conservatively, the cost of
these drugs would fall by 70 percent in the absence of patent
protection.^ This price reduction would imply a saving to consumers of $126 billion a year—nearly $1,000 per household.
However, if consumers could buy drugs at their competitive
market price, they would also buy more—or better—drugs. This
increase in demand associated with a lower price is the pure
static efficiency gain (as opposed to income transfer) associated
w^ith the elimination of patent protection.
Even if the demand for drugs is extremely inelastic (unresponsive to price changes), the efficiency gain from the elimination
of patent protection would still be large. An elasticity of 25 percent (a 10 percent decline in price leads to a 2.5 percent increase
in demand) would imply an efficiency gain of more than $20
billion a year. This is two orders of magnitude larger than the
efficiency gains typically estimated from NAFTA (North American Free Trade Agreement) or comparable trade agreements.
Copycat Research
A large portion of the research undertaken by pharmaceutical
companies is not designed to develop breakthrough drugs to
treat diseases for which no cures exist. Rather, the vast majority
of research spending goes to developing copycat drugs that serve
largely the same purpose as existing drugs. In a world with patent
protection, these copycat drugs serve a useful purpose. They
provide an element of competition that would not otherwise
exist, thereby lowering the price of the original breakthrough
drug. However, if patent protection did not exist, there would
be little point to devoting scarce research dollars to developing
drugs to treat diseases for which effective cures already exist.
80 Cballenge/September-October 2003
Free Market Solution to Preseription Drug Crises
(Copycat drugs are not completely without value—people react
in different ways to drugs. For some patients, a copycat drug
may prove considerably more effective than the original breakthrough drug.)
According to the Food and Drug Administration (FDA), approximately 75 percent of drugs approved over the last fifteen
years have fallen into this copycat category. The FDA determined
that these drugs did not represent qualitative improvements over
existing drugs. According to a study commissioned by PhRMA,
it costs nearly as much for the pharmaceutical companies to develop copycat drugs as to develop breakthrough drugs. This
study estimated that the research and development costs for
copycat drugs were on average 90 percent of the cost of breakthrough drugs. This implies that nearly 70 percent of the
industry’s research spending went to the development of copycat drugs rather than breakthrough drugs. Much of this research
would not be conducted without the distorted incentives created by patent monopolies. To put this slightly differently, if the
industry spends $28 billion a year on research, less than $9 billion of this money goes to developing breakthrough drugs. In
other words, drug patents force consumers to pay $125 billion a
year more than if drugs were available at the competitive market price, in order to support $9 billion a year in research into
breakthrough drugs.
Advertising and Sales Promotion
The monopoly rents that the industry earns by being able to sell
drugs at prices far above the marginal cost of production provide enormous incentives for aggressive sales promotion. As a
result, the pharmaceutical industry devotes a large portion of
its revenue to promote the sale of its drugs. This spending takes
the form of ads on television and in other media, which are tar-
Challenge/Scptembcr-October 2003 8.1
Baker
geted at consumers, and also the direct promotion efforts of an
army of “detailers,” salespeople who directly promote new drugs
with physicians.
In addition to being largely a waste of resources from an economic standpoint (these promotion efforts do little to educate
people about the relative effectiveness of different drugs), these
promotion efforts can lead to inferior medical care. In the case of
promotions directed at consumers, very few patients will be in a
position to seriously evaluate the merits of a drug they see advertised on television or in a magazine. The industry’s hope is
that the patient will request that his or her physician prescribe
the drug. Since the physicians may have no direct stake in the
matter (and may themselves be ignorant of the merits of the drug
in question), they may opt to prescribe the drug simply to keep
a patient happy. In many cases, this is likely to mean that the
patient is getting a drug that is less appropriate for his or her
specific illness or condition.
In the case of the promotional efforts of detailers, there have
been many instances in which drug companies were found to
have promoted their drugs for uses for which they did not have
FDA approval. While the FDA tries to police sales efforts in order to prevent drugs from being marketed for unapproved uses,
it cannot possibly monitor all the communications that take place
between drug company sales agents and physicians. The monopoly profits provided by drug patents virtually guarantee that
this sort of improper marketing will take place. In some cases,
the consequences for patients’ health will be serious.
Restrictions on the Dissemination of Research or the Falsification
of Findings
When the industry funds biomedical research, it almost always
insists on controlling the disclosure of research findings. This
82 Chatlenge/September-October 2003
Free Market Solution to Preseription Drug Crises
has led to numerous instances in which researchers were prevented from sharing important results in a timely manner with
other scientists. Drug companies will typically want to ensure
that they have applied for all the potentially profitable patents
related to a line of research before they allow the results to be
published in scientific journals.
Even worse than delays in publication is the possibility that
published results may be biased or even falsified in order to support the sales of a company’s drugs. A recent paper found that
drug studies were far more likely to find that a drug was effective when the research was supported by the company producing the drug than when the research was supported by an
independent body. Medical journals have struggled w^ith the
problems posed by unethical researchers for years. Predictably,
the profits allowed by patent monopolies have a tendency to
corrupt the quality of biomedical research.
Legal Costs Associated with Patent Filings and Enforcement
The process of filing for a patent is time-consuming and expensive. Patents can often involve hundreds, or even thousands, of
pages of technical writing, making the process of filing for a
patent costly for both the party filing and the patent agency required to monitor the process. (This cost can be an especially
serious problem for developing nations, which generally have
few people with the technical and legal training to review patent
applications.) From an economic standpoint, this process is
largely a waste.
Also, patents often lead to legal cases contesting the reach of a
patent. It is a standard practice for producers of brand drugs to
sue generic producers for patent infringement w^hen they try to
place generics on the market after a patent has expired. Such
suits can involve substantial legal costs.
Challenge/September-October 2003 83
Baker
Political Lobbying
As would be expected, the pharmaceutical industry spends generously on buying the political power needed to protect and extend its patent monopolies. It regularly ranks among the top
industries for political contributions. It also sponsors numerous
grassroots groups that lobby around specific diseases. Typically,
the industry will finance campaigns designed to force insurers
or the government to pay for a specific treatment that may be of
questionable medical value.
Gray Market Drugs
When drugs are sold at prices far above their cost of production,
it is virtually inevitable that a black or gray market will develop
where unauthorized versions of drugs are sold at much lower
prices. To some extent, this gray market has involved purchases
from other countries. When such purchases involve buying drugs
from Canada or other industrialized countries, the main downside will be the wasted trip or postage. However, when the purchases involve drugs from developing nations with less rigorous
quality control, or counterfeit drugs of questionable quality, there
could be serious health consequences for patients.
Neglect of Research That Is Not Likely to Lead to Patentable
Products
As a society, we have no reason to prefer research that is likely
to reduce the risk of cancer through drugs to research that could
reduce the risk of cancer through diet or changing the environment. However, the drug industry has a clear preference for the
former sort of research, because they do not get paid for the latter. In principle, our biomedical research spending should be
parceled out in accordance with where it is likely to produce the
84 Chatlenge/September-October 2003
Free Market Solution to Prescription Drug Crises
greatest improvements in public health. Insofar as research priorities are being driven by the pursuit of patent dependent profits, there will be a substantial bias in the direction of research
spending. This bias could lead to a far less than optimal use of
research dollars.
The Altemative to Patent-Supported Research
The complaints against the inefficiencies of the patent system
would be moot if there were not alternative methods of supporting biomedical research. Fortunately, there are longstanding
and well-tested alternatives to patent-supported research. Basically, instead of paying for the research at the back end, through
government-imposed patent monopolies, the research can be
paid for at the front end, through direct fiinding. The federal
government already spends more than $25 billion a year on biomedical research through the National Institutes of Health. Universities, foundations, and private charities spend about $5
billion more. This research has an impressive track record, leading to numerous medical breakthroughs, including the development of the polio vaccine, penicillin, and many of the most
important cancer and AIDS drugs.
At present, this funding is quite deliberately focused on basic
research. By design, NIH and nonprofit institutions generally
do not take drugs through the clinical testing process needed
for FDA approval. However, there is no reason to believe that
they are inherently unable to do this task. Unless brilliant scientists suddenly become incompetent when they change their task
from overseeing basic research to overseeing clinical testing, there
is no reason to believe that the actual development and testing
of drugs cannot be funded in the same way as basic research.
I have conservatively estimated that it would take approximately $25 billion a year in federal funds to replace the research
Challenge/September-October 2003 85
Baker
currently being supported by patent protection. This is slightly
more than half of the annual cost of the proposed Medicare prescription drug benefit. By using this money to directly finance
prescription drug research, and placing all the findings in the
public domain—allowing new drugs to be produced as generics—the savings to seniors would be more than twice as large as
the benefits provided by the proposed Medicare drug benefits.
Of course, the benefits from publicly funded
research would not go only to senior citizens in
the United States.
Of course, the benefits from publicly funded research would
not go only to senior citizens in the United States. Everyone
would be able to purchase drugs at their competitive market
price. This would include people in developing nations, who
would no longer have to worry about efforts to extend patent
protection under TRIPS. If the patents for the best new drugs
were placed in the public domain, there would be little reason
for concern if drug companies want to maintain patent protection for older inferior drugs.
The Mechanics of Publicly Supported Research
The exact mechanics of a system of publicly supported research
can be worked out through a process of trial and error. However,
there are some basic principles that seem evident. First, it would
be desirable to maintain competition between different sponsors.
This could mean having a variety of centers that sponsor research
rather than a single body. Representative Dennis Kucinich has
proposed a bill that would establish ten competing centers, each
with a budget of approximately $2 billion a year. After a ten-year
86
Chatlenge/September-October 2003
Free Market Solution to Preseription Drug Crises
period, an independent commission would review the accomplishments of each center and rank them. The bottom two centers would be eliminated and replaced with new centers.
As is the current practice at NIH, the centers should look to
contract out much of their work to universities, research institutes, and even the research divisions of pharmaceutical companies. While the centers would be responsible for the overall
There is no reason that a publicly supported
system should provide any less incentive to
researchers than a patent-supported system; it is
simply a different mechanism.
progress of research under their sponsorship, it will probably
prove more efficient to contract out most research instead of
undertaking it directly.
There should be complete openness for all research sponsored
by these centers and timely publication of all research findings.
The centers should file for patents for findings and place the
patents in the public domain under a “copyleft” principle.^ Any
patent can be freely used by other researchers and in other products, as long as the producers do not attempt to use patent protection themselves to exclude competitive products. This provision
would prevent drug companies from using patent protection to
profit from publicly supported research. As long as pharmaceutical companies sell their drugs as generic products in a competitive market, there would be no problem. However, if they want
to claim patent protection for a particular drug, then they will
be forced to negotiate with the center(s) that hold the relevant
patents and pay for this privilege.
The Kucinich bill also proposes to set aside a substantial pool
of money to reward researchers who accomplish important
Challenge/September-October 2003 87
Baker
breakthroughs or pursue especially innovative lines of research.
This would in effect create prizes—some running into the millions of dollars—to provide an additional incentive to researchers. There is no reason that a publicly supported system should
provide any less incentive to researchers than a patent-supported
system; it is simply a different mechanism.
While there are many more details involved in establishing a
full system of publicly supported research, these principles
should provide guidance. The main point is that this idea really
involves an expansion of an existing system of publicly supported research. It is not a great leap into the unknown.
There is one final point worth making in this context. Price
controls are often viewed as a less interventionist alternative to
publicly supported research. Whatever the merits of price controls, it is a mistake to imagine that such a system is less interventionist than a system of publicly funded research. Drug
companies determine their research priorities by their expected
profits. A system of government price controls determines the
profitability of different types of drugs. In this way, if the government is setting prices, it is determining the flow of research
dollars—although not bothering to think about it in a coherent
manner. Of course, the controlled price for various drugs will
itself be a topic of huge political debate, creating enormous opportunities for corruption and abuse. In addition, by keeping
prices above marginal cost (albeit at somewhat lower levels), a
system of price controls will leave in place the distortions intrinsic to patent protection.
Conclusion
It is remarkable that the patent system for supporting drug research has survived into the twenty-first century. It is even more
remarkable that the inadequacies of this relic from the feudal
88
Challenge/September-Octoher 2003
Free Market Solution to Prescription Drug Crises
system have gone largely unexamined by the economics profession, even as the resulting distortions create ever larger public
policy problems. Many of the problems posed by patent-supported drug research are seemingly intractable in the current
context—most obviously, the cost either to seniors or to the government of paying for their prescription drug needs will be an
immense burden if the patent system is left in place. Similarly,
efforts to impose U.S.-style patent laws on developing nations
will make many life-saving drugs unaffordable to hundreds of
millions of people. However, in a world in which companies
compete to sell drugs in a competitive market, these problems
could be dealt with far more easily.
The inefficiencies associated with a patent system are so enormous that it is virtually impossible to envision a scenario in w^hich
publicly supported biomedical research would not be more efficient. Given the importance of this issue, and the evidence of
the failings of the current system, it is essential that economists
and policy analysts begin to seriously examine alternatives to
patent support for biomedical research.
Notes
1. Baker and Chatani derive this estimate. In countries where drugs are still
protected by patents but subject to price controls, such as Canada and Australia,
drugs sell for approximately half their price in the United States. When drugs lose
patent protection and are subject to generic competition, their price often declines
by 80 percent or more, as recently happened with the allergy medication Claritin
(Dean Baker and Noriko Chatani, “Promoting Good Ideas on Drugs: The Relative
Efficiency of Patent and Publicly Supported Research” [Washington, DC: Center
for Economic and Policy Research, 2002] [www.cepr.net/promoting_good_ideas_on
_drugs.htm]).
2. “Copyleft” is a concept developed by the free software movement. It allows
software to be reproduced and distributed without charge, except when it is used in
programs where the designers restrict the distribution through copyright protection.
To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535.
Cballenge/September-October 2003 89
DOI:10.1002/cind.825_11.x
GLOBAL VIEW
Patients first
Sarah Houlton
is a freelance journalist
focused on US life
sciences
US
When it
comes to
the cost of
prescription
drugs, our
healthcare
system faces
four major
challenges:
high list
prices;
overpayment;
out-of-pocket
costs and
foreign freeriding
38
Proposed changes to lower the cost of prescription
drugs could take some time to filter through to patients
I
t’s long been a bone of contention for
American patients that drug prices in the
US are higher than they are elsewhere in
the world. Whereas schemes such as the
Pharmaceutical Price Regulation Scheme (PPRS)
in the UK enshrine price negotiations into the
healthcare system, this is simply not the case
in the US. The free market free-for-all means
drug companies can charge whatever they can
get away with, giving the impression that the US
subsidises the rest of the world.
One of Trump’s sweeping campaign
statements was that he would negotiate prices
for seniors via Medicare, the government health
insurance programme for over 65s and the
disabled. In early May 2018, his ‘American Patients
First’ blueprint was announced but, despite
Trump’s overblown claim at the announcement
that it was the ‘most sweeping action in history to
lower the price of prescription drugs’, the idea of
any such negotiations was notably absent from
the proposals.
‘When it comes to the cost of prescription
drugs, our healthcare system faces four
major challenges: high list prices; seniors and
government programs overpaying for drugs due to
lack of the latest negotiation tools; out-of-pocket
costs for consumers; and foreign governments
free-riding off American investment in innovation,’
claimed Health and Human Services (HHS)
secretary Alex Azar. ‘These problems have often
been discussed, but gone unaddressed. Under
President Trump, that has now changed. This
blueprint is a historic plan for bringing down the
high price of drugs and reducing out-of-pocket
costs for the American consumer’.
Suggestions included removing the pharmacist
gag rule that stops them telling patients whether
paying cash rather than using their insurance
would be cheaper, and even making pharma companies include prices in their direct-to-consumer
advertising. Yet the list of 50 proposals didn’t
include anything that would obviously lead to a
rapid and effective lowering of prices for patients.
Rather than government intervention in pricing, there was talk of allowing private prescription
drug plans under the auspices of Medicare Part D
– the part that covers self-administered prescription drugs – to negotiate prices, as is already
the case for Part B, which covers drugs given to
outpatients. It might also stop PBMs (pharmacy
benefit managers) who negotiate discounted
prices for insurers keeping rebate payments from
pharma companies. They could be forced to share
these with patients.
Unsurprisingly, the government spin put a
more positive light on it. ‘President Trump made
it clear how important tougher negotiation
is,’ Azar said. ‘We are delivering on President
Trump’s promise to do smart bidding and tough
negotiation in Medicare. We are going to bring
negotiation to where it doesn’t exist, in Part B,
and making negotiation more effective than it is
today, in Part D.’
Despite the absence of any form of price
regulation, trade association PhRMA was not
entirely happy. ‘While some of these proposals
could help make medicines more affordable
for patients, others would disrupt coverage and
limit patients’ access to innovative treatments,’
said its president and CEO Stephen Ubl. ‘The
proposed changes to Medicare Part D could
undermine the existing structure of the program
that has successfully held down costs and
provided seniors with access to comprehensive
prescription drug coverage. We also must avoid
changes to Medicare Part B that could raise costs
for seniors.’
According to Peter Pitts of the Center for
Medicine in the Public Interest, a tangled web
of special interests keeps the price of drugs
artificially high. The next policy conversation, Pitts
says, is whether lower patient co-pays will mean
higher premiums. ‘One man’s rebate is another
man’s kickback,’ he claims. ‘The large and growing
gap between the drugs’ list prices and the actual,
secret prices PBMs [pharmacy benefits managers]
pay is bad for competition.’ He believes the
proposed rule for passing along a portion of the
rebate would improve price transparency.
Drugs administered in doctors’ offices, clinics
and hospitals fall under Medicare’s Part B, for
which the federal government currently pays
providers a 6% premium on the average price.
This, Pitts says, incentivises manufacturers to
raise prices, and providers to choose the most
expensive medicines.
Pitts concludes that it’s important not to pay
much – if any – attention to whatever hyperbole
Trump uses. ‘Implementation of the initiatives will
be done by HHS, FDA and the Center for Medicare
and Medicaid Services,’ he says. ‘The good news is
that experts are at the wheel, and they’re focusing
on free market solutions. The ideas require an
ecosystem approach – nobody said it was going
to be easy.’
05 | 2018
037 GV – reviews – comment.indd 38
06/06/2018 11:28
Copyright of Chemistry & Industry is the property of Wiley-Blackwell and its content may
not be copied or emailed to multiple sites or posted to a listserv without the copyright holder’s
express written permission. However, users may print, download, or email articles for
individual use.