Prescription Drug Costs: In Washington’s Line of Fire

Guest post by Ken Perez, vice president of healthcare policy, Omnicell.

Ken Perez
Ken Perez

At two recent healthcare conferences run primarily for provider organizations, speakers spent a considerable amount of time highlighting the sharply increased U.S. spending on prescription drugs in 2014 (+12.5 percent versus 2013) and 2015 (+7.8 percent versus 2014)—about double overall healthcare cost inflation for those two years. In 2015, prescription drugs accounted for one-sixth of all the money spent on personal healthcare services. While drug spending growth is expected to moderate in the coming years, the attendees at the conferences were left with the lingering impression that pharmaceutical companies may have gotten away with inappropriate levels of profiteering in recent years.

Of course, that impression was made—and some would say cemented—last year when Martin Shkreli, former CEO of Turing Pharmaceuticals, famously hiked the price of Daraprim, a 62-year-old treatment for parasitic infections, by 5,455 percent overnight from $13.50 a tablet to $750. Similarly, Michael Pearson, outgoing CEO of Valeant Pharmaceuticals, raised by 1,800 percent the prices of two drugs used to treat cancer-related skin conditions: Targretin gel, a topical treatment for cutaneous T-cell lymphoma, and Carac cream, used to treat precancerous skin lesions called actinic keratosis. A 2012 report by Ipsos Public Affairs concluded that the U.S. pharmaceutical sector had a “net negative” favorability score with consumers, and the much-publicized actions of Shkreli and Pearson three years later obviously did not improve the public’s view of pharma.

As expected, the aforementioned price hikes by Turing and Valeant were denounced by numerous presidential candidates, and drug prices became a popular political football. Both former Secretary of State Hillary Clinton and Vermont Senator Bernie Sanders have made lowering prescription drug costs significant planks of their respective policy platforms. They both advocate allowing Medicare to negotiate drug prices with pharmaceutical companies. Sanders goes even further—to the brink of outright drug price controls—pledging to require pharmaceutical companies to publicly disclose information regarding drug pricing and research and development costs—with the obvious implication that there should be some reasonable relationship between the two.

The Committee on a Responsible Federal Budget estimates that Medicare could save $11 billion per year if brand-name drug manufacturers were required to lower their prices, but what would be the resultant impact on drug development?

According to a National Bureau of Economic Research working paper by Thomas Abbott and John Vernon, “The Cost of U. S. Pharmaceutical Price Reductions: A Financial Simulation Model of R&D Decisions,” cutting drug prices by 40 percent to 50 percent in the United States will lead to between 30 percent and 60 percent fewer R&D projects being undertaken in the early stage of developing a new drug, while small price reductions, such as 5 percent or 10 percent, are estimated to have relatively little impact on the incentives for product development—perhaps a negative 5 percent.

Notwithstanding the tough talk by Clinton and Sanders, Washington’s bark has traditionally been worse than its bite when it comes to cracking down on pharma. Drug makers wield a lot of political influence with their well-established lobby, enormous political campaign contributions, employment of millions of Americans, and significant contributions to the nation’s economy and the balance of trade.

That being said, though imposition of drug price controls is highly unlikely, the federal government will at least want to derive greater value from its mammoth expenditures on drugs. Andy Slavitt, acting administrator for the Centers for Medicare and Medicaid Services (CMS), says that the cost of drugs may well be the number one health policy challenge facing the next administration. In the future, look for CMS to experiment with a variety of value-based approaches, such as indication-based pricing, which reimburses healthcare providers more for drugs proven to be more effective.

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