Why Prescription Drug Price Reform Will Probably Fail
Source: U.S. Food and Drug Administration.
Election season is well under way -- even if the presidential election itself is still more than 13 months away -- and candidates from both parties are looking to differentiate themselves from a very crowded field.
Democratic presidential hopeful Hillary Clinton is one such candidate, and one issue she's recently decided to tackle is the pharmaceutical industry. Earlier this week, Clinton announced that she would unveil a proposal to curb prescription drug costs in the United States, which are arguably getting out of hand.
The prescription drug reform proposal from Clinton comes just a few days after privately held Turing Pharmaceuticals increased the price of Daraprim, an oral medication the company acquired last month designed to treat a rare parasitic infection, by a whopping 5,456% overnight (going from $13.50 per tablet to $750). Price increases for novel therapies aren't uncommon, but Daraprim has been on the market for 62 years, and Turing didn't change a thing about the formulation or delivery. Long story short, Daraprim's dramatic price increase caused eyebrows to raise and generated a lot of backlash from the American public.
Clinton's prescription drug reform proposal certainly won't be the first of its kind, nor do I suspect it will be the last, either, as drugmakers and the American public have found themselves increasingly at odds over the years.
Source: Gilead Sciences.
Last year we witnessed this with Gilead Sciences , with American consumers protesting the $1,000 per pill cost of hepatitis C drug Sovaldi. In 2011 it was protests over KV Pharmaceuticals' Makena, a drug given to prevent pre-term births. KV set the price of Makena at $1,500 per dose, compared to the $10 to $20 that pharmacies would charge for generic versions of the medicine. The number of battles fought over drug price are literally too great in number to list here.
Why prescription drug reform proposals fail
But if there's one near-certainty, I believe it's that efforts to reform the prescription drug market will fail. Don't get me wrong, I am not in support of a nearly 5,500% price increase on a 62 year-old drug where essentially nothing has changed other than the producer. However, I'm also a realist, and suspect that the barriers to change are simply going to be extremely difficult to overcome.
To begin with, attempting to change the prescription drug industry could force jobs to overseas markets where price restrictions are deemed less invasive. This isn't to say that some markets, such as India and Switzerland, haven't been successful at implementing price caps on prescription drugs and playing hardball with drugmakers, but the same tactic likely won't work in the U.S., where the jobs market takes center stage.
Source: National Institutes of Health.
Look what happened with the implementation of the medical device excise tax associated with the Affordable Care Act (also known as Obamacare). Orthopedic device maker Stryker laid off 5% of its workforce (nearly 1,200 workers), and cardiovascular health giant Boston Scientific announced a major investment initiative in China around the time the 2.3% medical device excise tax was implemented. Just imagine what would happen to pharmaceutical jobs and even innovation if the government began curbing drug prices in the United States. My suspicion is jobs would be lost and the desire to develop drugs for orphan diseases would slow dramatically.
By the same token, I've witnessed consumers call for an increase in charitable contributions from drugmakers. But what these U.S. consumers fail to understand is that (most) drugmakers are already quite charitable. Healthcare conglomerate Johnson & Johnson donated $157.2 million to charity in 2013, making it the eighth-largest corporate donor according to Philanthropy.com.
Additionally, drugmakers wind up losing money, or netting negligible profits, in emerging markets in order to deliver potentially life-saving therapies. The only way pharmaceutical companies can finance their money-losing ventures in emerging market countries is by subsidizing their push overseas with high drug prices in countries where the standard of living is higher, such as in the United States. Removing high-margin buffers in the U.S. could result in drugmakers not offering their products in emerging markets.
Another point of contention is that the demand for pharmaceutical products is higher in the U.S. than in any other developed country. The laws of supply and demand demonstrate that the greater the demand for a product, the higher its price point is likely to climb. Therefore, it's not all that unexpected that prescription drug prices in the U.S. have been somewhat unstoppable.
Source: Express Scripts.
Finally, insurers and pharmacy-benefit managers have few checks and balances to keep drug prices from skyrocketing. PBMs and insurers can resort to removing drugs off their formulary or approved reimbursement lists, but it only works if there's a suitable replacement available, which isn't always the case.
Express Scripts , the nation's largest PBM, is excluding 80 drugs in 2016 due to price. However, there are around 4,000 drugs approved on pharmacy shelves, so we're only talking about 2% of all possible drugs being excluded. If PBMs and insurers try to play hardball with drugmakers, they risk alienating their members, who want access to potentially life-saving medicines.
Can prescription drug price inflation be controlled?
This begs the question: with a multiplicity of barriers solidifying high prescription drug prices for the pharmaceutical industry, is there anything that can be done in the future to help control drug prices from getting even further out of hand?
The answer to this question is still very much up to debate, but cost controls may still be possible.
Source: Pictures of Money via Flickr.
I'd suggest the first thing needed is simply time. Specifically, time for Obamacare to work and get millions of additional people insured.
The idea here is that as more people gain insurance through Obamacare or private insurers, and the rate of uninsured consumers is pushed lower, a greater percentage of the population will be able to receive preventative medical care. If more pharmaceutical products are prescribed in preventative fashion and potentially chronic diseases are caught early enough, drugmakers may not feel as if they need to significantly boost their prices to cover the costs of drug development, marketing, and production. I believe the pharmaceutical industry would much prefer a demand-driven model to a price-driven model, and the ACA may work toward that end.
Reform may also be needed in the drug development process, or in the way patent protection is calculated.
As it stands now, even with the breakthrough therapy designation, which can shuffle drugs directly from promising phase 1 studies to the Food and Drug Administration's desk, it can take half a decade to more than a decade in some instances to get a drug approved and on pharmacy shelves. With patent protection beginning when the FDA approves an investigational new drug for human clinical trials, drugmakers can sometimes be left with less than a decade of sales time before a drug faces generic competition. If there were a way to bring drugs to market even faster without sacrificing safety, or ensure the patent protection of approved therapies for a set length of time once they reached pharmacy shelves, you probably wouldn't see such aggressive pricing from pharmaceutical companies.
As I said, there's no concrete way to tackle this problem given the many barriers that protect the industry. It's clear that the American public would like something to be done about it, but don't be surprised if efforts to reform the industry fizzle out.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns and recommends Express Scripts and Gilead Sciences. It also recommends Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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