The issue isn’t new: Drug prices in the U.S. keep going up. Manufacturers justify these increases based on the high price of R&D, pharmacy benefit managers (PBMs) negotiate rebates while pocketing a large percentage of the savings, and insurers pass down costs to patients via higher deductibles and copays.
As more innovative and expensive therapies enter the market, the issue of affordability vs. value—both on an individual and system-wide level—has taken on a new urgency. While related, they are not the same. A medicine can be “worth it,” in terms of eventual cost-savings and effects on patients, but if a patient or health system can’t afford it, “it doesn’t matter how much it’s worth,” said Gary Pisano, a professor at Harvard Business School.
Pisano was one of five panelists who convened to discuss strategies for “making medicines affordable” at the 2018 Galien Forum, which was held in New York in October.
While the panelists brought a variety of perspectives and suggestions to the table, more than anything else, the discussion highlighted just how far the U.S. is from implementing a solution.
Below are three potential big-picture goals to strive for, nonetheless.
Leverage. There’s been a lot of discussion around why drugs in the U.S. cost significantly more than they do in other developed countries. The reasons are as varied and complex as the American health system itself. In the U.S., unlike in many other developed countries, negotiations between manufacturers, PBMs, and payers are fragmented. And prices, which vary widely, are obscured, making negotiations difficult.
More glaringly, the U.S. government, the largest payer in the country, is barred from negotiating directly with drug companies over prices—which creates a leverage problem. “I think bargaining power matters a lot,” noted Pisano, who added that he is “open to the idea” of allowing Medicare to negotiate directly with drug companies.
There are valid criticisms to be made about the healthcare system in the United Kingdom, but lack of leverage is not one of them. In place of a private network of insurers, the U.K.’s health care is state-funded. As the payer, the government negotiates with manufacturers directly.
The National Institute for Health and Care Excellence (NICE) is charged with determining how much it is willing to pay for a drug based on the cost per quality-adjusted year of life it provides. If a manufacturer isn’t willing to lower the price of a medication to what the agency deems as “reasonable,” the government can refuse to cover it, explained Sir Andrew Dillon, NICE’s chief executive officer. This can create serious issues, of course, such as when a treatments are blocked or delayed, leaving desperate patients without access. But the U.K.’s ability to say no gives it a powerful tool in pricing negotiations.
In a Q&A session, a member of the audience asked the panel how bargaining would work in the U.S., if “you won’t say ‘no?’” Pisano’s answer: Essentially, it won’t.
Without the option to walk unless manufacturers lower prices, there’s little the government can do to force down costs. There are a few techniques that have been suggested in recent years, such as manufacturers voluntarily agreeing to honor value-based prices, as determined by organizations such as ICER that provide clinical and cost-effectiveness analyses, in exchange for value-based access from payers.
(There have been examples where drug companies have set prices too high, leading to a freeze-out by payers that ultimately hurt the manufacturer’s bottom line. Patients, as is usually the case, were the ones caught in the crosshairs.)
But this measure—voluntary and far from widespread—carries little weight. To negotiate effectively, you need real leverage.
Transparency. The Trump administration’s proposed requirement of having manufacturers include drug prices in direct-to-consumer ads has gotten a lot of attention—and pushback. PhRMA, the industry’s most powerful lobbying group, argues that such a measure would only confuse patients, as the price of a treatment varies dramatically depending on one’s coverage plan.
The validity of this argument gets at the U.S.’s byzantine drug pricing system, in which a variety of parties, including PBM, the much-aligned middle-men, pay far less for a new medications than the list price. This spectrum of discounts, via rebates, is kept deliberately opaque, so that there’s no clear sense of how much PBMs and insurers are paying for a drug, and how much of the negotiated savings are being passed on to consumers.
During the panel, Scott Howell, Novartis VP and head of U.S. market access, discussed “innovative contracting,” in which Novartis negotiates a variety of rebate structures with payers, including: “indications-specific contracts, outcomes-based contracts, money-back guarantees, and volume-cap guarantees.” While this perhaps is a welcome development from the payer’s perspective, it adds more layers of complexity to an already very complicated system, further obscuring the true price of a drug.
Contrast this, again, to drug prices in the U.K., which are determined by a value framework centered around a drug’s cost per extra year of life, after adjusting for side effects and symptoms. This method is controversial, and there are clear problems around access, but the system is transparent. A drug’s cost—along with the criteria behind it—is available for everyone to see.
Competition. Patents exist to incentivize innovation; develop a great product, and you’ll be rewarded with a period of exclusivity on all sales.
In some instances, however, they have the opposite effect. “If your rewards are too high in any innovative setting, you can dull innovation,” Pisano said. This is arguably true in pharma, where companies have grown complacent, depending on revenues from aging blockbusters.
Too many companies are dragging “out patents in ways that really just serve to take an old drug and keep it in a monopoly position longer,” he continued, a practice showcased to great effectiveness by AbbVie. Its patent for Humira expired in 2016, but the company has blocked biosimilar sales of the drug in the U.S. by filing more than 100 additional patents.
Tightening regulations to prevent such “patent thickets”—or, more radically, making it possible for generics to enter the market earlier by shortening drug patents’ shelf lives—could help drive prices down.