The American Enterprise Institute recently published a research publication on specialty drug pricing. The publication, written by Thomas Peter Stossel, MD, a visiting scholar at AEI, reviewed the contributions of prescription drugs to improved health and the structural and economic features of drug development that are largely responsible for price increases.
The report defined specialty drugs as drugs that are “expensive; address life-threatening diseases; may be complicated to produce, store, and administer; and often require elaborate patient monitoring.” While, as we have written about previously, drugs and medical devices represent a fraction of total health care expenditures, specialty drugs have temporarily accounted for the sharpest upticks in such spending.
Dr. Stossel recognized that the principal driver of specialty drug pricing is the “hardwired uncertainty” of biology and the resulting extreme risk of drug development. He believes that while some pricing practices are antisocial (some of which we and PhRMA have denounced previously – think Valeant and Turing), ideologically and politically motivated misrepresentation of the pharmaceutical industry has obscured the fact that wide application of arbitrary price controls necessarily impair drug innovation. He believes that the only way to sustain drug development and future cures is through prices and sales that are high enough to provide sufficient returns on huge risks. In no other commercial venture are the costs of taking a product to market unrelated to economic relationship to its development, production, or assessments of present value.
Dr. Stossel noted that the misrepresentation of the technical aspects in drug development has obscured important fundamentals. According to Dr. Stossel, the responsibility for such distortion lies with “academics, the media, and litigators who have relentlessly demonized the pharmaceutical industry.”
Fundamentals of Drug Development and Pricing
Dr. Stossel explains the history of the Food and Drug Administration (FDA) implementing restrictions and stipulations on pharmaceutical companies, going back to 1962 when the FDA initially began requiring companies to demonstrate both the effectiveness and safety of new drugs they developed through “adequate and well-conducted studies.”
Such stipulations added considerable costs to the expense of drug development, and to help keep drug companies solvent, Congress stepped in and imposed periods of marketing exclusivity, tax breaks, and other protections on top of the intellectual property rights of patented drugs. However, these benefits to companies have now turned into a temporary monopoly status that eliminates any price competition.
Dr. Stossel also focused on the frequent mergers in the healthcare community, of insurers, pharmacies, and pharmacy benefit managers, and the effect those mergers have on list prices. When players come together and merge, they have newfound leverage to demand reduced drug prices in exchange for giving preference to particular vendors’ drugs and promoting higher sales volumes. The insurance industry has also had an effect on rising costs by creating barriers for patients to receive drugs, not covering certain drugs at all, or requiring patients to contribute copays to obtain them.
Throughout the publication, Dr. Stossel continues to explicate about price control justifications, specific proposals, and the errors of price control justifications and proposals, as well as why price controls must impair drug innovation.
Conclusion
One opportunity for the pharmaceutical industry to improve its image is to step up efforts to provide drug payment assistance to lower-income patients. Little data actually exists as to how many patients actually have difficulty affording their drugs, and if companies can demonstrate that the number is low, that might be a response to the pricing criticism.
Dr. Stossel calls for all stakeholders to participate in finding solutions, including physicians, pharmaceutical companies, and insurers. As Dr. Stossel states in his publication, “imposition of drug price controls in the US will compromise access to better future therapies, not just for Americans, but also for patients’ worldwide because America is the world’s hub of drug innovation.”
In closing, Dr. Stossel states,
Avoiding the temptation to impose price controls requires understanding that current drug prices address future events over which we have little control….Our penchant for short-term deliberation is why we need hepatitis C drugs: they address tomorrow’s consequence of a disease caused by today’s pleasurable habit of intravenous substance abuse that spreads the condition. In calling for drug price controls, the critics epitomize this kind of tunnel vision.