Drug Pricing - Let's Get Real!

On December 12, 2019 the U.S. House of Representatives passed H.R.3, the Elijah E. Cummings Lower Drug Costs Now Act. At the heart of the bill is a proposal to adopt international reference pricing in an effort to reduce the prices of prescription drugs purchased under Medicare. Let’s think about that for a moment. Outside the U.S., foreign governments control drug pricing and reimbursement as they, the governments, are typically the single payer. In other words, the customer is setting the price of drugs that pharmaceutical companies have spent billions of dollars developing, over many years.

What H.R.3 proposes is that the U.S. government should put Medicare drug pricing in the hands of foreign governments. So, rather than taking control of drug pricing, the U.S. is essentially ceding pricing control to foreign governments. There is no market basis for drug pricing outside the U.S.. Foreign drug pricing is not based on competition or the level of investment in drug development or any ROI basis whatsoever. Foreign governments control drug pricing and reimbursement in a self-serving, artificial manner. For decades, the suppression of drug prices outside the U.S. has put additional upward pressure on U.S. drug pricing as pharmaceutical companies seek to recoup their significant R&D investments and fund future innovation of new drugs from sales in the U.S. market. If H.R. 3 becomes law, then there is no doubt that this innovation will be significantly impacted.

The passing of H.R.3 led 150 biotech CEOs to issue a warning that the bill would destroy their businesses by slashing biopharmaceutical revenues by $1 trillion over the coming decade. Sources estimate that the bill may well save the federal government $400bn over that decade, but at what cost? Both the Congressional Budget Office and the President’s Council of Economic Advisers have warned that the bill would reduce the number of new drugs developed and approved, with the latter estimating that as many as 100 new drugs would not come to market over the decade ahead.

I find this approach mind boggling. Firstly, it is not immediately obvious how these cost savings would impact patients. Do we really think that the government is going to pass those savings on to patients in the form of discounts or lower co-pays, or perhaps some kind of tax reform?  Even if this were the case, the individual impact would be minimal and short term, while the ramifications of preventing 100 new drugs coming to market could be enormous for our children and their children. How many lives will be lost as a result of not bringing these new therapies to market? Is the short-term gain really worth it?

Now don’t get me wrong, there is no doubt that healthcare costs need to be curbed. Total U.S. healthcare costs have grown from $27bn in 1960 to $3.5 trillion in 2017 - equaling almost 18% of GDP – with retail prescription drugs accounting for just 10% of total healthcare spending in 2017. But is the media and political focus on prescription drug costs justified? The reality is that prescription drug costs have been relatively stable in recent years, according to CMS, with spending on retail prescription drugs growing just 0.4% in 2017. Growth in prescription drug spending has been far outpaced by increased spending on hospital services (+4.6%), physician services (+4.2%) and total healthcare spending (+3.8%). Where’s the media and political outrage around the other 90% of healthcare costs?

Putting that aside and looking just at prescription drugs, is focusing on the list prices of drugs the right thing? The prescription drug supply chain is unnecessarily complex, with multiple players involved in the supply of drugs to patients, including PBMs, distributors and pharmacies. Each of these players is taking a profit. I know from my past experience that discounts given to PBMs in order to secure a position on their formulary can frequently be 40%-50% of the list price. Drug distributors may charge smaller pharmaceutical companies more than 10% of the drug cost just to ship their products to pharmacies – far above the cost of using a service such as FedEx or UPS. Then there’s the pharmacy. CVS alone had revenues of $195bn in 2018. Media and politicians frequently focus their attention on drug prices and pharmaceutical companies, yet these companies invest $2.6bn on average to bring a new innovative drug to market. It is easy to see the value that this innovation brings. Where is the value in the rest of the supply chain? How much of a drug’s list price goes to PBMs, distributors and pharmacies?

H.R.3 does nothing to address the underlying factors that impact drug pricing. It is a purely political, populist bill. It seems to me that it is time for politicians to do their homework and try to understand the complexities of the pharmaceutical supply chain, rather than wasting time on making headlines. It is clear that radical changes are needed in the pharmaceutical supply chain to remove the complexities that enable low value-adding players to extract profits from the system.  Simplifying the supply chain not only has the potential to dramatically bring down drug costs, it also has the potential to bring drug companies much closer to their patients. That means more than better value. It means better service, better data and a better understanding of patients’ needs.