Drugs in America

A row over Mylan’s EpiPen allergy medicine raises fresh questions about how drugs are priced

BusinessSep 3rd 2016 edition



For pharma firms, this is a worrying prospect. To date the government has done little to lower or cap spending on medicines. Across Europe governments control prices in one way or another, but American drug firms can set whatever official price they like. Their single biggest customer is Medicare, which spent a massive $112 billion on medicines for the elderly in 2014. The way it operates rewards doctors for selling costly intravenous drugs. And it is illegal for Medicare to negotiate with drug companies. Only private health insurers do so on the government’s behalf, but they are sharply constrained—for example, they are required to pay for six broad categories of drugs. The idea is that competition among insurers (and accompanying pressure to pass on savings to consumers) will restrain costs, but it has not done so. As a result America spends 44% more on drugs per person than Canada, the next-highest.

There have been plenty of rows over drug prices in the past, but matters are becoming more heated now. For one thing, insurers are obliging patients to pay a greater share of the cost for their treatment, so they notice higher prices. Ms Keeping has private insurance, but she still had to spend nearly $3,000 last year on her son’s care.

Prices are also rising rapidly. The average launch price of a range of cancer drugs, adjusted for inflation and health benefits, grew by 10% each year between 1995 and 2013, according to a recent paper from the Journal of Economic Perspectives. Prices for older, patented drugs are climbing, too (see chart). Drugs firms used to say increases were due to inflation, says Steve Miller, the chief medical officer for Express Scripts, a firm that manages drug costs for employers. Since there is now little general inflation about, he says, “it’s price gouging.” The pharma industry’s rationale, which is that brilliant new drugs are worth it, is often faulty. Some new medicines are impressive, such as Gilead’s $84,000 cure for Hepatitis C, Sovaldi, but others are not. Sanofi introduced Zaltrap, a cancer drug, for $11,000 a month, despite the fact that it offers little more benefit than cheaper drugs.

Price increases for generic drugs seem even more arbitrary. The most egregious case remains Turing, a small company that bought an old HIV drug with an expired patent and boosted its price by 5,556%. Many in the industry branded its boss, Martin Shkreli, an evil anomaly. But the case of Mylan shows that Turing was not quite the outlier it appeared to be. The larger firm’s chief executive, Heather Bresch, heads the generic-drugs lobby and is the daughter of an American senator.

In the field of patented medicines, the industry points to the billions of dollars that are required to develop new treatments. But many question whether drug firms’ profit margins, which greatly exceed those of other industries, especially in the case of biotech companies, need to be as high as they are. “There’s limited evidence to show that spurring innovation requires that level of profit,” says Ronny Gal of Sanford C. Bernstein, a research firm.

What does the doctor order?

The Food and Drug Administration (FDA) has made progress in addressing some of these problems. Last year it approved an impressive number of both generic drugs and innovative medicines. Still, it could work faster, particularly when a generic has a monopoly.

Private insurers and pharmacy-benefit managers, such as Express Scripts, are old hands at resisting high drug prices. They use co-pay schemes and other incentives to push patients towards cheaper medicines. They also refuse to pay for some new drugs when there is a reasonable alternative. This works quite well. The official or “list” prices for spending on drugs climbed by 12.2% last year, according to IMS Health, a research outfit, but net spending, which includes the rebates and discounts that employers and health insurers demand, rose by a more modest 8.5%.

A popular idea is to let the government negotiate prices of the drugs for Medicare directly with pharma firms. The idea has support from both Democratic and Republican voters. But any legislation might not pass, and it would be complex to put into practice. Furthermore, Medicare would need to be able to refuse to pay for some medicines; neither Mrs Clinton nor Mr Trump have gone so far as to suggest that. The public might object, too. The only thing that Americans detest more than an expensive drug is a bureaucrat who says they can’t have it.

Reform will of course be opposed strongly by the pharmaceutical industry, which has many friends in Washington, DC. The chief strategy employed by drug companies to rein in costs for patients has bordered on the devious. They offer coupons and other help to cover patients’ out-of-pocket costs for expensive drugs. But the prices for insurers remain high, which raises costs for everyone. Now that the threat of regulation looms, they may be willing to do better.

This article appeared in the Business section of the print edition under the headline "Seizure-inducing"

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