Legislating Drug Prices

Loyal readers of my blog (both this one and my prior blog for St. Luke’s Health System) know that I try very hard to present health care issues fairly, objectively and from a non-partisan viewpoint. I try to outline both sides to these issues, state the pros and cons, and write my analysis in a way that non-medical people can understand and make their own judgment. However, at the end of these pieces, I also state where I come down on the issue, because some readers want to know. But, I am very careful to be clear when I am presenting facts and when I am presenting opinion.

I don’t know if I can do it this time. I won’t have any problem being objective about the specific proposals. Frankly, while I do think one is better than the others, if I were asked to solve the drug pricing problem (and I haven’t, but Mr. President, you know how to reach me), I would propose a completely different scheme.

The problem that I will have is in not rolling my eyes and making faces at some of the utterly ridiculous things being said as reasons some legislators do not want to support any regulation of drug prices. So, I am going to give it a try, but my apologies in advance.

Well, I am going to fail right off the start. I have to editorialize about the crazy drug pricing methodology that is being embraced by drug manufacturers and academicians. There is no need to get into all the complexity to explain the problem of it. Let’s just understand that this new and prevailing drug pricing philosophy is that the drug price should be tied to the number of Quality Adjusted Life Years (QALY). This measurement accounts for both the quality and quantity of life added by a treatment. If a treatment were to cure a disabling disease that generally took the lives of children, but those treated children would now lead normal lives with normal adult life expectancies, then the QALY would be very high. The QALY is then multiplied by a value of a year of added life and the number can be quite high, which explains why we now have medications on the market with six and seven figure price tags, including one for which a course of treatment costs more than $2 million.

Now, at first blush, you might think that a drug that cures a bad disease and allows a child to live a normal life expectancy should be priced high. But, the absurdity comes in when you apply this same pricing philosophy to anything other than drug prices. For example, if a child has a perforated appendix and is not operated on, a certain number of those children will die. Does that mean an appendectomy should be priced at millions of dollars? Heat and electricity can be life-saving to a child during the winter. Should our power bills be in the hundreds of thousands of dollars? What about water? Winter coats or blankets? In all other industries, the price for products and services has some correlation to cost. The reason drug manufacturers can think about pricing drugs in the hundreds of thousands or millions of dollars? Health insurance.

Now, if I did not convince you that pricing drugs (or anything else for that matter) based on QALYs is crazy, then consider this. Asking two questions has helped me immensely in setting out compensation methodologies, health care policy positions and making many other decisions. What incentives am I creating, and are they aligned to my objectives? Knowing the rules, how will people do end-runs around it to maximize their position to my detriment?

In this case, let’s just think about the first question. What incentives does this pricing methodology create? It incentivizes drug makers to place their investments in diseases of children that limit their life expectancy, because then the QALY can be quite high. Now, that is a good and worthwhile incentive. Nothing has broken my heart more than children who die of various diseases. But, let’s look at the second part of that first question – are those incentives aligned with our objectives? I want cures for children, but I would also like research into and development of cures for dreadful diseases like Alzheimer’s. If a huge part of the drug price is the number of years of additional survival, how much effort is going to go into developing a treatment for Alzheimer’s disease when the average age at diagnosis is 80? Additionally, we are facing a problem right now of drug makers not investing in antibiotics, at a time when we are seeing infections emerge whose causative organism is resistant to all or most all currently available antibiotics.

Okay. Enough editorializing for the moment. Let’s look at some of the current proposals.

Not surprisingly, Republicans and Democrats have very different approaches to this problem. The one approach that has general agreement is to cap seniors’ out-of-pocket spending under Medicare drug plans[1]. Currently, there is no limit on how much a senior might be required to pay for medications pursuant to co-pays and co-insurance. This is very important because surveys suggest that nearly 1 in 4 seniors struggle to pay for medications, and that due to costs, about 29 percent do not take their medications as directed, not filling prescriptions, skipping doses, cutting medication doses to spread their medication out more, or substituting their medication for something else over-the-counter.

Limiting seniors’ medication costs and ensuring that seniors take their medications as prescribed serves a very important policy objective. Given that medications are the mainstay of therapy to control congestive heart failure, diabetes, high blood pressure, asthma and many other conditions that if not controlled result in a high rate of hospital admissions, subsidizing the cost of these medications is far more economical than paying the much higher costs of hospitalization.

The House bill (Democratic)[2] would require the Medicare program to negotiate the prices of at least 35, but up to 250, prescription drugs a year[3] and cap the prices Medicare would pay for those drugs based on the prices paid in other countries[4]. The price negotiated by Medicare would also be available to commercial insurers, and drug-makers who declined to agree to a negotiated price would be subject to an excise tax of up to 95 percent of the gross sales of the medication. President Trump, early on, had given his support for this kind of approach pointing out that Americans were subsidizing the costs of drug development for the world. More recently, he has indicated that he would not support this bill. Given that Leader McConnell refuses to have hearings or a vote on this bill, it is DOA to the Senate.

The other significant bill on drug pricing comes out of the Senate Finance Committee[5] and is championed by Sens. Grassley (R-IA) and Wyden (D-OR). This bill would penalize drug-makers that raise their prices faster than the rate of inflation. As a point of reference, the current inflation rate is around 2 percent, and drug-makers typically announce drug price increases twice a year, with the first being in January and those price increases for 2020 averaged around 6 percent (Pfizer increased prices on 40 drugs by more than 9 percent). Unfortunately, there are only about ten Republicans in the Senate who have signed on to this bill and Sen. McConnell has thus far refused to put the bill before the Senate for consideration.

Okay. Prepare yourself. I am going to begin editorializing again. Republicans have objected to “price controls” and interference with a free market as reasons, including allowing the Medicare program to negotiate prices of drugs it pays for, not to support either bill. There is just one problem – the pharmaceutical industry is not a free market[6]. It is also ironic that while many have objected to price controls being applied to drug pricing, they have supported price controls in the context of surprise billing (that’s a whole other story).

In any other industry, when the government intentionally creates a monopoly or establishes a single provider of a service (much as it does with pharmaceutical companies when it grants them exclusivity through a prolonged period of patent protection), the government also imposes regulated rates. With the tremendous lobbying power of the pharmaceutical industry, Congress has refused to impose any rate regulation. Congress is even balking at limiting pharmaceutical companies from raising the price of drugs in excess of inflation. Instead, a number of pharmaceutical companies came out and stated that they would limit price increases to no more than 10 percent – that is five times the current inflation rate. And, these are drugs for which there is no substitute or competitor.

Now, the other more incredulous argument is that we cannot allow Medicare to negotiate drug prices because we must preserve a free market. I will admit right away that I am not an economist. But, isn’t negotiation the very hallmark of a free market? As far as I know, the sales of cars and houses occur in a free market. Would these legislators seriously want us to believe that they would just go in and offer the sticker price on a car or the listing price on a home (okay, maybe they would have to in Boise) without any negotiation?

I just wish we could have serious policy debates and negotiations in Congress. I would respect legislators who would just be honest about their opposition to these bills, rather than proposing a ludicrous rationale or insulting the intelligence of voters. If you want to argue that supporting these bills would inhibit development of new drugs, then we can have a rational debate about that. If you want to argue pharmaceutical companies are a powerful driver of our economy and we don’t want to do anything to hurt their earnings or their stock prices, okay then; lets discuss that. If you even just want to be honest and say that it is expensive to run campaigns and therefore you are dependent upon pharmaceutical company financial support, or alternatively, your re-election prospects would be hurt by negative ads sponsored by pharmaceutical drug companies against you if you did not support them; at least your honesty would be refreshing. But, when you say silly things like we have to protect the free market for medications, then we just don’t know whether you are clueless or whether you think we are.

In my next blog post, we’ll consider another proposal to control drug prices that is unlikely, in my opinion, to work – drug importation from other countries.


[1] The cap would be $2,000 under the House bill and $3,100 under the Senate Finance bill. To give you an idea of the problem being addressed, more than 1 million Medicare beneficiaries cross the catastrophic threshold for prescription drug costs every year, which in 2019 was $5,100 in out-of-pocket costs.

[2] The Lower Drug Costs Now Act of 2019 (H.R. 3).

[3] Under current law, the government is actually forbidden by legislation passed in 2003 from negotiating the prices of medications for the Medicare program.

[4] To be eligible for negotiation the medication would have to meet criteria of being costly and not having a competing generic version. In addition, insulin is specifically excluded from eligibility for negotiation. The countries whose drug prices would be averaged to set the benchmark would be Australia, Canada, France, Germany, Japan and the United Kingdom.

[5] S 2543. The Prescription Drug Pricing Reduction Act of 2019.

[6] Evidenced by federally-granted periods of exclusivity and patent protections that can last a number of years to 20 or more years and the statutory prohibition on the federal government against negotiating prices of medications for the Medicare program and on states for negotiating the prices of medications for the Medicaid program.

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