Drugmakers’ Pricing Power Helped by Exclusivity Rights: JAMA

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The U.S., which spends more on drugs than any other country, might contain costs by limiting market exclusivity for brand-name medicines and changing coverage requirements for government health plans, some doctors argue.

Although brand-name drugs account for only 10% of all dispensed prescriptions in the U.S., they make up 72% of drug spending, a trio of Harvard-affiliated doctors note in a paper published today in JAMA.

Brand-name drugs are only 10% of all prescriptions in the U.S., but make up 72% of drug spending Click To Tweet

In a “special communication,” the authors conclude that more stringent requirements for U.S. patents and other market protection–effectively speeding up the rollout of lower-priced generic medicines–are “the most realistic short-term strategies” to deploy against rising drug prices.

The doctors are seeking to shape the growing debate on how to contain the surging costs of prescription therapies. Many drug industry critics have discussed giving Medicare, the largest U.S. health insurer, the power to negotiate prices with drugmakers–a proposal that has been echoed by presidential candidates Hillary Clinton and Donald Trump.

But the JAMA article contends that empowering Medicare is only part of the solution. It focuses instead on an area that has received little attention in the dialogue over drug prices: how branded drugs enjoying federal market protection drive the bulk of U.S. spending on medicines.

Between 2008 and 2015, prices for the most commonly used brand-name drugs surged 164% in the U.S., far outstripping the 12% gain in the consumer price index, which measures what people pay for retail goods, Dr. Aaron Kesselheim of Brigham and Women’s Hospital and Harvard Medical School in Boston and colleagues point out in the paper.

“High prescription drug prices in the U.S. are due to a combination of the market exclusivity given to pharmaceutical manufacturers by patents and other U.S. laws that protect them from direct competition for years–potentially over a decade–after the drugs are first marketed, as well as limitations on payers’ ability to negotiate effectively either because they are restricted to do so by law or because there is not enough good comparative effectiveness information available,” Kesselheim said.

“Between 2013 and 2015, net spending on prescription drugs increased approximately 20% in the United States, outpacing a forecast 11% increase in aggregate health care expenditures,” the Brigham and Women’s doctors wrote. “Prescription medications now comprise an estimated 17% of total healthcare costs, and prescription medication coverage constitutes 19% of employer-based insurance benefits.”

To assess the forces driving drug costs, Kesselheim and colleagues reviewed research published from 2005 to 2016 exploring the sources of drug prices in the U.S., the consequences and possible solutions.

In the U.S., per capita spending on prescription drugs was $858 as of 2013, more than twice the $400 average for 19 other industrialized nations, the analysis found. List prices for the top 20 drugs by revenue help explain this gap.

Combined, average list prices for these drugs were three times greater in the U.S. than in the U.K. Drug prices are higher in the U.S. than in the rest of the industrialized world because manufacturers set the prices.

In many other countries, regulators negotiate prices or reject coverage of medications when they consider the price too high based on the amount of benefit patients might get from the treatment.

High prices can reflect the increasing cost and complexity of drug development, Kesselheim and colleagues concede. High prices were once limited mostly to brand-name drugs for rare diseases. But drugs for common medical problems like diabetes and cancer now have high costs, too.

Many new cancer medicines are debuting with price tags exceeding $100,000 for a course of therapy, the authors note. And the average price of insulin for diabetes has surged 300% from 2002 to 2013.

Doctors, too, are part of the problem because they don’t necessarily consider costs even when comparable alternatives are available at wildly different prices, the authors note.

This problem persists in part because drug costs can vary by health plan and not all patients have the same out-of-pocket fees, noted Stacie Dusetzina, a pharmacy researcher at University of North Carolina at Chapel Hill who wasn’t involved in the study.

“If the provider and patient had reliable information about the price of different treatment options then they might consider prescribing or using the less expensive drug–saving both the health system and, possibly the patient, money,” Dusetzina said.

One fix to this might be an idea known as value-based pricing, which weighs both the cost and benefit of medicines. This approach would bind appropriate prices to lower costs for patients, because higher out-of-pocket fees are generally driven by steep price increases, noted Dr. Peter Bach, director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center in New York.

“But to be clear, I believe that we should not put patients in the position where they are being asked to make therapeutic tradeoffs against their own economic ones,” Bach, who wasn’t involved in the study, added.

Dr. Steven D. Pearson, president of the Boston-based Institute for Clinical and Economic Review, said the JAMA article shows how changes in market protection–along with moves to generate more data on comparative effectiveness of medicines–can fuel the kind of competition that will help control prices.

“There’s no one silver bullet,” Pearson said. “Working on the patent side would not fix everything. But it’s part of a set of approaches that could create more competition.”

Kesselheim and his colleagues called for changes in the criteria used by the U.S. Patent and Trademark Office for issuing secondary patents based on “clinically irrelevant” changes to their medicines. They also called for stricter enforcement of existing laws that allow pay-for-delay arrangements to be treated as antitrust violations.

“I have discussions all the time with my patients about drug prices,” Kesselheim said, adding that many worry about affording rising co-pays and deductibles even if they have insurance coverage. “This is definitely an issue that’s on the forefront of patients’ minds.”

Steve’s Take: Pharmaceutical companies’ power to raise prices is firmly intact despite loud complaints from health insurers, intense scrutiny by U.S. lawmakers, and steadily increasing media coverage about rising prescription drug spending, as pointed out by the doctors in the above JAMA paper.

More than two-thirds of the 20 largest pharmaceutical companies said price increases buoyed sales of some or most of their biggest products in the first quarter, according to a Wall Street Journal review of corporate filings and conference-call transcripts.

Shares of many drugmakers first slumped (then recovered) this year, partly because of investors’ concerns that Congress could implement new price controls, or that public scrutiny would cause companies to voluntarily ease price increases.

So far, however, Congress has shown little willingness to address the issue, and many drugmakers have continued to raise prices. The Harvard-affiliated doctors now suggest that price increases–although moderate ones may be acceptable–might be reined in by shortening government-sanctioned market exclusivity periods.

The upshot is that in a period of low inflation and sluggish economic growth, drugmakers’ power to raise prices still exceeds most other industries. And though it’s long been common for companies to gradually raise prices on drugs after launching them, the magnitude and frequency of the increases have grown in recent years.

Prices received by manufacturers of U.S.-made pharmaceuticals rose 9.8% from May 2015 through May 2016, the second-highest increase among the 20 largest products and services tracked by the Bureau of Labor Statistics’ Producer Price Index. Investment services ranked first “You can’t take the price of the iPhone…up 10% a year,” said Geoffrey Porges, a Leerink Partners LLC biotech analyst.

A fragmented U.S. healthcare market, combined with a complex system of drug discounts and rebates, makes it difficult to accurately track U.S. drug prices. Companies often describe in regulatory filings the factors behind product sales growth or declines, including all the rebates and discounts they give insurers and pharmacy-benefit managers often extolling these discounts off their list prices as evidence of a competitive marketplace where powerful health insurers check their pricing power.

To be sure, drugmakers’ pricing power in the U.S. isn’t absolute. State Medicaid programs, which provide health insurance to the poor, limit drug-price increases to the rate of consumer inflation. And drugmakers have had to increase the rebates they pay commercial insurers for drugs in competitive disease areas, such as hepatitis C and diabetes. But for many companies, raising prices is still a significant driver of growth.

Steve's Take: I doubt legislation to shorten patent protection will prevail anytime soon Click To Tweet

I seriously doubt that legislation to shorten patent protection and the associated exclusivity rights for newly minted and approved medicines will prevail anytime soon, particularly given the time-honored tradition here in the U.S. of making the discovery of new, often life-saving medicines, financially rewarding.

And the assumption that the many breakthrough after breakthrough discoveries will continue ad infinitum could, in fact, prove a bit too optimistic–despite all the recent, exciting treatments involving, for example, the use of our own immune systems.

Approaches to reign-in our national healthcare spending are demonstrating progress, especially by shifting patients out of the acute-care into the sub-acute and, in particular, the home-care setting. But bringing drug spending down significantly anytime soon? Sounds laudable, but…I wouldn’t bet on it.

Contributions to this story: Boston Globe; Reuters