Illuminating Drug Pricing

Ask any pharmaceutical executive to explain how companies decide upon the price of one of their medicines and the answer you will get is, “It’s complicated.” And it is, but …

It’s complicated because there are many variables. There are always a lot of things to consider when pricing a product, be it a medicine or an automobile. It’s complicated because it’s hard to calculate value. And the value proposition is different depending on the constituency. As they say inside the Beltway, where you stand depends on where you sit.

The first thing to understand is that medicines aren’t priced in a vacuum. Pricing decisions are based on numerous meetings and tough negotiations between manufacturers and payers over a long period of time – often years before the FDA approves a product. In fact, many product programs are stopped or altered well before Phase III trials depending on these conversations.

So, when you hear about a new medicine and payers are complaining about the price, it’s (at best) disingenuous, but they get away with it. Why? Because manufacturers are uncomfortable calling out the insurance companies and PBMs with whom they must do business. The reverse is untrue in the extreme. And “disingenuous” is a polite way to say something else.

When Sovaldi came on the market, it quickly became known as “the $1000 pill.” But is anyone really paying that price? Media hype notwithstanding large payers negotiated discounts of between 20-50 % off of the list price — but these discounts were not passed on to the consumer. Government payers get even more based on mandatory rebates, supplemental rebates and best price guarantees and protections to any price increases; these include Medicaid and VA patients. For those patients without insurance coverage there are generous programs supplied by the manufacturer.

$1000 a pill isn’t reality, but it is a “grand” sound bite that makes it seem there’s only one “bad guy” – the manufacturer. That’s convenient for payers and (alas) all too believable by the general public and elected officials. And, when it comes to the pharmaceutical industry Qui tacet consentiret. All the amazing and important pharmacoeconomic arguments present a strong the case for the tremendous economic and societal value innovative products bring to the market are for naught minus an honest and explainable answer to “why is this drug so expensive.”

The first words out of the mouth of an industry (or corporate) spokesperson cannot be, “it’s complicated.” As HL Mencken quipped, “For every complex problem there is an answer that is clear, simple, and wrong.” And the media, politicians, and the public love clear and simple solutions. Drug importation comes to mind – as do government price controls.
One thing that drug pricing is certainly not is transparent. In fact, negotiations between manufacturer and payer are highly confidential. Is there a role for the patient voice? It’s certainly becoming more potent during the regulatory review process, but does it have any leverage during pricing conversations? Should it?

Another problem is that “industry” can’t sharply address the question since every company approaches the pricing question with its own process and nuance. That’s why industry organizations focus on the value of medicines. It’s a potent argument but it’s not enough. As long as drug pricing remains a black box it will obscure the value conversation.

Industry would do well to heed the words of James Thurber who said, “There are two kinds of light–the glow that illuminates, and the glare that obscures.”

It’s time to shed some open and honest illumination on the question of drug pricing. Or, to put it another way, it’s time to take off the gloves.


Peter J. Pitts, a former FDA Associate Commissioner, is President of the Center for Medicine in the Public Interest and an Executive Partner at YourEncore.

Morning Consult