February 9, 2015 at 5:00 am ET
America’s pharmaceutical industry is engaged in discovery and innovation that border on the unbelievable.
Cutting-edge technologies now offer the potential to end cancer, replace defective genes, and even re-grow organs and tissues to replace damaged ones. And, given the pace of progress in the pharmaceutical industry, many ideas that now seem far-fetched could come to fruition sooner than we expect. But the real question lies not in the potential of these new drugs and treatments but in whether we will pay for them.
While the technology has never been more promising, the outsized promise of these new treatments appears to come with an outsized price tag. A growing number of policymakers, insurers, and doctors have come to believe that these costs are a function of greed rather than of the enormous expense and risk involved in developing new drugs. To solve this problem, opponents of market pricing are demanding that the government step in to make the system more “rational” — presumably through heavy-handed price controls.
The tempest over Gilead Science’s breakthrough Hepatitis C drug Sovaldi provides a good example of the debate cropping up over the cost of new pharmaceutical innovations. Two United States senators, Oregon Democrat Ron Wyden and Iowa Republican Chuck Grassley, even sent a letter to Gilead demanding an unprecedented amount of information on the company’s internal pricing methodology, development budgets, and marketing. The senators write that Sovaldi’s pricing “has raised serious questions about the extent to which the market for this drug is operating efficiently and rationally.”
The letter appears to have been intended as a warning to the entire industry against charging “too much” for its new drugs; it threatens greater government interference in drug-pricing decisions if prices aren’t reduced to a level more to the senators’ liking. In their letter, however, the senators ignored some of the fundamental drivers of the high cost of many new medicines, most importantly the heavy cost of research and development, high failure rates, and the limited time frames for recouping initial investments.
High drug costs can present real problems for some payers and patients – at least in the short term – but reforming the regulatory path that medicines must travel to market, while preserving the free marketplace itself, is the best way to contain costs while promoting life-saving innovation. Perhaps the most significant step policymakers can take involves the FDA. The existing drug-development and approval paradigm is fundamentally broken, contributing significantly to “outsized” drug costs.
The basic FDA approval process represents an enormous all-or-nothing gamble by investors and companies. This gamble exists for both novel technologies, where regulatory standards may be unclear (or non-existent), and more established treatments, such as drugs for diabetes, where regulatory requirements have become increasingly burdensome and expensive.
A more rational framework would boost industry productivity by doing several things: spread costs and profits over more approved products and over longer effective patent times, sharply lower drug-development costs, better target medicines to those most likely to benefit, and increase the overall value proposition that new medicines deliver to the entire health-care system. Doing so would help cut the cost of drugs, and, most important, patients with serious and life-threatening diseases wouldn’t have to wait in excess of a decade for access to better therapies.
We would see greater competition as more products get approved more often for the same indication. After Following Gilead’s launch of an updated Hepatitis C combination therapy, Harvoni, last October, drugmaker AbbVie received FDA approval just two months later for a competing product (V-Pak). The two companies have since been in a pricing war for “preferred” status on insurers’ drug formularies. In fact, prices have come down so far that one pharmaceutical benefit manager, Minnesota-based Prime Therapeutics (which covers 25 million patients for Blue Cross and Blue Shield plans in nearly two dozen states) has elected to cover both combination drugs. Once generics enter the market – typically after about 10 years – prices will plummet even further.
Thankfully, there are signs that Congress is poised to address roadblocks to innovation in ways that would accelerate and streamline drug development through the bipartisan 21st Century Cures initiative in the House (led by Energy and Commerce Chairman Fred Upton and Congresswoman Diana DeGette), and on the Senate side (Innovation for Healthier Americans) by Senators Lamar Alexander and Richard Burr. The White House is jumping on the bandwagon too, with a proposed Precision Medicine Initiative.
The Gilead-AbbVie price war should be a lesson that markets, properly structured with smart regulations and incentives, will best encourage innovative new treatments while constraining prices through value-based competition. Indeed, the most expensive thing we could now do is to discourage innovators from investing in the next generation of treatments and cures.
Innovative drugs surely come with costs – at least in the short term – and the industry and government regulators should face concerns about drug pricing directly. Government and industry should embrace the market that so many critics pillory and reform it, promoting competition and faster approval of drugs from the lab to the pharmacy.
Slashing the time and cost required to develop innovative drugs and diagnostics will accelerate their ability to compete not only with each other, but with the physician and hospital services that account for the lion’s share of America’s $3 trillion health care tab.
When it comes to drug pricing, as in so much of our economy, the market is not the problem but the solution.
This article is adapted from Reforming Drug Pricing, in the Winter 2015 issue of National Affairs.
Paul Howard, Ph.D., is a Manhattan Institute senior fellow and director of the Manhattan Institute’s Center for Medical Progress