September 5, 2017 at 5:00 am ET
In recent months, the public outcry over drug prices has been somewhat drowned out by the controversy surrounding efforts to reform the Affordable Care Act. Although the administration is still expected to issue an executive order targeting drug pricing soon, the current lull presents an opportunity to evaluate recent efforts to constrain drug prices.
In 2016, average prices for all drugs — brand, generic, and specialty — increased by an average of 8.77 percent. Although still a significant increase, 2016 prices increased by less than the over-10-percent increases seen in 2015 and 2014. Meanwhile, Food and Drug Administration Commissioner Scott Gottlieb has announced FDA efforts to facilitate generic entry into the pharmaceutical market, which should increase competition and further lower prices on many drugs.
At the same time, some drug makers are taking it upon themselves to control drug prices. Starting with Allergan’s announcement in September 2016 that it would limit annual price increases to single digits, four other drug companies — Novo Nordisk, AbbVie, Takeda, and Sanofi — followed Allergan’s example and made similar explicit commitments. Two other companies, Merck and Johnson & Johnson/Janssen, while not explicitly committing to single-digit increases in the future, have released reports showing that they have generally increased aggregate list prices by only single digits in the past. To further pressure drug makers, the powerful lobby group PhRMA has publicly criticized drug company members that have significantly increased prices and has recently changed membership rules to keep out many drug companies that have faced public scrutiny over their pricing decisions.
Drug makers’ voluntary commitments to limit price increases can have significant long term impacts on drug pricing. For example, the first company to promise single-digit increases, Allergan, raised 2017 list prices by an average of only 6.7 percent. In contrast, the average list price increase for branded drugs was 12.92 percent in 2016. This difference in annual price increases accumulates over time, with a 12.92-percent annual price increase resulting in drug prices that are twice what a 6.7-percent annual price increase would produce within 15 years.
These voluntary pricing commitments have been described as the drug industry’s “social contract.” Indeed, it is useful to think of the relationship between drug companies and society’s current and potential patients as a social contract — an understanding created for the mutual benefit of both groups that entails certain rights and duties on the part of each group. Under this social contract, patients have the right to reasonably priced, innovative drugs and sufficient access to alternative drug choices, while drug companies have the right to earn profits that compensate for the risk inherent in developing new products (it costs over $2 billion to bring a new drug to market and only 1 in 10 drugs that begin clinical trials are ever approved by the FDA). But these rights come with certain duties. Drug companies have a duty to not gouge patients with exorbitant prices, to not engage in wrongful behavior that limits patients’ access to alternatives, and to develop innovative new drugs that save or improve lives. Patients have a duty to allow companies to earn reasonable profits and to provide an environment that gives drug companies both the ability and the incentive to innovate.
Thus, the social contract between drug companies and society requires a balance: a balance of prices (not too high to gouge consumers but not too low to insufficiently compensate drug companies), a balance of competition law (not so lenient that it ignores anticompetitive behavior that restricts patients’ access to alternative drugs, but not so strict that it prevents companies from intensely competing for profits), and a balance of patent law (not so weak that it fails to incentivize innovation and drug development, but not so strong that it enables drug companies to monopolize the market for an unreasonable amount of time). These balances are critical to ensuring that the social contract is for the mutual benefit of both parties.
Unfortunately, several developments threaten to disrupt these delicate balances. Despite the efforts that several drug companies have made to curtail drug price increases, other drug companies continue to hike prices to exorbitant levels, jeopardizing patients’ ability to pay for life-saving and life-enhancing drugs. Patent challenges on spurious grounds or that exploit the anti-patentee bias of Inter Parties Review proceedings imperil intellectual property rights and decrease incentives to innovate. Antitrust lawsuits involving novel theories, such as the incorporation of innovation effects in merger analyses, threaten to preclude beneficial mergers and slow aggregate drug innovation. Constant threats by lawmakers to impose price restrictions or permit government negotiation of drug prices creates uncertainty about future profits that deters innovation and threatens patients’ access to important drugs.
Ultimately, we must expect both sides to live up to their side of the bargain in this social contract. More drug companies must provide innovative drugs at reasonable prices and, in turn, society must allow drug companies to earn sufficient profits and provide a stable environment that gives the companies the incentive and ability to innovate. If significant imbalances in the social contract persist for too long, we risk either endangering patient health outcomes or jeopardizing innovative drug treatments that save and enhance lives.
Joanna Shepherd is a professor of law at Emory University School of Law and the author of several studies examining the impact of government price controls on drug prices.
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