February 9, 2017 at 5:00 am ET
President Donald Trump took an important step in the right direction when he recently met with pharmaceutical executives and expressed grave concern about high drug prices. Escalating prices, especially for life-saving cancer therapies, are a serious problem for patients that must be addressed.
As a businessman, the president understands that truly free markets foster competition, which, in turn, produces high-quality, lower-priced products. The president also knows that the pharmaceutical market is definitely not a “free” market, distorted by regulations and inefficiencies, which are barriers to increased competition.
Streamlining the approval of safe, effective drugs at the FDA in a more cost-efficient manner is a start. However, focusing on the drugs of tomorrow is only part of the problem. The president and Congress need to address the shadowy web of discounts and rebates that are driving the price of drugs through the roof today. What may seem like good vehicles to control prices are perversely driving drug prices higher.
President Trump and Congress need to look at the 800-pound gorillas that are sterling examples of government run amuck and are fueling higher drug prices: the 340B drug discount program and Pharmacy Benefit Managers.
The once obscure 340B program was created in 1992 to provide drug discounts to a handful of safety net hospitals. However, like often well-intentioned government programs, 340B has mutated into a pot of gold for hospitals that can make up to 100 percent profits reselling cancer drugs and other Medicare Part B medications they receive at a discount. An analysis found that the 340B program grew by 66 percent between 2013 and 2015 and is forecasted to grow to over $23 billion in sales (at deeply discounted 340B prices) by 2021, a level exceeding all 2014 Part B drug reimbursement. Further documenting the magnitude of 340B, more than 62 percent of all Part B outpatient hospital reimbursement for cancer drugs is in 340B hospitals.
Although 340B discounts are critical to the ability of hemophilia, AIDS, and other community clinics to help needy patients, 340B hospitals are not held to the same level of accountability and transparency to ensure that patients in need benefit. Hospital profits from 340B drugs can be used for anything, including construction of new buildings and funding executives’ bonuses. In fact, a study documented that 64 percent of 340B hospitals provide less charity care than the national average,including for-profit hospitals.
Proponents of 340B argue it is funded by pharmaceutical companies, so it doesn’t cost patients, Medicare, or taxpayers anything. However, any business person, like Trump, knows that discounts always get priced into products. As 340B proliferates and discounts increase to hospitals, drug companies incorporate the 340B discounts, which they are required by the government to provide, into prices. It’s no coincidence that the astronomical growth of 340B in hospitals has correlated with rising Part B drug prices.
A similar situation exists in Medicare Part D with oral cancer drugs and other expensive specialty medications. PBMs are corporations that contract with pharmacies, negotiate drug payment rates, and process drug payments. Just four PBMs now control prescription drugs for 266 million Americans — 80 percent of the market — and the rebates that they extract from drug manufacturers have exploded from 11 percent of gross drug sales in 2010 to over 17 percent in 2015.
PBMs claim that rebates reduce premiums, but that’s just part of the cost patients pay. Because seniors covered by Medicare pay full list prices for Part D drugs — before rebates are applied — they are on the hook for greater costs. The higher prices patients pay upfront push them through and out of the “donut hole” faster, resulting in higher costs for them and Medicare. Additionally, because PBMs charge pharmacy providers percentage-based network fees — up to 9 percent of drug list price — higher drug prices mean higher PBM profits. PBMs have a vested interest in keeping list prices high, while extracting more and greater back-end rebates from manufacturers to include their drugs on PBM formularies. Much like 340B discounts, these rebates ultimately get incorporated in drug prices, fueling them higher.
Trump’s goal of fixing the FDA is critical to increasing competition, lowering drug prices, and fostering innovation to find cures for terrible diseases like cancer. However, to make an immediate impact, the President and Congress should address out-of-control government-regulated discounts and rebates that are increasing drug prices, costing seniors, Medicare, and taxpayers more. Until that is done, we will not have a truly “free” market that will provide the environment for lower drug prices, regardless of FDA fixes.
Ted Okon is executive director of the Community Oncology Alliance.
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