Capitol Insights: Soaring Drug Prices: Consumer and Clinician Perspectives and Policy Options

On November 2, 2017, in an event cohosted by UC Center Sacramento, the Philip R. Lee Institute for Health Policy Studies at UCSF, the UCSF/UC Hastings Consortium in Law, Science and Policy, and the UCSF Center for Healthcare Value, a panel of health policy experts discussed rising drug prices in the United States.

Richard Kravitz, director of UC Center Sacramento, introduced the panelists and laid the foundation for the event.  He explained that drug prices account for 10-11% of overall healthcare expenditures but are rapidly increasing and are twice what they are in the United Kingdom and are higher than all other developed nations.

Lisa Gill, deputy editor of Consumer Reports’ Best Buy Drugs, was the first panelist to speak.  She focused on drug pricing’s impact on consumers and how consumers can lower the costs of their pharmaceutical bills.  After looking at national data, she reported that $424 billion was spent on prescription drugs in 2015 before discounts, and half the U.S. adult population takes four or give prescription medications.

Furthermore, according to Consumer Reports secret shopper and survey data, one in four consumers surveyed had at least one of their drugs increase in price over the last twelve months, and that increase was, on average, about $50.  Gill reported three main reasons drug prices went up.  First, increasingly more people have high deductible insurance plans from their employers, which means that they must pay more upfront before their benefits take effect.  Secondly, insurance companies change their formularies so that drugs become costlier for the consumer.  Finally, according to the insurance industry, a few high-priced drugs increase costs for everyone.

Because of these rising costs, many consumers have not complied with their prescriptions and some have cut back on their groceries.  Gill and Consumer Reports suggest some alternatives, which you can read about on their website.  For example, in 71% of cases, when a patient asked if they could stop taking a medication due to cost, the doctor took them off at least one drug.

Dr. Adams Dudley, MD, MBA, Professor of Medicine and Health Policy at UCSF and Director of UCSF’s Center for Healthcare Value, part of the Philip R. Lee Institute for Health Policy Studies, focused on drug prices in light of his clinical experience.  He explained that sometimes new drugs are a cure, and sometimes they are merely repackaged and reformulated drugs that have been on the market for years.

One instance that exemplified this issue was the introduction of Tygacil, a new antibiotic, to the market.  The only difference between this new drug and its predecessors was that it presented a higher risk of death.  Perhaps to recoup its losses for the drug, Pfizer, the manufacturer, increased the price of the drug by 20% in 2016.  Another example that has received a lot of media coverage is the EpiPen, which went up in price by 450% from 2004 to 2016.  Even though this drug’s development costs were paid for many years before it was acquired by its new company in the U.S., the price of the drug went up extensively.

However, Dr. Dudley suggested that policy does not have remain this way and that patent laws can change.  Additionally, he described how money from the consumer and insurer gets distributed to many entities, including the manufacturer, wholesaler, pharmacy, pharmacy benefit manager, and the insurer/employer.  This means that should policymakers enact change, they need to consider the spread of this revenue when employing changes in drug pricing policy.

Dr. Dudley explained that manufacturers often rely on the claim that drug prices do not truly matter because no one pays them; when prices increase, there are accompanying discounts that equal no loss to the consumer.  Yet, when Dr. Dudley looked at the data, when the list price goes up, so does the net payment.  In the end, the consumer spends more.

He also proposed that lack of price transparency is a major detriment to our pocketbooks.  Drug companies and pharmacies do not have to disclose the costs of drugs, so it is difficult to acquire pricing information as a member of the public.  As a result, it is a part of the market that is hard to respond to and manage.

Robin Feldman, Harry & Lillian Hastings Professor and Director of the Institute for Innovation Law at UC Hastings, then closed the panel by discussing how the prices going up are a boon for pharmaceutical companies.  She explained that most of those companies’ profits are coming from increased drug prices and not new drugs.

According to Professor Feldman, new protections on drugs are making it harder to get control of prices.  For example, patents are supposed to last for a limited amount of time and then generics are supposed to enter the market to drive prices down.  Instead, pharmaceutical companies have been extending the protection cliff.  According to data from between 2005 and 2015, approximately 77% of new patents on the market were actually recycled old drugs, allowing companies to extend their competition-free zones.  Additionally, the number of old drugs receiving an orphan drug designation (which grants 7 years of exclusivity) has tripled between 2005 and 2015.

Professor Feldman explained that a few key drivers are the reason for the price increases.  First, she clarified that this behavior is not limited to a few pharmaceutical bad actors.  The industry and policy, as a whole, incentivize rising drug costs.

Secondly, formulary and rebate games drive up costs.  Most people have some form of health insurance and thus what the consumer pays is usually informed by third party intermediaries, pharmacy benefit managers (PBMs).  PBMs enter into highly complex and secret contracts with entities paying the bill, such as Kaiser and Wal-Mart.  As a result, these entities do not know where the payment goes and cannot know because of gag rules.  They are not allowed to know drug prices.  However, because of recent court cases, some details about these contracts and drug prices are slowly trickling out, and it appears that competitors with cheaper drugs are getting excluded from formularies or they are disadvantaged in a number of ways.

Third of all, consolidation of the healthcare industry is leading to higher prices.  The hospital, generic drug, and third-party intermediary industries have all seen a trend of consolidation.  For example, only three major PBMs exist in the entire country.  When there aren’t many players in an industry, consumers suffer.

Professor Feldman, however, explained that although the issue of drug pricing is usually within the purview of the federal government, the states can enact laws to affect this situation.  For example, state transparency laws could dramatically change the playing field.  The pharmaceutical industry currently thrives on secrecy.

States could require pharmaceutical companies and PBMs to disclose cost and agreement information, especially in those cases where the state is paying the bill such as with Medicaid programs.  Additionally, pharmacy substitution laws, which is where pharmacies can substitute a doctor’s prescription for a brand name drug, are state-based.  States may be able to regulate and require greater transparency for those companies that try to game the system, including through the imposition of penalties.

Another area states could regulate are patient advocacy groups.  Patient advocacy groups are often funded by pharmaceutical companies, which poses a conflict of interest for those politicians receiving campaign funds from these groups.  States could impose sunshine laws that require those donors to disclose where their funding comes from.

Finally, states could pursue antitrust actions against pharmaceutical companies and PBMs for anti-competitive behavior.  The state attorney general also has the power to allow in-state mergers to go forward on the condition of conduct remedies supervised by the state, which could in turn include transparency and competition requirements.

These proposed policy changes touch upon the difficult realm of federalism, and so states must tread carefully.  However, it is important for states to take up the mantle of responsibility, as the federal government seemingly is unable to enact change right now in the issue of substantial drug prices.

You can view a recording of the event here.

This event was supported in part by the California Health Care Foundation.