News about soaring drug prices rival health insurance premium increases for media attention to healthcare these days. Mylan Pharmaceuticals’ 461% price increase (2007-2014) for its EpiPens is the latest call-out on the heels of similar stories about drug company profit-taking.
As it turns out, the Mylan’s price increases are core in their business strategy: this year, it also raised its prices for ursodiol, a generic medicine used to treat gallstones, by 542%, dicyclomine used for irritable bowel syndrome by 400% and metoclopramide, a generic drug that treats gastroesophageal reflux disease by 312%.
The apparent exploitive pricing schemes by Mylan, Turing, Valeant and other drug manufacturers has deepened America’s dissonance about prescription drugs: we depend on our drugs and believe them safe and effective, but we cringe at their cost and growing numbers believe manufacturers put their profits above all else.
Most Americans have no idea what it costs to produce a drug and what our myriad of insurers negotiate for their portion. We can’t distinguish between large and small molecule compounds and combination therapies nor do we comprehend formulary designs and P&T committee deliberations. We don’t know how pharmacy benefits management companies operate nor how business schemes like “pay to delay”, “benevolent use” and “discount cards” actually work. We suspect our drug companies sell the same drugs cheaper in other countries and don’t know why importation isn’t allowed. And we care about our co-pays and hold our fingers hoping someone else will pay if we’re unlucky and need a big ticket drug.
As a health system, Americans spent $419 billion on prescription drugs last year: 11% of total health spending or $858 for every man, woman and child in our population. That’s double the average per capita for the 19 most industrialized nations on the planet. Total spending for drugs was up 12% from 2014; this year, forecasts are for another double digit climb. Drug costs hit the pocketbooks in almost every household through co-pays and deductibles and are embedded in our hospital bills and insurance premiums. And they’re the fastest growing health spending category in all.
Let’s be honest: drug prices are escalating because manufacturers can raise them: that simple. It’s not illegal. It’s just business. The boards of directors of these companies reward their CEOs handsomely for their success in raising prices and growing revenues: CEOs of the 14 biotech and pharmaceutical firms in the Standard & Poor’s 500 that served all of 2015 pulled down median compensation packages valued at $18.5 million in 2015–71% higher than the median $10.8 million for S& P 500 executives in all industries according to an analysis by Equilar. Their corporate PR teams extol their leadership prowess and strategic vision. But when the companies draw criticism for alleged price gouging, the CEOs are vilified as is currently the case for Mylan’s Heather Bresch, Turing’s Martin Shkreli and Valeant’s former CEO Michael Pearson. To be clear, the responsibility for pricing strategies and executive comp falls at the feet of drug company boards of directors. The buck stops there.
The drug manufacturers spent heavily last year lobbying Congress and state legislators for bills that facilitate their business models and protect their market power. And many have relocated their corporate homes offshore to pay lower taxes. It’s part of their business model, along with pricing their pills and injectables at the highest level their markets can bear. Mylan was one of many to relocate offshore via inversion, a tax avoidance strategy. It’s just business.
So what’s the answer to escalating drug prices?
At a federal level, the saber rattling by candidates who promise to reduce drug prices is usually little more than campaign rhetoric. More practically, it’s the federal government’s role as payer for Medicare, Medicaid, Veterans Health and other programs that holds the greatest potential for curtailing high drug costs. Medicare alone spent almost $100 billion for drugs last year, and increased drug costs were the reason for 17% increase in its popular Part D Prescription Drug Discount plans that serve 38 million enrollees. But it’s precluded from contracting directly with drug companies to purchase their wares, and it grants market exclusivity and control of drug pricing to the companies themselves. It’s no surprise prices increase at the will of the drug company boards. And rules governing the Food and Drug Administration’s oversight of drug discovery and commercialization is key: presumably, it can do more but to date it’s done little.
And at the state level, there’s action as well: in California, voters in November will weigh in the California Drug Price Relief Act, would require state agencies to pay the same price as the United States Department of Veterans Affairs (USDVA) for prescription drugs. In Montana, insurers have to offer at least one marketplace plan at the silver level or higher that charges only copayments in all drug tiers. And in Texas and Nevada, insurers are restricted from changing their formulary, or list of covered drugs, midway through the year and required to advise consumers of changes. And in its meeting this week, the National Association of Insurance Commissioners will consider changes to its Health Carrier Prescription Drug Benefit Management Model Act last updated in 2003.
But federal and state efforts have produced only modest success in slowing the drug price train: it’s a powerful industry that gets its way. The greatest force is grassroots activism. Case in point: Mylan routinely increased EpiPen’s price tag while its Board awarded its CEO as $18 million pay day last year. Its board saw the numbers: EpiPen produced 40 % of Mylan’s total operating surplus and a 55% profit margin (Bloomberg). But it wasn’t until a public outcry was stoked through social media that the company responded offering a $300 savings card to insured patients to help offset some of the costs. Too little too late. Presumptive Democratic Presidential nominee Hillary Clinton weighed in driving its stock down at week’s end and American Medical Association called the company’s behavior “exorbitant”.
The average price for brand name drugs increased 16% last year and 98% since 2011 (Express Scripts). One in three branded products had 20% or higher price hikes last year. Are drug prices likely to spark an Occupy Healthcare movement in the U.S.? It’s possible. In middle income households, healthcare spending has increased 26% since the downturn in 2007 compared to decreases in housing, transportation, fuel and food costs (Brookings).
Out of pocket spending for prescription drugs is a major contributor feeding growing discontent. Occupy Healthcare can happen. Drug prices are a match that can ignite the fire.
P.S. The June Pulse Night Club massacre in Orlando that took the lives of 49 and injured 50 drew national attention to senseless violence and hate crimes. Appropriately it also drew attention to the heroics of the community’s first responders and health providers. Last week, the wire services carried a story that play’s out regularly in scenarios like this: the Orlando hospitals (Orlando Regional, Florida Hospital) are absorbing the non-reimbursed costs for the victims running into millions. Many had no insurance; all had out of pocket costs.