Why we can’t stop US drug companies from charging astronomical prices

What a mess.
What a mess.
Image: Reuters/Ronen Zvulun
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In August, Turing Pharmaceuticals, a startup biotech firm founded by controversial ex-hedge funder Martin Shkreli, bought a 62-year-old drug that mostly treats infections in AIDS patients and others with suppressed immune systems. Overnight, its cost increased from $13.50 a pill to $750.

The 5000% hike resulted in widespread outrage. A condemnatory tweet by Hillary Clinton promised to change the whole drug-pricing system, sending the biotech market down yesterday.

But that market response may be a bit of an overreaction. The truth is that, because of the way that drugs are priced and paid for in America, there’s very little that can stop companies from suddenly raising prices in this way without justification.

Tough to negotiate privately 

Medicare, the United State’s national social insurance program, is prohibited from directly negotiating prices with manufacturers. Even after waves of consolidation, private insurers and pharmacy benefit managers can only really drive down prices for new and expensive branded drugs when there are near-identical competitors from different drug makers.

Still smarting from massive public outrage, lawsuits, and backlash to experiments with more aggressive managed care in the 90s, private payers are wary of denying extremely expensive treatment to consumers. And since consumers usually don’t pay the majority of the cost of the most expensive drugs, they’re not very price sensitive.

“In the US, the idea of price controls is anathema, and individual private payers don’t have the clout to lower prices,” Wharton professor and health policy expert Patricia Danzon told Quartz.

“What they can do depends on patients sharing costs, which is capped under the Affordable Care Act. It really isn’t a viable system. It leads to bad medical care, and it isn’t effective at controlling costs. It’s where we’ve boxed ourselves into, and we’re left with prices going up.”

Beyond public control

The centerpiece of Clinton’s new plan to address these issues would require drug makers spend a certain amount of their profits on research and development. This could affect companies at the margin that buy up other drugs, mark up prices, and spend almost nothing on research, but details were scant, and the plan fails to address many of the issues driving prices up.

The proposal also suggests reducing the exclusivity period for biotechnology drugs, to get generics to market more quickly. Suggested caps on out-of-pocket costs would halve the ones currently mandated by the Affordable Care Act, but this could make people even less sensitive to the cost of expensive treatments and actually increase overall spending.

Analysts are skeptical that Clinton’s proposals would result in the sort of robust price controls that have worked in other countries.

Allowing the government to use its massive purchasing power to negotiate with drug makers—one of the most potentially effective parts of Clinton’s proposal—has been a longtime favorite of Democrats. But it has proved pretty much impossible to make law because of the strength of the pharmaceutical lobby, which spends more to influence lawmakers than any other industry, and due to Republican opposition. Republicans have historically rejected these sorts of proposals, and are likely to maintain control of the House of Representatives.

“Regardless of what any Democratic candidate says about drug pricing, his or her ability to make that a reality as president is close to zero,” Evercore ISI political analyst Terry Haines said in a note to clients.

Clinton’s fellow Democratic presidential candidate Bernie Sanders has proposed a bill that lowers barriers to importing cheaper drugs from Canada, in addition to allowing the government to negotiate. It is unlikely to make any headway in a Republican-controlled Senate.

The cycle of outrage

This is not the first cycle of outrage on rising or excessive specialty drug prices in the US. Gilead’s staggeringly profitable new hepatitis treatments, which cost over $80,000 for just a few weeks treatment, caused widespread protest last year and led to congressional hearings.

And its not just new branded drugs that are causing concern, though they are the biggest.

Increasingly, older off-patent drugs (paywall) that treat rare diseases and have tightly controlled distribution or manufacture that make generic alternatives tougher to find are being snapped up in order to raise their price dramatically. Shkreli used the same tactic repeatedly at his last company, Retrophin. There’s a gap in the generic market that’s proved easy to exploit.

At the very least, Clinton’s proposal might strike up a much needed debate. The very fact that markets reacted so strongly indicates that there’s a real fear that current trends in specialty pricing might be unsustainable. But outrage aside, there’s currently nothing to stop Shkreli and people like him from doing this over and over again.