Oct. 18 2016

How to Bring Drug Prices Back to Earth

Are sky-high drug prices justified? In the heat of the election season, Bhaven Sampat offers his perspective on balancing innovation and access.

Outrage was nearly universal in August when pharmaceutical giant Mylan hiked the price of its EpiPen to more than $600—four times its cost only a decade ago. Among the company’s few defenders was Martin Shkreli, reviled as the Pharma Bro, who came under fire for raising the price of Daraprim, an old antiparasitic drug, no less than 1000 percent.

With a presidential election on the near horizon, candidates are exploring what to do about the high cost of prescription medications. For six consecutive years, drug prices have seen double-digit increases. As the candidates ponder solutions, economist Bhaven Sampat, associate professor of Health Policy and Management, shares his thoughts on how various policies provide help at a reasonable price.

When it comes to prescription drug policy, Republican candidate Donald Trump favors removing a wall, allowing people to access cheaper medicines from Canada. According to Sampat, the idea is traditionally the bailiwick of the left, not the GOP. Indeed, Hillary Clinton supports the policy too. The candidates also agree that the government needs to do more to negotiate drug prices—although any real change would likely only take place if the Democrats regain Congress. Negotiation under Medicare Part D has been banned since the benefit became available in 2006, and it would take new legislation to change the policy. He agrees that negotiation “is the surest way to lower drug prices.”

But another Clinton proposal to create an expert taskforce to decide whether the price of a drug is fair leaves Sampat skeptical. In 2011, Sampat convened 20 policy experts to experiment whether they could agree on what “affordability” meant in the context of the Affordable Care Act. Short answer: they couldn’t. He thinks the same would happen with drug pricing. “I have no idea how you’d implement the reasonableness standard. I don’t think one could implement this in a way that was transparent, didn’t have severe unintended consequences, and wasn’t subject to lobbying.”

In addition to more negotiation, the other main way to reduce drug prices is through more competition, says Sampat. The Hatch-Waxman Act of 1984, which created the modern generics industry, has helped make drugs affordable for millions of Americans. “Generic competition is the big win over the past 30 years.” The recent generic price hikes—exceptions to the rule—are due to limited competition for certain generics: for different reasons, both EpiPen and Daraprim enjoy effective monopolies.

To promote generics, Clinton supports better funding for the Food and Drug Administration’s Office of Generic Drugs so they can catch up on a multi-year backlog on drug approvals. “This policy, and re-importation for generic drugs on shortage,” he says, “seem like a step in the right direction.”

Clinton also pledges to prohibit “pay for delay” arrangements where branded drug companies pay generics who challenge their patents to drop the suits. The prohibitions, Sampat says, would be a positive step. His previous research (influential in a 2013 Supreme Court case, FTC vs. Actavis) suggests that these settlements are typically on “low-quality” secondary patents that would be overturned if the cases were not settled. While the law generally likes settlements, with pay-for-delay consumers are denied the benefit of early generic entry.

R&D Costs (and Who Pays Them)

It’s practically a cliché: When challenged about high drug prices, pharmaceutical companies say the drugs wouldn’t be possible without massive investments in research and development. Back in July, President Obama authored an article in JAMA—a first for a sitting present—in support of greater disclosure, and added just such a proposal in the 2017 budget he sent to Congress. But so far, reliable numbers on how much drug companies pay to come up with a new drug are elusive.

There are real doubts about current estimates that a drug costs more than $2 billion to develop, in part because the figures are based on proprietary data provided to industry-funded academics. While Sampat shares these doubts he is uncertain that transparency will do much. “Whether $800 million or $2 billion misses the point,” he says. “It’s a big number: there’s no doubt that it’s costly to come up with a new drug that helps people and doesn’t kill them.” Despite what drug companies and their critics suggest, he is skeptical that drug prices have much to do with R&D. “They will charge whatever the market will bear,” he says. “If R&D is zero or 2 billion, if they can charge $600 a pill, they will.”

One common critique of drug companies is that much of their development costs is supported by the National Institutes of Health (NIH). But Sampat’s research demonstrated that the public sector was directly responsible for only one in five important drugs approved between 1988 and 2005. While there appears to be a much larger public sector role through avenues like basic research and training students, he says it would be a mistake to say we don’t need private innovation incentives since the public sector does it all. He is uncertain about how another Clinton proposal—to “rebate” the public sector for its input—could be operationalized, since it is so difficult to trace intellectual influence.

For Sampat, the bottom line for pharmaceutical policy in the U.S. is a tradeoff between innovation and access at a reasonable cost. “On the left, including many in public health, there are a lot of people who want to run away from that essential tradeoff—by assuming that R&D is cheap, or the government does most of the work. Economists are more comfortable with the idea that we can’t have it all.”