Should Drug Prices Be Capped?

1218_Drug Prices
More than three in four Americans want government to cap what drug companies can charge for certain medicines, according to a poll by the Kaiser Family Foundation. Srdjan Zivulovic/Reuters

Americans understandably want to pay less for medicines, and they are demanding government action.

More than three in four Americans want government to cap what drug companies can charge for certain medicines, according to a poll by the Kaiser Family Foundation. Fully 83 percent want the federal government to negotiate prices for drugs for Medicare patients.

But more government involvement would have serious and damaging side effects. Federal meddling contributes to making today's most advanced pharmaceuticals more expensive for patients. Giving the government more power over pricing will cause costs to rise even higher.

Nonetheless, Democratic presidential candidate Hillary Clinton has announced a plan to go after "price-gouging" by drug companies and is proposing, among other things, federal legislation imposing a $250 monthly cap on how much patients with chronic and serious medical problems would spend on prescription drugs. This "solution" would manifest in higher premiums for everyone.

The Kaiser poll also finds that 86 percent of Americans want pharmaceutical firms to disclose how they set their drug prices, reflecting public distrust toward the industry.

What they would find is that the cost of developing new drugs is stratospheric. According to researchers at Tufts University, pharmaceutical firms spend an average of $2.6 billion and 10 years to develop a single new medicine. Just 15 years ago, the average cost of creating a new drug was "only" $800 million.

Development costs have risen so rapidly in part because of decisions made in Washington.

More than a decade ago, the drug industry began funneling more research dollars into developing specialty drugs after lawmakers and regulators demanded fewer "me too" drugs—medicines that improve existing therapies as part of the evolutionary process of scientific discovery.

The backlash against me-too drugs led companies to invest in innovative medicines targeted at the toughest, rarest diseases. Now, many of these specialty drugs are finally being approved.

In 2014, 41 percent of newly approved specialty drugs were first-in-class, meaning they are substantially different than any other medicine on the market. That is double the percentage of first-in-class drugs approved in 1993-2003. Today, first-in-class medicines account for roughly 70 percent of drugs in development.

Increasingly, these innovative treatments are targeted at "orphan diseases" that may affect fewer than 0.1 percent of Americans. There are more than 450 drugs for rare conditions in the pipeline at this moment. Only two in 10 will recoup the company's investment.

The shift from me-too drugs to innovative specialty and orphan drugs is worth celebrating. But due to the smaller patient populations and higher development costs, the cost of creating the drugs must be spread over a smaller population of people needing the treatment, which increases the price.

Patients are desperate to receive these new medicines, but for too many patients, obtaining specialty drugs is a financial strain. But here, too, federal policies are a big reason why.

President Barack Obama's health overhaul requires health insurers to cover a wide range of products and services deemed "essential health benefits"—including speech therapy, smoking cessation and contraceptives. Treatments deemed "preventive" carry no out-of-pocket costs to patients.

To try to keep premium costs as low as possible while providing these mandated benefits, health insurers have taken a number of steps, including increasing cost-sharing on medicines— including specialty drugs—that are not considered "essential health benefits" under Obamacare. Basically the law forces insurers to skimp on higher-end medical treatments to pay for other expensive mandates.

Sick patients are paying the biggest price. Researchers at Emory University found that chronically ill people in individual health plans sold on the ACA exchanges pay, on average, twice as much out-of-pocket for prescription drugs each year as people covered through workplace insurance.

More than 60 percent of policies sold in the Obamacare health exchanges placed all multiple sclerosis medicines in the highest cost-sharing tier. The same percentage placed all cancer drugs from certain classes in their priciest tier. And if a medicine a patient needs isn't on an insurer's list of approved drugs, then the patient could be responsible for its full cost.

That contrasts with coverage for hospital stays where insurance pays a much higher percentage. For most Obamacare health insurance policies, spending on non-covered drugs doesn't count toward the deductible or out-of-pocket spending limit.

Distortions like these arise when federal policymakers get deeply involved in regulating the delivery and cost of medical care. Drug firms charge high prices to make back their extraordinary investment, with enough left over to offer a return to investors and fund future research to help patients desperate for new treatments for Alzheimer's, multiple sclerosis, lupus, cancers and so many other diseases.

Drugs that cost $2.6 billion to develop aren't likely to come cheap for consumers. But they don't have to be so expensive, either. Real competition that can actually lead to lower costs—for example, the Hepatitis C drug Sovaldi is now being discounted 46 percent from launch price after competing products entered the market.

And drug companies also are developing new business models to make the drug development process more efficient and less costly. Most companies continue to do their own in-house research, but they also are investing in new products incubated in smaller firms that need the heft of a major pharmaceutical company to navigate the regulatory maze and get their products to market. This means fewer dead-end investments.

We also could have more competition in the generic drug market were it not for a backlog of thousands of applications at the Food and Drug Administration. It can cost up to $20 million and more than four years to get FDA approval to make a generic drug. Faster approval would lead to more competition, which would quickly put an end to bad actors like Turing Pharmaceuticals jacking up the price of its Daraprim drug from $13.50 to $750 a dose.

House Oversight Committee Chairman Jason Chaffetz (R-UT) is demanding information from the FDA about its process for reviewing generic drug applications. The agency will receive $1.5 billion over five years from industry fees in order to speed the public's access to safe and effective generic drugs. House investigators want to know what the FDA's hold up is.

At every turn, federal policies that tamper with the health care market have made prescription medicines even less affordable. Americans are right to lament the high cost of specialty medications. But more regulation and government price controls are the wrong treatment.

Grace-Marie Turner is president of the Galen Institute.

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