Today's Managing Health Care Costs Number is $325 billion
We have a drug price crisis in the United States. Total cost of pharmaceuticals is now 1/5 of costs for many employers, and we routinely see new drugs priced at $100,000. Some of these drugs are lifechanging (like new treatments for melanoma and hepatitis C cures), although others are only marginal improvement over existing less expensive therapy (many other cancer drugs). Last year drug spending climbed 9% to $325 billion; it climbed 12% the previous year. Source
Donald Trump has promised to unleash the market by slashing regulations on drug companies, but has threatened to tame drug prices through competitive bidding and his bully pulpit.
Let's look at the underlying causes of high drug costs to consider what is likely to happen during the Trump administration.
- Innovation: When a company produces a product that meets a real need - there is value to that - and the company will general price its product to reflect its value to purchasers.
- Chronic disease: Our population is getting older and we have more obesity and diabetes - so the prevalence of chronic disease is up. The pharmas have been effective at producing drugs that address chronic disease - so "customer retention" is high - and lifetime cost of a chronic medication is almost always more than for acute self-limited treatment .
- Government policy: The US is the only high income country that doesn't employ either price regulation or monopsony purchasing to keep pharma prices in check. Pharmaceutical companies raise prices because they can
- Supply chain: The supply chain in pharmacy is a mess. The pharmaceutical companies sell to wholesalers who provide drugs to local pharmacies; pharmacy benefit managers (PBMs) negotiate prices on behalf of employers with the pharmaceutical company. "List" prices are irrelevant - rebates are paid form the pharmaceutical company to the PBM in an utterly opaque manner - so determining the true price paid for a drug is maddeningly difficult.
- Moral hazard: Insurers have employed cost sharing as a way to encourage patients as consumers to purchase drugs prudently. But the pharmas provide coupons and even give drugs away to avoid lowering their "list" price, and fund dedicated charities to decrease patient cost share again to protect their price
- Social norms: CEOs want their companies to be successful, and given mostly fixed costs of producing any given drug, price increases are the best way to gain higher margin
The Trump administration's proposals to decrease FDA regulation are not likely to decrease the cost of drugs. The FDA is pretty quick with its reviews at this point - and regulatory issues are not the main development cost. If we allow marketing of medicines with unproven efficacy that will likely increase cost - as they will all have a price tag, and some won't work and some might even be harmful. The use of rebates and coupons makes it unlikely that patients will be able to be true "value" purchasers.
There appears to be no chance the FDA will initiate review of cost effectiveness of pharmaceutical products at this point. The FDA could allow importation of a drug from other "trusted" countries when there was a shortage or when a medication was viewed to be priced too high in the US - and this could help keep a lid on prices. This will be less effective for single source brand name drugs, where the manufacturer could limit supply to other countries where the price is lower.
Some regulation of the supply chain with full disclosure of rebates could make a difference - although that's regulation we're unlikely to see. I also think we're unlikely to see Medicare Part D amended to allow CMS to do bulk price negotiation. This works well for the Veteran's Administration -but that would be increasing the government role, which I see is unlikely.
Which brings us to bully pulpit. Pharmaceutical companies (just like health plans or hospital systems) are sensitive to their public image -and they don't want to be subjects of Donald Trump's angry early morning tweets. I think the invective around drug prices is likely to have some impact, although I worry there will be a few high profile price rollbacks (like Mylan's Epipen) and the overall costs of pharmaceuticals will continue to soar.
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