2016 Candidates on Drug Pricing: What Does it All Mean?

I’ll be splitting this series over several articles, with each focusing on a different set of the candidates’ drug pricing proposals. To read part 1 of this series on the role of pharmaceutical companies in drug pricing, click here. To read part 2 of this series on the role of health insurance, click here.

Candidates across the board are proposing sweeping changes to combat rising drug prices. What do their proposals mean and how effective could they really be?

I’ve aggregated all of the candidates’ initiatives into the groups below. I’ll begin by covering the first two and will work through the rest in future posts. Where applicable, I’ve also highlighted initiatives by President Obama.

1. Allow Medicare to Negotiate Drug Prices
2. Legalize Drug Purchases from Other Countries
3. Mandate Transparency into R&D Costs
4. Mandate Drug Pricing Transparency
5. Reform the FDA to Enhance Innovation
6. Eliminate Pay-for-Delay Patent Extension Schemes
7. Shift to a Model of Value-Based Care
8. Allow Health Insurance Companies to Compete Across State Lines

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Allow Medicare to Negotiate Drug Prices

What Does this Mean?

In my last blog post, I highlighted that Medicare is barred from negotiating drug prices with pharmaceutical companies. Rather, private plans negotiate on Medicare’s behalf. This regulation came about in the 2003 Medicare Modernization Act which finally expanded coverage of health services to include prescription drugs (under what are known as Part D plans). It was a hotly contested subject in Congress when signed into law by then-President Bush, with many arguing that government should not play a role in price negotiations.

With rising drug prices, many candidates are now revisiting this issue again. The main point of contention has been this: do you believe Medicare can negotiate drug prices more effectively than private sector payers?

Who Supports It?

President Obama*, Hillary Clinton, Bernie Sanders**, Donald Trump

*Granting Medicare negotiation powers was proposed in Obama’s 2008 campaign, a policy McCain opposed (despite supporting it in 2003 in Congress). After Obama was elected, he unfortunately had to drop the clause on direct Medicare drug negotiations from Obamacare as a concession to the strong opposition by various pharma industry groups and Republicans at the time.

**Bernie Sanders supports Medicare negotiations too, but believes it to be an extension of his single-payer system proposal whereby all U.S. citizens would be covered by Medicare.

Why Might it Work?

Allowing Medicare to negotiate directly with pharmaceutical companies can drastically enhance leverage and buying power. As I mentioned in Part 2 of this blog series, negotiating good prices is all about leverage. The more members the payer covers, the more leverage it has. This is why Canada and other single-payer countries, where the government manages its citizens’ access to drugs, have such great leverage to set low prices.

Today, buying power for Medicare is split across multiple private payers. As of 2013, 10 private payers sponsor 80% of all Medicare Part D plans, with 3 making up the top 50%. This effectively means that the ~40MM Medicare members today are split across these major private payers. Negotiating leverage of each private payer is thus reduced dramatically.

The idea is if you recombine all these members under one government-run plan, Medicare can then gain extraordinary buying power to negotiate better prices.

Furthermore, if private payers get wind of how much Medicare is negotiating for prices (i.e. if negotiated prices are made public), these private payers may “reference” that price point and demand similarly low prices, resulting in a domino-effect of lower drug prices across the country.

Why Might it Fail?

While centralizing buying power into one entity certainly grants significant leverage, it’s not immediately clear whether Medicare would be more effective than private payers in negotiating price. There are two main reasons:

• Private payers have a lot of accumulated experience and infrastructure set up to negotiate prices. Entire payer teams of doctors and health economists evaluate the strengths and weaknesses of a drug, which are used to negotiate with pharma. Overtime, payers have developed more complex formularies (i.e. co-pay levels) and access restrictions to drugs built into IT systems and into education materials with physicians. More complex contracts between payers and pharma are also emerging, which benchmark real-world drug performance to drug price (a cool subject to explore in the future). How long would it take Medicare to achieve the same level of expertise in negotiations?
• Private payers have more leeway when making access decisions. A payer decision to not cover a drug, at worst, results in bad PR. Patients would still have the option to switch to another payer that does cover a drug. For the government, denying coverage could be scandal (see controversy in 2015 in UK regarding cancer drugs). We would be entrusting the government to dictate how good a drug is, a notion that scares many. Any mistake in evaluation could be devastating to patient health.

Despite the challenges, many developed markets have, over time, developed strong capabilities to evaluate drugs and manage access. But, how long will this take and how much would the U.S. invest in these capabilities?

Legalize Drug Purchases from Other Countries

What Does this Mean?

U.S. drug prices are higher than any other countries’. This includes our northern neighbor Canada, whose single-payer, government-run healthcare system achieves relatively low drug prices.

Today, it’s illegal to purchase drugs from Canada. As a quick fix solution to make drugs more affordable, some candidates are proposing that it should be legal for U.S. citizens to purchase cheaper drugs from other countries.

Who Supports It?

President Obama*, Hillary Clinton**, Bernie Sanders***, Donald Trump***

*Supported by President Obama, but he unfortunately dropped this clause from Obamacare in the face of mounting industry opposition.

**Supports imports for personal use from foreign countries.

***Supports imports for wholesaler distribution from Canada.

****Unclear…

Why Might it Work?

To see if this could work, we can look to Europe, where purchasing drugs across countries has been legal since the 1990s. While EU countries are generally dominated by single-payer systems, drug prices across these countries still vary drastically. Differences in regulations and negotiation processes can lead to certain drugs in Germany priced >~200% than those in Greece.

With such large price differentials in the EU, countries like Germany are legally empowered to import drugs from Greece at Greece’s cheaper price. Suddenly, these drugs in Germany can be much more affordable.

Drugs traded between countries are known as parallel imports. In 2012, over $6 billion in drugs were traded between EU countries, making up for nearly 11% of the total pharmacy drug market. As the paper shows, the value of drugs imported in Germany has grown significantly since 2005.

According to some industry groups, Germany saved over €220 million ($246 million USD) in 2014 alone through parallel imports.

Why Might it Fail?

• 1. It may lead to drug shortages. While Germany may benefit from importing Greece’s cheaper drugs, Greece may not. When Germany, a country of 80 MM people, imports drugs from Greece, a country of only 11 MM, the demand can often overwhelm the supply. In fact, rising demand to import cheaper drugs has led to several, significant drug shortages in Greece where drug prices are generally lower. Such shortages can be devastating to patients who require medication on a timely basis. To combat this, Greece has had to suspend their own drug exports on occasion.
• Could this happen to Canada, a country of 35 MM, when the U.S., a country of 320 MM, starts importing drugs? In 2003 when online ordering of drugs from Canada was still a legal gray area, Canada’s government also moved to block exports.
• 2. It adds another, unnecessary middleman who takes a cut of the profits, which may limit savings. In contrast to the €220 million savings claim above, other industry groups claim that only €66 million ($74 million USD) in savings have been accrued in 2014, a small fraction of the €33 billion ($37 billion USD) German drug market. Why so little?
• Parallel imports create a new business for middleman distributors, who in this case, would help export drugs from Canada to the U.S. Such distributors may be incentivized to sell at large markups above Canada’s drug price, and just a tad below U.S. prices. Just take a look at this guy in Europe who’s made a fortune off this business.
• 3. Regulatory differences across markets may compromise patient safety. Drugs are sold under different drug quality regulations by market. How would the FDA ensure the quality of imported drugs from countries with more relaxed regulations?
• Today, distribution processes within the U.S. are well regulated and defined. To ensure minimal drug tampering, the FDA has been increasingly adamant about “track-and-trace” systems that monitor exactly how a drug travels from manufacturer to patient. Each additional middleman introduces another layer of complexity to this process. In fact, pharma has blamed cases of counterfeit and unsafe drugs on these EU middleman distributors. Will the new middlemen distributors be reliable enough? Will manufacturing regulations from the source country meet FDA standards? How will foreign drug labels or directions be translated to English?
• 4. U.S. payers may not be able to compete on price. The influx of cheaper drugs from Canada and elsewhere may not force U.S. payers to be more competitive on prices. The differing regulatory landscapes don’t make for a fair, competitive market. Instead of U.S. payers being more competitive on negotiating better drug prices, they may drive their members to buy imported, Canadian drugs, if only to reduce their own cost-burden. In this scenario, it’s possible that the U.S. becomes over-reliant and beholden to the pricing models of foreign countries.

While there are many points of contention around these policies, how real or common these fears are continue to be debated. One key difference between Sanders and Clinton is that Sanders supports high-volume, wholesaler import of drugs, which may exacerbate the above potential failure points. Clinton, however, only supports imports for personal use, which limits the potential for large middleman businesses.

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In the course of this exercise, I’ve come to grow a full appreciation for how important it will be to have detailed regulations. Even the best proposals could have the worst executions into law. While my “Why Might it Fail?” sections tend to be longer here, let that not be an indication on the proposal’s probability for success. Rather, my goal is to highlight how intricate the system is and how crucial it will be to have a candidate that can speak on details over one who speaks on broad generalizations.

Lastly, I want to acknowledge the legitimate industry concern that all drug pricing reduction proposals have the potential to hurt drug innovation. However, it’s unclear what the extent of this concern is. I will look to explore this in future posts, too.

There are several more proposals which I’ll cover sequentially over the next several blog posts. As always, feel free to leave your questions or thoughts below.