Reducing the high prescription drug prices in the US

Photo by Christina Victoria Craft on Unsplash

Executive Summary

Prescription drug prices are 2.5 times higher in the US than in other developed countries. With drug prices rising at nearly three times the rate of inflation, the steep increments affect 66% of Americans. Thus, swift and decisive action is necessary. The culprits are Pharmacy Benefit Managers, who fail to live up to their nominal purpose of lowering costs for patients, and the practice of patent evergreening. The price shifting caused by the PBMs allows them to profit while patients pay the price. Loopholes in patent law have allowed the formation of monopolies and consequently monopolistic prices. Therefore, it is important to uncover the unethical practices of PBMs, reexamine the monopoly enabling patent laws, and leverage laws that are already in place (section 1498 and the Bayh-Dole act of 1980) in order to provide the drugs at lower prices.

Introduction

Alec Smith was 23 years old when he was diagnosed with type 1 diabetes. When he could no longer stay on his mother’s insurance plan, he resorted to buying Insulin with cash. He decided to ration his Insulin supply because the normal dosage was priced far beyond what he could afford. On June 27th, 2017, at the age of 26, he was found dead of diabetic ketoacidosis (a potentially fatal complication associated with a shortage of insulin). Unfortunately, his case is not unique. One in four people with diabetes has admitted to rationing their Insulin because of the cost. With prices rising at nearly three times inflation, a large percent of the 66% of American adults using prescription drugs will struggle to cope with the rising prices.

Global spending on prescription drugs in 2020 was estimated to be around $1.3 trillion. The United States alone is expected to exceed $350 billion. Among OECD (Organization for Economic Co-Operation and Developement) countries, total drug spending was approximately $795 billion, with the United States accounting for 58% of sales but only 24% of the volume. Prices in the United States average 2.56 times more than those seen in 32 other countries, and for name-brand drugs, the price is 3.44 times higher. This is exemplified by the price of the most commonly used Insulin (used to treat one in ten Americans), which is ten times more expensive in the United States than in any other developed country. While the numbers are staggering, a lot of finger-pointing has led to the identity of the culpable party becoming unclear. This policy brief exposes the shared culpability of PMBs, manufacturers, and patents. Given the helpless state that drug prices have left many patients in, it is high time that the government takes appropriate action to comprehensively address the guilty parties.

What are PBMs and what do they do?

Pharmacy Benefit Managers are a crucial part of the complex drug supply chain and play an important, albeit behind the scenes, role in determining how drugs are priced. PBMs are organizations whose primary objective is to negotiate lower prices with drug manufacturers on behalf of insurance companies and plan sponsors. They create tier-based formularies (lower tiers have a lower copayment and higher approval) which determine the coverage provided for that drug and the patient’s out-of-pocket costs. Additionally, PBMs will also negotiate rebates (direct or indirect remuneration) and discounts from the manufacturers on behalf of plan sponsors. The intended role of a PBM, therefore, is to ensure that patients receive the latest and best drugs available at the best prices while ensuring that insurance companies’ spending does not grow too quickly.

Pharmaceutical manufacturers want their drugs placed on the preferred tiers to maximize market share. With three companies (Express Scripts, CVS Caremark, and OptumRx) controlling 80% of the PBM market, drug manufacturers face high stakes when negotiating for tier placements. Realizing that they could use the tier-based system to gain financial concessions from the drug manufacturers, PBMs have used rebates to boost their earnings. Rebates paid by the manufacturers lower the net price of the drug; however, most, if not all, of the rebate is passed on to the insurance companies and PBMs instead of the consumer. Meaning that rebates are effectively kickbacks from manufacturers to PBMs. In 2016, American pharmaceutical companies reported gross sales of $462 billion and net sales of $318 billion. The difference, $144 billion (31%), was returned to intermediaries like PBMs through rebates and concessions. PBMs are causing a price shift, resulting in greater profits for themselves and insurance companies, while reducing the revenue of pharmacies and generally increasing prices for patients.

Given such a dynamic, it is conceivable that, despite their intended purpose, PBMs would favor drugs with higher rebates, even when the others have lower net costs. Unfortunately, the exact mechanisms and workings of PBMs are unclear because drug price and rebate information are kept confidential. Fortunately, using publicly available data, SSR Health LLC was able to develop proprietary estimates and found a positive correlation between rebates and list prices. A $1 increase in rebates was associated with a $1.17 increase in list price. This not only illustrates a clear financial incentive for PBMs to raise list prices using rebates, but is also consistent with statements by various pharmaceutical company heads. Novo Nordisk’s president, via the companies website, affirmed that the continued increase in list prices is an attempt to maintain profitability by offsetting the increase in rebates and concessions. This is further corroborated by the fact that payments to PBMs grew disproportionately (15%) to increases in revenue to the pharma companies (2.7%). Now that we have addressed the middle men, we must now examine how the suppliers are exploiting patent laws for the sake of profits, at the expense of patients.

Problems with patents

The purpose of a patent is to encourage innovation by rewarding ingenuity with exclusive rights and sovereignty to the inventor (for a limited time), thereby preventing others from benefiting financially or otherwise from the invention. However, in the case of prescription drugs, patents have allowed companies to create monopolies and exploit consumers. Ideally, monopolies will not last as generic competition enters the market when patents expire. However, manufacturers are able to maintain this virtual monopoly by patent evergreening (continually extending patented status period). The Insulin market, for instance, is controlled by three companies (Novo Nordisk, Eli Lilly, and Sanofi-Aventis) who, thanks to patent extensions, are able to continually increase prices without consequence. Despite being discovered in 1921, Insulin still has a patent to this day. While initial improvements to the Insulin made it more convenient and effective, recent changes are not necessarily improvements. According to Dr. Adriane Fugh Berman, new drugs are not always better because drug companies do not have to prove that the new drug is better, just that it is not worse. Even though drug patents in the US are issued for a 20 year period, manufacturers are able to exploit this loophole to receive extensions.

Since its introduction, 70 patents have been filed for Lantus, a long lasting Insulin used to treat type 2 diabetes, giving it an additional 30 years of patent protection. Sovaldi, a drug used to treat chronic Hepatitis C, is priced at $85,000 for the standard twelve-week therapy. The high price is the result of companies using patents to set a virtually insurmountable barrier to entry, thereby preventing the entry of generics and price competition. This is supported by the fact that it is competitively produced and sold for $1000 in India for the same twelve-week dose and a study has shown that competition can drive down prices to as low as $100–250.

Dr. Kevin Riggs said that “a lot of the time we get caught up in the hype”. As is the case with Insulin, newer versions have theoretical, if not actual, advantages. Due to extensive marketing efforts, we buy into those advantages. This was the case with Humulin, which cost more than twice as much as the older (animal) Insulin. Despite studies showing no significant improvements and many patients preferring animal Insulin, the older (cheaper) Insulin disappeared from the market, and only the new (more expensive) Insulin remained. Interestingly, the older, cheaper alternative, is still widely available in other countries like Canada. The discontinuation seems to be for no other reason than for manufacturers to exploit loopholes to pad their profits.

Courses of action

Given the many-headed nature of the issue, multiple policies must be implemented in tandem in order to effectively and comprehensively address the problem of prescription drug prices in the US. The first, and, if recent studies cited above are accurate, the most widespread contributor to increasing prices are PBMs. The three largest PBMs (Express Scripts, CVS Caremark, and OptumRx) are owned by three of the largest insurance companies in the US (Cigna, CVS Health and Aetna, and United Health Group respectively). Whereas their purpose is to negotiate lower prices with manufacturers, to in turn benefit the patients, their revenue model incentivizes them to act differently. The convoluted nature of the flow of payments between manufacturers, PBMs, insurance companies, and patients means that it is difficult to tell who the rebates and concessions are accruing to. However, as discussed above, the data seems to point to the fact that the PBMs, rather than the patients, are the beneficiaries. It is therefore of paramount importance to:

1. Enact policy solutions that increase transparency across the distribution system in order to better understand how rebates affect drug prices. This ensures that only those actions which benefit patients are rewarded with profit, rather than competition-hindering actions.
2. Prevent the vertical integration of medical companies, as has been done with PBMs and Insurance companies, wherein the parties that are supposed to negotiate against one another now have a perverse incentive to cooperate.

We must now address the monopoly-enabling patent practices. Policymakers fear that tampering with patents may disincentivize innovation. However, when the cost to society of leaving the patents in place for life-saving and life-prolonging drugs is so high, government intervention is necessary. Patent reforms might include:

1. Requiring a greater threshold of improvement for approval of the patent extension. The necessity, significance, and subsequent rise in price must be evaluated by a judiciously appointed panel of experts without any conflict of interest.
2. Eliminating pay-for-delay schemes, where the monopolistic patent-holding companies pay smaller generic manufacturers to delay market entry.

Apart from enacting changes to patent laws, the government can also leverage existing laws to reduce prices. One of them is the Bayh-Dole Act of 1980, which gives the government march-in rights and nonexclusive license if federal funding was involved. For instance, Sovaldi, the hepatitis-C drug priced at $85,000 for the 12-course treatment, was a product of ten years of government-funded research. Additionally, Remdesvir, a Covid-19 drug that received a $70 million grant from the government-funded NIH, was priced at $3,120. The outrageous prices patients face is not a fair reflection of the significant contributions made by the government for their development. However, it can only be used when the patent holder: (i) is not doing enough to get the product to the marketplace, (ii) fails to alleviate health or safety needs, (iii) fails to meet requirements for public use specified by Federal regulations, and (iv) is in breach of the agreement.

The NIH has rejected at least six march-in petitions including in 2004, when Abbott laboratories quadrupled the price for their AIDS drug, Norvir. The public and some congresspersons failed to sway the NIH, who claimed that march-in would not address “any health or safety need”. They further labeled marching-in an “extraordinary measure” inappropriate for resolving drug price issues. It seems reasonable that pricing drugs at such levels, making them virtually unaffordable, should warrant a violation by failing to alleviate health or safety needs. If not, the government must seriously consider revising the specificity of those conditions. Understandably, march in rights should not be misused, but in its current state it is grossly underused.

Another is 28 U.S.C Section 1498, a little-known law, that gives the government the right to intentionally infringe upon a patent if it provides the holder with “reasonable and entire compensation.” This compensation is usually in the form of a royalty set by the court. The reasonableness of the amount is determined by the amount invested in the drugs development, risk of failure, and should permit the company to achieve at least average profit. Assuming there are no errors in the estimates of investment and risk of failure, the royalty would be robust enough to prevent the disincentivization of innovation because companies can be assured of compensation for their ingenuity. This would not only circumvent the concern of discouraging investment in research and development but would also significantly lower the cost of important medications like Insulin to those who need it the most. Furthermore, unlike the Bayh-Dole Act, this is not limited to inventions funded by the government.

The US government commonly used Section 1498 to procure generic drugs and negotiate lower prices in the 1960s but stopped in the 1970s. This is often attributed to shifting political tides and the rise of ‘propietarian’ thinking about intellectual property. In 1971, when the Comptroller General was asked about the possibility of implementing Section 1498, he cited concerns over damage awards. This is ironic considering that most case would be settled, and the fact that agencies had been using it for years without clearly established precedents. The real challenge with this recommendation is determining the royalty to the patent holder. Setting a royalty too low would disincentivize private innovation. If the royalty is set too high, then its very purpose is defeated. Despite this difficulty, Brennan et al., compelled by the absurdly high Hepatitis C drug, have devised a methodology by tethering ‘patent compensation to the risk-adjusted cost of innovation’. Their recommendations allow the government to set an ex-post price thereby eliminating the deadweight loss and increasing the efficiency of investment in research. They assert that even with a large margin of error in calculating the royalty, the social gains will still far exceed any potential losses. The government must be compelled to once again revive its usage, especially considering that Brennan et al. estimate that, using their methodology, the government could pay a mere 2% of the total cost, of a whopping $234 billion, to treat the 5.2 million Americans with Hepatitis C. Their methodology could potentially provide millions of ailing Americans with the necessary drugs at a fraction of the cost.

While those recommendations are more urgent, in the long term, the government might consider Marianna Mazzucato’s suggestions for establishing an ARPA-H for health. The objective is to use public funds to crowd in health care innovation and even stimulate private sector activity, just as DARPA-H has done so well for defense and the military. The goal here, similar to the Bayh-Dole act, is to ensure that government investment in innovation is recognized when pricing the invention.

References:

• Brennan, Hannah, et al. “Login.” — HeinOnline.org, https://heinonline.org/HOL/Welcome.
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• Thomas, John R. “March in Rights under the Bayh Dole Act.” Congressional Research Service, 2016, https://sgp.fas.org/crs/misc/R44597.pdf.
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