Policy Issues and Solutions for High Drug Costs

For the first time, the rate of drug price increases has surpassed the increase of the cost of hospitalizations, which is an important turning point, said Charles J. Fazio, MD, medical director of HealthPartners, Inc, during a panel discussion at America’s Health Insurance Plans’ National Health Policy Conference in Washington, DC, March 8-9.

However, HealthPartners is not spending any less on hospitalizations. Instead, the rate of drug cost increases has surpassed the increase in the cost of hospitalizations.

“I think that some of the new drugs that are coming along, some of the new meds, some of the new cures, some of the ability to treat things we didn’t used to be able treat is a remarkable thing,” he said. “[It is a] separate issue about how much we should pay for it.”

The problem is that the pharmaceutical industry is not motivated to self-govern, Fazio said. Aaron Kesselheim, MD, JD, MPH, of Harvard Medical School and Brigham and Women’s Hospital, echoed the sentiment. He added that the reason why drug prices have risen so much is because pharmaceutical companies are allowed to price their products at whatever the market will bear after giving these companies market exclusivity.

“When we give companies monopolies, it’s not a coincidence that they act like monopolists,” Kesselheim said.

Martin A. Makary, MD, MPH, of Johns Hopkins University School of Medicine and Johns Hopkins Bloomberg School of Public Health, highlighted the act of markups. These are typically called “cost to charge ratios,” but Makary and his team at Johns Hopkins believe that it is important to change the lexicon.

“If I said, ‘petroleum prices were increasing,’ that wouldn’t mean nearly as much as if I told you, ‘gas prices are going up,’” Makary explained.

The healthcare cost crisis is partially a vocabulary crisis. Having a special lexicon—like saying “cost to charge ratio” instead of simply “markup”—almost detaches the problem and frees it from negative associations, he said.

The panelists tried to highlight some possible ways to address the high cost of drugs. Fazio mentioned bringing value into the FDA approval process, eliminating direct-to-consumer advertising, and ending loopholes in the system, such as gaming the patent process.

“High drug prices are a nuanced problem and demand a nuanced policy solution,” Kesselheim said.

He noted that the Department of Veterans Affairs is the one place in the government that has some control over formulary, and as a result, it has lower prices than Medicare. Competition will also play a role in bringing down drug prices, but he echoed Fazio’s comment that companies know how to game the system. When the exclusivity period is close to coming to an end, companies will put in place barriers, such as extending exclusivity period by doing studies in children.

These barriers prevent generics from coming on to the market and creating competition. Kesselheim offered some suggestions for preventing companies from preventing generics to come to market, such as putting a moratorium on extensions as innovation incentives and reconsidering all brand/generic drug settlements that keep generics off the market.

However, just having a generic available does not guarantee the drug will be cheap, he noted. There needs to be competition for that generic as well. It isn’t until there are at least 4 other generics on the market that the price starts to come down.

“Better pricing is not politically impossible, because three-quarters of Americans feel that drug costs are unreasonable,” Kesselheim concluded. “And this makes it a bipartisan issue.”