The Crisis in Drug Pricing


The price of drugs is a major factor contributing to the escalating cost of healthcare in America. Within HIV disease, the advent of effective but expensive treatment illustrates the problem. People with adequate access to healthcare routinely live 20 years or longer with HIV. Yet the net cost of the drugs needed over such a long period has become a huge burden. Programs that assist people with purchasing drugs, such as the AIDS Drug Assistance Program (ADAP), are failing to meet the need, due to a mix of excessive prices and increasing demand. More and more people in the U.S. are finding themselves without access to treatment.

Many living with HIV appreciate the contributions that the pharmaceutical industry (hereafter called "pharma") has had on their lives and health, at least if they have access to the drugs. In a relatively short time, it developed more than 20 anti-HIV drugs. The success of basic and clinical research funded by the National Institutes of Health (NIH) combined with the drug development expertise of pharma gave new hope and new life to people afflicted by one of the worst diseases ever known. Activists must balance this against the high prices of the drugs and harm such prices do in the battle for universal access to treatment.

Drug prices have long been a problem, now further complicated by the ballooning federal deficit. The U.S. government will spend at least $500 billion more than it collects in 2004. The budget resolution, now in debate, could contain provisions that would further damage essential domestic programs for many for years to come. State governments face their own budget crises. Consequently, many ADAP programs are reducing the lists of drugs covered and/or the number of people served. More than 1,600 people are already on ADAP waiting lists because of inadequate resources and high drug prices.

Another issue is the recent passage of a partial Medicare prescription drug benefit for the elderly and disabled, who are deeply affected by drug prices. The program helps only some people and doesn't guarantee access to drugs, yet it will cost taxpayers at least $534 billion over the next 10 years. Some estimate that a comprehensive drug benefit for senior citizens, at current prices, would cost close to two trillion dollars. Every new increase in drug prices will make things worse.

Pharma's justification for high U.S. drug prices is that they are necessary to finance research and development (R&D) into new drugs. They argue that the lower prices charged in almost all other countries (typically forced by local regulations) allow little margin for new research. Thus, U.S. taxpayers must subsidize the costs for everyone. No one wishes to force prices so low as to discourage R&D, but there's considerable dispute whether lowering prices would harm future research. It is not clear that European prices, for example, are insufficient to contribute to R&D, and there are many other ways to reduce industry spending, as described later.

A few companies have attempted to keep prices down. For example, Merck originally priced its protease inhibitor indinavir thousands of dollars lower annually than competitive drugs. Others have been less responsible citizens, setting ever higher prices for new drugs and repeatedly raising the price of older drugs for higher profits. Abbott Labs recently raised the price of its protease inhibitor ritonavir several hundred percent in a single step, setting off a storm of criticism and legal action. Most companies prefer a lower profile, quietly making 5-10% increases one or more times a year. Over time, this adds up to major increases. In contrast, we almost never hear that a drug's price has been lowered after its development costs have been recovered.

Unless this trend of escalating prices is not stopped but reversed, it will hasten the collapse of the American healthcare system. The system is already overburdened by rising hospital costs, ballooning malpractice insurance costs, and a rapidly increasing number of uninsured and underinsured people. Pharma, which as a whole is the most profitable industry in America, must understand the part it plays in this time of crisis. While people and institutions suffer greatly, it has come to look greedy and insensitive. It is failing to convince the public and policy makers that its high prices are needed to sustain R&D. Something must be done. The only question is whether it will be voluntary change or forced.

Possible solutions are routinely discussed, and some have been tried. To date, there's no national consensus on any of these and views are sharply polarized. The most commonly discussed solutions include:

  1. Federal price controls;

  2. Purchasing drugs at lower prices through other countries;

  3. Changes in patent laws to widen the use of generic drugs;

  4. Other methods of drug research, development and manufacturing; and

  5. Government action to break patent protection on unfairly priced drugs and other forms of government pressure.

Federal Price Controls

Federal price controls have been tried as a general way to stabilize prices, but they've not been selectively used in the U.S. to fight prices of individual industries. Economists debate whether controls have helped or hurt. The last imposition of controls occurred in the Nixon era. While they sound attractive, they also carry risks. At best, they temporarily block against runaway inflation. Once lifted, prices quickly rise again.

Some forms of price control are already used in the U.S., like forced discounts for ADAP and Medicaid as well as negotiated prices for the Veterans Administration. In Europe, several different approaches help contain prices. European type controls (ranging from cost-effectiveness evaluations, to price comparisons with similar countries, to industry/government negotiations) offer promise, but only when there is a political consensus about their use. It's hard to get a political consensus on anything in Washington. The fact that the U.S. would be the last major industrial country to widely use such controls would bring more burdens to the negotiating table, particularly in terms of how they would affect investment in pharma -- and thus the effect on future drug development.

Although price controls are intensely opposed by the present Administration, the mere discussion of them is important and might influence the leadership of pharma. This debate must be encouraged. If industry leaders really believe that price controls would be disastrous to their business, they can easily avoid them by offering their own plan to reduce prices and begin acting more responsibly.

Purchasing Drugs at Lower Prices Through Other Countries

Purchasing drugs through other countries at lower prices (re-importation) is a popular notion, with many in state legislatures and Congress discussing ways to make it legal. It sounds great -- like buying drugs at a discount pharmacy rather than a small retail store. It is not that simple, however.

Drugs are cheaper in Canada because its government negotiates prices under the Canadian national healthcare plan. But if large numbers of U.S. citizens, or even whole states, take advantage of Canadian pricing, a huge problem can develop -- Canadians may soon be pitted against U.S. buyers. The vast majority of these lower priced Canadian drugs are made by the same companies that sell them in the U.S. at higher prices. Those companies are not going to start shipping greater quantities of their drugs to Canada so that they may be re-imported to the U.S. at lower prices.

Several major drug companies have announced that unless the practice stops, they will stop or greatly curtail shipments to Canada. In addition, advocacy groups in other countries are likely to protest. Already, several of Canada's advocacy groups have petitioned its government to stop sales to the U.S. through internet pharmacies. Another option for industry would simply be to increase prices to all countries, thus undermining the value of re-importation to the U.S. while also harming the interests of citizens of other countries. Such a response could undermine all the progress that has been made in securing lower drug prices for developing nations.

Industry supporters argue that re-importation is, at its core, a way to import price controls into the U.S. Well-meaning efforts to buy lower-cost drugs this way amount to the U.S. fighting its drug-pricing war on another country's soil, potentially at the expense of their citizens and healthcare systems. There's also growing pressure from the U.S. on the World Trade Organization to establish trade barriers to these practices. Like price controls, however, discussion of re-importation schemes may help stimulate public debate. Whether compromise is possible depends on the scale of re-importation.

Changes in Patent Laws

Changes in patent laws are sometimes proposed to increase the use of generic drugs. It is only when generic versions of popular drugs become available that market pressures can work to lower prices. Without generic competition, treatment would still be out of reach for most people with HIV in developing nations. However, the competitive power of generics within the U.S. and other developed nations is limited by patent laws. Patent laws create incentives for people or companies to form a steady stream of new and better products. Under current international trade agreements, patent owners get exclusive rights to sell their inventions for 20 years (except in certain healthcare emergencies).

Drugs, however, almost never get the full 20 years of protection due to the long lag time between getting a patent and when a drug comes to market. If it takes 10 years to bring a drug to market, it would only have 10 years of protection left in the marketplace. Drugs are allowed to get back an extra year of patent protection for every two years spent in the FDA approval process, up to a maximum of 5 years of patent extension. But they are limited to no more than a total of 14 years of exclusive marketing after FDA approval. There are, of course, ways that companies get around this, such as making slight changes in their products and calling them "new" drugs when the patents run out.

Some believe that patent protection may be working too well for prescription drugs, seen by pharma's extremely high prices and high profits compared to other industries. Thus, the threat of further reducing patent protection, or perhaps eliminating the 5-year extension might warrant discussion. But changing patent laws would be very difficult, as the basic patent laws apply to all inventions, not just drugs. It has taken decades to work out the mechanisms of patent protection for drugs, and there's a strong interest in keeping the rules consistent from one country to the next. Policymakers realize that shorter patents, which could hasten generic competition, would likely also result in higher, rather than lower, prices for branded drugs during their patent life.

Other Methods of Drug Research

Other methods of research and production have been proposed as ways to lower the cost of drug development. One could try to put drug development into a public or non-profit environment. While this sounds logical because drugs are an essential health product, it may not be very practical. There are a few pioneering efforts of this type currently underway.

The tough questions are: Who will do the work? Who will fund it? Who has the infrastructure and experience? How would new discovery be fostered in a public setting? Right now, there are no clear answers, other than the existing pharmaceutical industry. Neither government nor anyone outside pharma has the infrastructure for large-scale drug development and manufacturing. Government funds a great deal of basic research, but it is only minimally involved, if at all, in "drug development."

While some may cite Brazil as a recent exception with its production of anti-HIV drugs, it has at best only performed the functions of a generic drug company. It did not create, develop or test any of the drugs it now manufactures. Even if society were to move in this direction, it would take decades to create a public sector process that could compete with industry.

Action to Break Patent Protection

Public seizure of unfairly priced drugs is one method that has been in search of a test case for some time. Seizure is theoretically possible under a law called the Bayh-Dole Act. Recently, the 400% increase in the price of Abbott's ritonavir created a test case that's currently working its way through the legal process. The rationale is that if government funds were used to help create a drug, then government has a right to seize the product in the event that unfair pricing or failure to produce the product is harming access to a necessary drug.

What remains undefined though is just how much government involvement in a drug's history is needed to make a seizure legal. A large percent of new drugs will have some form of government grant in their history, simply because the NIH funds basic research that leads to new drugs and cures. Patent applications typically list such grants, but this doesn't prove that the government owns or has rights to the patent or product. Another uncertain factor is to what degree access to the drug is being harmed by the company's actions. In the case of the ritonavir pricing action, there are also efforts to test in court whether the company's actions have harmed patients or the drug's competitors. All these matters remain undecided for now.

Still, the threat of such action -- successful or not -- will cause companies to think hard before acting in the future.

The Bottom Line: Will Anything Work?

To date, these methods all seem to present both challenges and opportunities. Most lack the necessary support to carry them through a strong counterattack by industry. But this doesn't mean the task of reducing prices is impossible. And we must always remember that drug prices alone are not the sole source of our crisis in healthcare.

The senior managers of pharma must balance many conflicting interests: people want better therapies as quickly and as cheaply as possible; stock owners want to see high profits; institutions that invest employee pensions in drug company stocks want to see their funds grow; regulators want the highest quality data and product; scientists seek investment in their area of expertise and interest; and a lot of ordinary folks who happen to work in the company, with families, needs and lives of their own want to feel good about what they're doing. It is too easy, and unfair, to see drug companies and their executives and employees simply as greedy monsters. But they are indeed people who need to face change.

High profits cannot be allowed to come at the cost of denying people access to medicine, crippling their financial security or undermining our healthcare system. More money should not be spent on marketing than research. The "me too" drugs in their portfolios should not outweigh innovative advances against disease.

The core of the problem is that pharma has often been pushed and molded more by Wall Street than the Hippocratic Oath. The people in this industry need to get serious about the crisis of drug pricing, from the Chief Executives and Clinical Researchers to the Community Relations Managers and heads of Marketing. The system is broken and must be fixed. No one could fix it more quickly than those who run the companies.

As prices have soared, the number of new drugs and devices being submitted for FDA approval has actually declined. In recent years, the industry has consolidated as a few large companies have bought up more and more of the smaller ones. Yet these acquisitions seem to have done more to crush competition than to develop more and better products. How is the public served by this?

Pharma must rethink and restructure its business model. If they truly believe they can't sell drugs for substantially less without harming R&D, they need to ask, "What can we cut? What must we change?" At the same time, government must rethink its all too cozy relationship with the industry. A few suggestions for government and industry follow.

Change the Law That Allows Direct-to-Consumer (DTC) Advertising by Drug Companies

Billions of dollars could be freed up over the next 5 years to permit lower drug prices, without spending a nickel less on R&D. Vast amounts of corporate cash now go into DTC advertising. This was banned until well into the 1990s, when Congress "gifted" the right to industry.

Although some surveys suggest that doctors and their patients benefit from advertising, these are simply opinion surveys. There is no evidence that people are medically served by such advertising. Continued bans on this advertising in most other developed nations don't seem to hurt anyone.

Spending on DTC Advertising by Pharma

  • 1997: 908 million

  • 1998: 1.3 billion

  • 1999: 1.8 billion

  • 2000: 1.9 billion (Jan-Sept)

  • 2005: estimated 7.5 billion

Moreover, there's no evidence that the extra sales it generates have resulted in greater revenues being spent on research. However, it does appear that drug prices have risen right along with advertising dollars. Fewer drugs and devices are being submitted to regulatory agencies worldwide each year, signifying that increased drug prices and marketing budgets have not led to new drugs.

Set Limits on Lobbying

Pharma spends more money on lobbying Congress, the Executive Branch, political parties, and state governments than any other industry. It may also spend more on lobbying than on R&D. (Because of complex accounting practices, it's difficult to know what they spend on anything.) The need to reduce spending in this area requires no explanation.

Remove Any Bans That Prevent Government Payers, Like Medicare, From Negotiating Prices With Pharma

While some government purchasers do negotiate drug prices, a key provision of the new Medicare prescription drug benefit is a ban on negotiating prices with manufacturers. This makes no sense in a country, and under an Administration, that claims to believe in free market forces. The ability to negotiate prices is perhaps the most fundamental tool of a free market economy. Drug prices are negotiated in some way with industry in almost every other industrialized nation.

Use the "Bully Pulpit" of the Presidency to Encourage Lower Drug Prices

Pharma currently spends hundreds of millions of dollars to gain the favor of the White House, and it seems to get what it pays for. The president has made it clear he would never consider price controls. So what is his solution then? Let the White House make use of its friendly relations by telling industry what's needed for the good of the people and the country in these difficult economic times. Pharma can't "take its business elsewhere" because no place else in the world is willing to pay the high prices routinely accepted here.

Let the Boards of the Major Pharmaceuticals Restructure Executive Compensation Packages

This would reward competitive pricing strategies and better product development, rather than just short-term profits. Competitive pricing and better products are perhaps the best ways to increase sales and market share.

Final Comment

However reasonable and self-evident these approaches might appear, none are things that pharma will do on its own. However, they are all things that can be accomplished through public or political pressure. If industry abhors such methods, fine -- let them reduce prices some other way. The only option that can't be tolerated any longer is to continue the status quo. In the end, this will crush them as badly as it is already hurting people who need their drugs. It is time for us to make them be at least as responsible to their customers and the country as they have been to their stockholders.

Back to the Project Inform Perspective July 2004 contents page.