The Great American Drug Deal

by Peter Kolchinsky

  13Like with any marketplace that relies on competition and comparison shopping, there can be inefficiencies. For example, when a town has only one pharmacy, it might not have a strong incentive to source the cheapest drugs. However, with many patients now getting their drugs from online pharmacies, local pharmacies have to try all the harder to keep their customers.

  14Alexander Gaffney, “How Many Drugs Has FDA Approved in Its Entire History? New Paper Explains,” Regulatory Focus, Oct. 3, 2014, https://www.raps.org/regulatory-focus%E2%84%A2/news-articles/2014/10/how-many-drugs-has-fda-approved-in-its-entire-history-new-paper-explains

  15In 2018, the US spent $271 billion on branded drugs and a comparatively modest $76 billion on generics. Unlike almost any other aspect of healthcare, drugs constantly go generic, which keeps total spending on retail drugs a fraction of total healthcare costs (9.4% in 2018), about the same as it was in 1972.

  16Arthur A. Patchett et al., 1983, Aminoacid Derivatives as Antihypertensives, US Patent 4,374,829A, filed Feb, 17, 1981, and issued, Feb. 22, 1983.

  17There are some drugs that won’t, or cannot, quietly go generic—this is a problem we’ll address in Chapter 8

  18Chie Hoon Song and Jeung-Whan Han, “Patent Cliff and Strategic Switch: Exploring Strategic Design Possibilities in the Pharmaceutical Industry,” SpringerPlus 5, no. 1 (2016): 692, accessed Oct. 15, 2019. doi: 10.1186/s40064-016-2323-1, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4899342/.

  19Peter Kolchinsky, “Let’s Throw a Patent- Burning Party,” Wall Street Journal, Sept. 30, 2018, https://www.wsj.com/articles/lets-throw-a-patent-burning-party-1538329275.

  20How? By paying for branded drugs via insurance that makes those drugs affordable to the patients who need them. Once we see it as a priority to continue to invest in creating more generic drugs by continuing to pay for branded ones, it won’t be hard to find the few tens of billions of dollars we need to cover the cost of branded drugs for the patients currently struggling with out-of-pocket costs by cutting back on less worthy spending elsewhere, including elsewhere within healthcare.

  21Many new diagnostics and medical devices are similar to drugs in that they cost a lot to develop and are patentable. They can cost a lot once they get on the market and then become inexpensive when their patents expire because many companies are able to make them and compete with one another on price. But because most diagnostics and medical devices are used in hospitals or as part of visits to the doctor, their costs are bundled in with other costs, which obscures their prices. For example, the costs of cancer tests or artificial knee implants are not widely known and have not attracted much public scrutiny. Therefore, I have chosen to keep this book focused on drugs and drug prices. However, the principles of this book apply to all medical innovations, including diagnostics and medical devices. In fact, I would argue that flaws in the way that diagnostics and medical devices are paid for, which have a lot in common with how antibiotics are paid for, impede important progress we should be making in the discovery and development of better diagnostics, medical devices, and antibiotics (because companies and investors know that, even if they create something useful and valuable, insurance plans are likely to put up roadblocks to paying for them).

  22According to IQVIA, in 2018 the US spent a net $344 billion on all drugs, of which branded drugs represented 78.7% of all drug spending, which comes to $271 billion. The US GDP was $20.5 trillion and the US spent $3.65 trillion on healthcare in 2018, which means that the US spent 1.3% of GDP on branded drugs and that made up 7.4% of all healthcare spending, so a 90% drop in branded drug spending due to all drugs going generic would save 1.2% of GDP and 6.7% of all healthcare costs. (IQVIA Institute for Human Data Science, Medicine Use and Spending in the U.S.: A Review of 2018 and Outlook to 2023 (Parsippany, NJ: IQVIA, 2019), https://www.iqvia.com/-/media/iqvia/pdfs/institute-reports/medicine-use-and-spending-in-the-us---a-review-of-2018-outlook-to-2023.pdf?&_=1557542013851.)

  23“Health Spending,” OECD Data, Organisation for Economic Co-operation and Development, accessed Oct. 15, 2019, https://data.oecd.org/healthres/health-spending.htm;

  Centers for Medicare and Medicaid Services, National Health Expenditure Projections, 2015-2025, accessed Oct. 15, 2019, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/Proj2015.pdf

  24Centers for Medicare and Medicaid Services, National Health Expenditures 2017 Highlights, accessed Oct. 15, 2019 https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/highlights.pdf

  25Peter Kolchinsky and Jessica Sagers, “We Need a Public Domain Day to Highlight When Drugs Go Off Patent,” STAT, Feb. 14, 2019, https://www.statnews.com/2019/02/14/public-domain-day-drug-patent-expiration/.

  26Glenn Fleishman, “For the First Time in More than 20 Years, Copyrighted Works Will Enter the Public Domain,” Smithsonian.com, Jan, 2019, https://www.smithsonianmag.com/arts-culture/first-time-20-years-copyrighted-works-enter-public-domain-180971016/.

  27Lila Bailey, “Join Us for a Grand Re-Opening of the Public Domain,” Internet Archive Blogs (blog), Dec. 5, 2018, https://blog.archive.org/2018/12/05/join-us-for-a-grand-re-opening-of-the-public-domain-january-25-2019/.

  3

  Branded Drugs: An Investment—Not an Expense

  How many times in the past few months—or even days—have you heard that drug prices are too high or read that drug price controls are needed? How often have you seen a politician or member of the media portray pharmaceutical companies as price-gouging profiteers intent on wringing every possible dime out of their customers?

  I will be the first to admit that branded drugs carry high price tags, but are they too high? Are the profit margins of these companies outrageously bloated? And do they serve a purpose other than lining executives’ pockets? I’ve introduced you to the Biotech Social Contract and the mountain of generic drugs that is its result—and we’ll dig deeper into those topics later—but for now, let’s take a closer look at branded drugs, those strangely named products that are advertised incessantly on television and receive so much media attention and draw considerable political ire.

  What society pays in total for branded drugs is an investment, incentivizing and attracting society’s talent and capital to the biopharmaceutical industry to fund and research new cures and treatments that will eventually add to the generic drug mountain.

  But even if temporarily high prices for branded drugs are necessary to expand our generic drug armamentarium, I don’t think we should allow anyone’s child or aging parents to be denied the medication they need on account of cost. The branded drug investment should be borne by the whole of society, not just the vulnerable minority of current patients.

  Branded drugs can be made more affordable—without imperiling biopharmaceutical innovation—by ensuring that health insurance properly covers patients, sparing them the euphemism of “cost-sharing,” which refers to all the out-of-pocket costs insurance companies demand of patients (e.g., copays and deductibles) on top of regular monthly premiums. The real reason why some new drugs are unaffordable to some patients lies not with branded drug prices themselves but with the intentionally poor design and distribution of healthcare insurance in our country, which I’ll explore in more detail in the next chapter.28

  Higher Spending Does Not Mean Higher Prices

  In 2014, drug spending jumped 10%. It appeared that drug prices were skyrocketing, and people weren’t happy. But here’s the thing: drug prices weren’t actually skyrocketing. Yes, list prices grew a reported 13.5% from 2013, and many people understood that to mean that actual drug prices were up by that amount. But they weren’t taking into account the drug rebate system—and that’s understandable; it is both byzantine and unfamiliar to most. Rebates
are like discounts, except that companies pay them back to insurers, but they are confidential and some insurers negotiate more effectively than others for greater rebates. Taking into account 2014 rebates, the net price of drugs grew 4.3% from the prior year, higher than inflation but hardly headline-worthy.

  Digging a little deeper, we find that in 2014 nearly half (4.6%) of that 10% increase in drug spending was driven by the launch of those long-awaited, blockbuster cures for hepatitis C, which generated $12.3 billion in sales. And recall that multiple companies launched competing products within a short time, eroding those prices quickly—even before any of the drugs came close to their patent expiration.

  Had no one invented the cure for hepatitis C, drug spending would have grown only half as much as it did in 2014. But in this alternate reality, America would have been on the hook for tens of billions of dollars a year in spending to care for millions of patients with chronic hepatitis C progressing to liver failure, cancer, and an early death.

  Moving forward to 2019, a May report from IQVIA pegged the growth of net prices (what drug companies actually get after discounts and rebates) at 0.3% from 2017 to 2018.29 That’s well below inflation. Furthermore, net prices are projected to stay close to flat through 2023, thanks to a slew of new generics and biosimilars (which are like generics of types of drugs called biologics—discussed in detail in Chapter 8) that are on their way to market.

  Yes, total spending on drugs did go up from 2017 to 2018, by around 4.5%, but not because of net price increases. It went up for two legitimate (and encouraging!) reasons: new drugs were approved and more patients got the treatments they needed. To the extent that prices of some drugs increased that year, like most years, they were nearly entirely offset (all but 0.3%) by other drugs going generic.

  Healthcare in the US vs the Rest of the World

  Here’s a complaint you’ve no doubt come across: Healthcare is more expensive in the US than anywhere else in the world, including comparably wealthy European countries and Canada, but our outcomes lag far behind, with lower life expectancy in the US than in some other countries.30

  There is plenty of evidence to support that assertion and a good deal of research that refutes it, but what’s clear is that, even as one can see when a drug has cured a patient of cancer, the link between drug spending and disparities in health at the level of entire populations is very hard to characterize.31,32 For example, healthcare outcomes are influenced by many factors that have nothing to do with pharmaceuticals, including obesity, gun violence, suicide, and how infant mortality is recorded. At the same time, the US makes the most use of generic drugs—more than any major healthcare market.

  Generics make up 90% of prescriptions filled in the US, compared to 17% in Switzerland, 30% in France, 47% in Spain, and 80% in Germany. 33,34 It’s true that Americans pay more for branded drugs, but those in other countries continue to pay for branded drugs longer than we do in America. Europeans were still spending more money on older, far less effective treatments for hepatitis C when America was already far along in curing its population with newer treatments.35

  That said, there is certainly a difference between how Americans pay (or can’t afford to pay) for drugs and how people in other developing countries do it. We’ll get into that in much greater detail when we discuss health insurance (see Chapter 4).

  Drugs as Precious “Infrastructure”

  Increasing infrastructure investment is one of the last areas of bipartisan agreement in the US.36 We know that we need infrastructure—we need functional roads and water and sewage treatment facilities. Most agree that infrastructure spending creates jobs, too.37 This holds true for the drug industry. We need (or will eventually need) the things that the biopharmaceutical industry creates as well. And the sales of branded drugs make all of that possible by supporting millions of highly trained people employed directly or indirectly in the discovery, development, and distribution of these medicines.

  At less than a tenth of total healthcare spending, branded drugs represent 1.3% of the US GDP.38 Compare that to the 2.4% of GDP spent by the US government on roads, drinking water, and wastewater infrastructure, and few would consider those to be unworthy investments. But it’s the differences in how we pay that make clean water feel affordable to all while drugs feel inaccessible to some.

  Because health insurance plans, including Medicare, require out-of-pocket copayments as high as 20% of the price of a drug, vulnerable patients disproportionately carry the burden of supporting the biopharmaceutical workforce and building our common stockpile of generic treatments.39 We don’t fund development of other important infrastructure in this way—we don’t pay for the security of a police force or fire department by charging ruinous copays (or any copays) to those who call for help.

  QALY-based Pricing: Precision Without Accuracy

  Health economists around the world propose calculating the benefit a drug offers and paying a price that is proportional to that benefit.40 This kind of value-based pricing scheme typically assigns a value called a Quality Adjusted Life Year (QALY) to estimate the reduction of life and quality of life associated with a patient having a particular condition. Calculating the QALY of living with a particular condition relies on asking a person what chance of death they would accept for a total cure.41 If someone said 30%, then it means they consider each year of living with that condition as having 0.7 QALYs. In the US, the Institute for Clinical and Economic Review (ICER) assumes the value of a QALY gained is $100,000-$150,000 (net of all savings).42 ICER’s approach suggests that it isn’t worth developing a drug if doing so can only be justified by charging a net price higher than that.

  The trouble is that you get a different QALY value when you ask different people how they perceive a condition. Someone who is otherwise healthy but who has just been in a car crash might think that being paralyzed would be a fate worse than death and therefore assign that condition a very low QALY value. But an already paralyzed person who may have found joy and purpose in living with those disabilities would assign a higher QALY. Indeed, the same person might assign different QALYs at different times in their life. So which perspective do you take into account when telling innovators how society would value a cure for paralysis? Undervaluing the benefit might disincentivize investors from funding a company to pursue such a breakthrough.

  Consider also that the value of a drug that cures paralysis would not only restore QALYs to those people who are paralyzed, but it would reduce in all healthy people the low level of fear of ever ending up paralyzed, whether from falling from a horse, playing sports, skiing, car crashes, or some other trauma. Similarly, thanks to all of the progress we are making in treating cancer, someday soon parents will know that their daughters will never die of breast cancer and their sons will never die of prostate cancer. That peace of mind isn’t captured in any models.

  Once they have assigned quantities to every variable of a disease and its treatment, health economists can be quite precise in calculating the value of a biomedical innovation by using QALYs (though they don’t take future genericization into account). But given all the subjectivity in their work, their conclusions can’t be considered accurate. Should we really trust health economists to decide what any breakthrough is worth to everyone for the rest of time? I strongly agree with those who say that we shouldn’t.43

  So many advances—from the car to the Internet to statins—were at first under-appreciated; society simply isn’t good at anticipating what kinds of innovation are possible, much less what kinds of innovation might transform our lives. Rather than risking our collective myopia setting the upper ceiling on what society should be willing to pay for a breakthrough, I would rather that we not set it, since we don’t really know what it should be.

  The Fair Price Conundrum

  So just how do we establish a drug’s cost-effectiveness, whether or not it has been “worth it” to produce and whether or not i
t was “worth it” for the patient? Even a supposedly small medical breakthrough that will someday go generic—think back to lisinopril’s modest advantages over enalapril—offers society high value for low cost when that advantage is permanently embedded in our armamentarium and compounded indefinitely.44

  Others have proposed the notion of a biotech social contract but defined it entirely differently, putting the emphasis on keeping branded drug price increases in check while they are patent-protected.45 But genericization without undue delays is the key provision of the Biotech Social Contract as I define it, and the industry has, for the most part (though we will explore exceptions in Chapters 8, 9, and 13), honored that provision for decades. As long as a drug ultimately will go generic, it’s not all that critical to the long-run price/value assessment whether it starts off at a lower price, climbs, and then goes generic, or if it starts off at a higher price, stays flat, and then goes generic.

  A drug’s cost-effectiveness is linked to its cost today, its cost in the future, and how much it helps society save in other costs over time. A patient with elevated cholesterol who skips treatment to save money in the short term, should he suffer a heart attack, might end up costing himself, his family, and society more later. In such a case, the patient should want preventative treatment, and society should want him to get it. But it’s not only about the money.