“AS A LIFELONG farmer who raised hogs, cattle and sheep…[I] know when someone’s trying to pull the wool over my eyes.” So declared Senator Chuck Grassley, a Republican from Iowa, this week after the Senate Finance Committee, which he chairs, ordered top executives from seven global drugs firms to explain why American drug prices are the world’s highest. Ron Wyden, the senior Democrat on the committee, denounced the industry’s “two-faced scheming and profiteering”.
Big Pharma has been pilloried for decades but still flourished, not least because it keeps producing life-saving innovations needed by Americans, who are in aggregate getting fatter, older and sicker by the year. Still, the hearing marks a dangerous moment for the industry. Reforms may force big changes to a lucrative business model.
Anger is growing over rising drug costs (see chart). Insulin cost less than $200 for a vial 15 years ago but sells for nearly $1,500 today, according to one estimate. Such price spikes have led to bipartisan support in an otherwise rancorous Congress for measures to tame the industry.
The reform efforts could lead to three changes, reckons Benjamin Isgur of PwC, a consultancy. One involves pricing. In October the Trump administration unveiled an “international pricing index” that would link the prices paid for a number of expensive drugs purchased by Medicare, a giant government health-care plan for the aged, to lower prices paid for those same drugs by other rich countries.
If implemented, this would force dramatic change. PwC estimates that it could lead to a loss of $500m in annual revenues at each of five big drugs firms, and losses of between $100m and $500m a year each at six others. Knock-on effects could push down prices for drugs not purchased by Medicare. This week pharmaceutical executives noisily objected to the proposal, arguing that a sharp cut in profits would inevitably reduce their research capabilities.
The second push is for transparency. In America, Big Pharma sells its output mostly to pharmacy-benefit managers (PBMs), a handful of intermediaries who consolidate the demand generated by many insurers. PBMs force drugs firms to give huge secret rebates (part of which they pocket) on list prices in return for favourable treatment. Drugs bosses argued at the hearing that it was PBMs, and not their own greed, that led to higher list prices.
The Trump administration calls this a “hidden system of kickbacks to middlemen”. In January it proposed an end to the existing legal protection for confidential rebates between drugs firms and PBMs. Instead it wants discounts to go directly to consumers. Drugs bosses hailed this as a step towards transparency.
PBMs remain unbowed, arguing they are the most able to stand up to Big Pharma. Steve Miller, the chief clinical officer of Cigna Express Scripts, a recent union of a big insurer and a big PBM, thinks the Trump plan for transparency is flawed. PBMS have already tried to get insurers to pass on rebates to consumers, he says, but they prefer to use the savings (arising mostly from drugs used by the sickest) to cross-subsidise and lower the cost of typical insurance plans (to win more healthy customers). He advocates explicit caps on “co-payments” required of patients.
The third, and more promising, area of likely reform involves boosting competition. Momentum is building for American regulators to catch up with Europe in promoting “biosimilars”, which are generic approximations of patented drugs. In America drugs firms sometimes use thickets of patents and payoffs to biosimilar upstarts so that a lucrative but ageing drug can be milked a few more years. At this week’s hearing Mr Wyden likened the tactics used by America’s AbbVie to protect Humira, a blockbuster drug with global sales of some $20bn last year, from competition in America to “Gollum with his ring”.
Imperfect though these proposals are, they still pose a threat to Big Pharma. Observing that at no time in his career has he seen such bipartisan commitment to tackling drug pricing, Dr Miller insists: “Drugs are the sharp end of the spear.” Perhaps, but PBMs should take little comfort from the misery of Big Pharma. Congress is already planning to hold hearings on them, too.
This post was originally posted at https://www.economist.com/business/2019/03/02/global-drugs-firms-are-under-pressure-from-american-politicians.