NEW YORK (MainStreet) -- Earlier this week former Secretary of State and Presidential hopeful Hillary Clinton unveiled her plan for prescription drug reform. In what has become a theme of the 2016 race, her plan strikes a nakedly populist tone, taking direct aim at pharmaceutical companies who in her words “are together earning $80-$90 billion per year in profits at higher margins than other industries, while charging Americans thousands of dollars for new drugs.”
The plan is a Left Wing wish list of industry reforms, starting with its cap on out of pocket drug costs for individual insurance plans.
Clinton’s timing couldn’t be better, coming on the heels of news that Turing Pharmaceuticals CEO Martin Shkreli inflated the price of a critical anti-parasitic AIDS drug by over 5,000%. Although her plan, available on Clinton’s website, doesn’t call out Shkreli by name, Clinton took the opportunity to do so with a tweet that read “[p]rice gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on.”
Take it on she does, but how well do Clinton’s ideas stack up to reality, and would they really stop the next Martin Shkreli from giving old drugs upticks?
One of the keys to Clinton’s plan is a new emphasis on generic drugs as a way to improve competition.
Competition has always been an issue of special concern in the drug market because of the monopoly-granting effect of patents. Pharmaceutical companies argue that strong protection is necessary because of the enormous amount of investment and risk that goes into creating a new drug; it may only take 40 cents to make the second pill, the old argument goes, but it took $100 million to produce the first one.
And they’re right, but at the same time locked in markets allow events like Shkreli’s price-hikes to happen. Although all intellectual property grants a private monopoly, when it comes to pharmaceuticals consumers are a captive audience.
If Taylor Swift increases the prices on her next album by 5,000% listeners can find someone else. When it’s a drug that patients rely on for quality of life, no less survival itself, they have no choice.
Along with strong, but reasonable, patents, opening up generic opportunities would create enormous value by enforcing real competition in a market where consumers have no choice but to participate.
Outcome Based Pricing
Much more importantly, according to Dr. Mark Fendrick, director of the University of Michigan’s Center for Value-Based Insurance Design, is Clinton’s promise to make sure that drugs “provide value and high quality to consumers, rather than adding to cost without improving treatments and outcomes.”
It’s what Fendrick calls “clinical nuance,” directing spending based on how much treatments actually help the patient rather than a fixed cost.
“We need to understand that the current system for both payment pricing and benefit designs are based on cost rather than the amount of benefit that’s produced,” he said.
For example, when it comes to long term health of the patient, the single most effective thing that a pediatrician can do is vaccinations, Fendrick continued. “But when I tell people that most pediatricians lose money vaccinating kids, they start listening to my story," he said. "No other sector has people lose money on its most valuable portion.”
Linking drug prices to therapeutic value, as Clinton suggests she’ll do, would bring the pharmaceuticals market more in line with most industries, in which profitability is driven by products that produce the most value for the customer.
Clinical nuance would be particularly important given the enormous reliance on chronic medication among patients. Almost all of the ten most-prescribed drug categories in America treat ongoing conditions, including all of the top three which, in order, address: cholesterol, depression and pain.
Like with Shkreli’s other adventure in price gouging, the kidney pill Thiola, patients will take and pay for these pills for most, if not all, of their diagnosed lives. Letting patients pay for how much relief they actually get would be something.
“I call it rewarding the good soldier,” Fendrick said. “This idea I’ve put forth is you’ve got to use the first line drugs first, but if you use them and they don’t work, your co-pay is lowered for the more expensive drug.”
“Folks need to understand that clinical medicine is a dynamic, not a static process," he added. "So if I’m treating something like type 2 diabetes, I use a bunch of generic drugs. They may or may not work, but because the disease changes and the treatment changes, they also may or may not continue to work.”
As treatments get less successful, patients should try new options, but maybe they shouldn’t pay for drugs that don’t make them feel better.
For anyone sick of hazy commercials that rattle off kidney-imploding side effects over a slideshow of beaming (generally elderly) people, good news. Clinton’s plan tries to cut that down to an extent.
Drug advertising is big business. It’s huge business. Pharmaceutical companies hire legions of attractive representatives (generally young) to march into doctors’ offices peddling their products. They pay for thousands of hours of air time to convince patients of the need for purple pills or blue hexagons or whatever other biological Lucky Charm they prefer.
According to doctors interviewed for this piece, that money works. Patients literally walk into appointments asking for the drugs they’ve seen on TV and get what they want, because often it’s six of one and a half dozen of the other.
This is a particularly big deal, because, as referenced above, most drugs taken by Americans treat chronic conditions. It’s a long-term relationship and patients form brand loyalties the same way they do with Brawny paper towels. Convincing a 40-year-old with high blood pressure to get on your antihyperlipidemic agent could mean decades of sales. One effective commercial during a college football game could hook a roomful of former frat brothers and mean literally millions in sales over their lifetimes.
Of course, $500 million dollars were dedicated to erectile dysfunction alone in 2014.
Getting the drug companies off of that advertising fix won’t be easy, and Clinton’s proposal to shift tax incentives by no longer allowing this industry to write off the business expense of advertising probably won’t move the needle very much.
Her idea to direct the money recouped from those tax breaks into an R&D write off is good, though, as is her general notion to “require pharmaceutical companies that benefit from federal support to invest a sufficient amount of their revenue in R&R, and if they do not meet targets, boost their investment or pay rebates to support basic research.” Of course without actual numbers, that’s a meaningless statement, but it sounds good.
Done right, it could mean a valuable effort to refocus America’s medical research away from its gradual creep into entertainment. Just don’t expect those ads to go off the air or those leggy pharma girls to walk out of the waiting room. They’re big business.
Out of Pocket Caps
Sometimes the shortest distance between two points is a straight line. Sometimes the easiest way to make something cheaper is to limit its price.
And sometimes that has consequences.
Clinton’s proposal to cap out-of-pocket spending for prescription drugs at $250 per month will make life considerably easier for a lot of people, and from a consumer point of view, the short term benefits would be considerable. Plenty of people will start paying less for their medicine, but sticking insurance companies with the tab means that costs may start going up across the board.
“I like the idea of clinically nuanced payments, benefit design [and] out-of-pocket max deductibles,” Fendrick said. “[But] if everyone had out-of-pocket caps for everything then people are exactly right, that’s just going to shift costs and premiums are going to go up. Which is where I get this term clinical nuance. We don’t want out-of-pocket caps on everything.”
Capping drug prices would probably make insurance premiums go up, because that’s just math. Someone has to pick up the tab, and while insurers may negotiate some prices down, they’ll end up passing extra costs along to the consumer.
Still the effect would probably be net beneficial. Consumers who struggle to pay their bills would find their lives appreciably easier, and ACA premium caps ensure that even if insurance gets more expensive, there’s an upper limit to the pain.
Clinton’s prescription drug proposal isn’t a perfect plan, and there are no guarantees as to how well it would work. Still, when it comes to benefit of the doubt the health care reformers have experience on their side. America’s free market approach to medicine has proven, if nothing else, an absolute failure at keeping costs down with general results.
Opponents of the ACA’s regulatory approach have yet to produce a meaningful alternative, while the law continues to post moderate but steady improvements on most industry metrics.
In other words the, regulators have at least earned a chance to try.