The Op-Ed: States And Increasing Drug Prices
17 CommentsBy Ed Silverman // December 14th, 2007 // 9:35 am
Every so often, we like to try something different on this evolving site. And so this time, we are experimenting with what amounts to a guest column. Why? We like the idea of livening up the usual menu of items with input from a loyal reader, but also one who has experience in the trenches and a refreshing point of view. This piece offers some provocative reforms, for instance. Will we do this again? Maybe. We do not wish to be flooded with requests, but we are open to suggestion. Meanwhile, we hope you enjoy this little contribution…
How the States Can Lower the Impact of Increasing Drug Prices and Expenditures
By Robert A. Freeman, Ph. D. and Professor of Pharmaceutical Sciences, Texas A & M University Health Science Center, Irma Lerma Rangel College of Pharmacy in Kingsville, Texas. Bob is also a former executive director of public policy at AstraZeneca.
It doesn’t take the proverbial rocket scientist to recognize the global pharmaceutical industry is facing a myriad of challenges from upcoming patent expiries, a lack of innovation, questionable marketing and sales practices, troubling safety issues, international trade disputes over intellectual property and a slowing of real revenue growth. We read frequent reports of reductions in workforce, the elimination of “unproductive†R&D areas and outsourcing of manufacturing and clinical research to China and other emerging countries.
The industry will continue to implement strategies to reduce its cost base, but this will not have any effect on drug prices and utilization. Existing products will have to be squeezed to increase profit margins and to hold or increase market share. Physicians will be detailed aggressively by the 100,000 or so sales reps employed by the industry. As the time to patent expirations approaches, prices will be increased further, exposing the Medicare Part D benefit and state Medicaid programs to increased costs. Direct-to-consumer advertising will continue to drive consumer demand for specific drugs, and inappropriate utilization and costs will remain concerns. Doctors will continue to receive gifts, honoraria and consulting fees and their office staff will continue to enjoy lunches provide by sales reps. Since the US is the only country that does not control price directly, it is the American consumer and public and private third-party payers who carry the load for the rest of the world through higher drug prices.
Is this bad behavior on the part of big pharma? No, this is a predictable and rational business strategy. It is, however, likely to reduce further pharma’s standing with the public and the Congress. In spite of the calls for price controls, no one views this as a serious policy option since price controls would have a negative impact on innovation as well as being an administrative nightmare.
Regardless of which political party prevails in 2008, the prospects for substantive health reform are dim. The federal government is unlikely to be given the authority to negotiate prices directly, regulate DTC advertising or enforce stronger safety regs. Band-aid approaches such as allowing drugs to be imported from Canada and perhaps beyond will be tried, but will likely fail and even if enacted would have minimum impact on expenditures.
In the recent past, we have seen states’ governors take the lead on key policy issues when the federal government has failed to enact meaningful health reforms. I would argue that the time has come again for the states to revisit innovative regulations and take action on prescription drug reforms. A partial list of state initiatives would include the following:
• Register if not license all sales reps and other field personnel and impose a per capita license fee of $2,500 per year. If there are approximately 100,000 sales reps in the US this would generate $2.5 billion, if all states enacted such legislation, to provide essential drug services to children, low-income Medicare recipients and others without coverage.
• Impose a 25 percent supplemental Medicaid rebate on all prescription drugs advertised directly to consumers either by print or broadcast media. The approximately $4 billion in annual spend for TV advertisements alone would generate $1 billion in revenues if the supplemental rebate were applied nationally.
• Impose a value-added tax (VAT) of 17 percent on all continuing medical education programs sponsored in a state, including a tax on all gifts, lunches and dinners provided to physicians and their office staff. The total spend on this area is unknown, but it is a significant marketing expense incurred by companies for sales reps to gain access.
• Impose an additional supplemental Medicaid rebate of 15 percent on all products for which Phase IV post-marketing studies have not been completed and reported. Although the FDA routinely asks for additional safety studies, the industry’s overall track record has been inconsistent in their completion and reporting.
• For products with known safety issues (the “black box†warning in the product’s labeling, for example), impose an additional rebate of 10 percent to create a State trust fund for treating adverse events and improving adverse event reporting at the point of service. Health care is about the only good or service where patients and insurers have to pay for mistakes - this would reduce the financial burden.
• Impose an effective VAT of 100 percent on price increases of all drugs, brand and generic, above the CPI for prescription drugs in the prior year. While not a major revenue enhancement, the VAT may achieve its intended purpose of moderating price increases.
The industry has clearly demonstrated that it is neither willing to hold back on drug price increases nor is it capable of exercising restraint in sales and marketing activities. Physicians and professional organizations have not cut back effectively on accepting payments and gifts. The outcry by the industry that innovation will be hurt falls on deaf ears when the sales and marketing budgets of companies exceed R&D expenditures and, frankly, there’s a dearth of innovation based on the numbers of new drugs being approved as well as their incremental clinical benefit. It is time to offset the impact on public and private prescription drug plans by compelling the industry to share in the burden.
Mike L
Yikes. If direct negotiations would be an administrative nightmare, what you suggest in the myriad of taxes and fees would be simply hellish. I agree that the industry needs restraint and that it has little ability to self-impose the restraint, but administering just one of the taxes/fees that you recommend would be unlikely to be adopted because of the economic uncertainty inherent in its administration.
I don’t think that all of your recommendations lack merit. Frankly, licensing representatives is something that, whether or not Pharma companies would like to admit it, would HELP them more than it would hurt them. Representatives have oversaturated the medical profession. Most companies have hired well passed the point of diminishing returns. They do so because the competitive advantage of drowning out other companies messages outweighs any value lost due to diminished returns. A 1% marketshare gain in a market with billion dollar products is meaningful enough to push companies to hire simply to compete. We’ve seen some companies cut sales forces recently, but those efforts have made little impact in the doctors’ offices. A licensing fee could shift the economics of the sales force to where the competitive advantage would be outweighed by the cost of having a massive sales force.
I would add to your recommendation, however. Instead of a flat licensing fee per representative, I suggest having a progressive tiered system. As the size of the sales force increases, the fee also increases. This would put significant downward pressure on the size of sales forces. It would affect the larger companies (who are better able to assume a large cost burden) without being oppressive to the smaller companies.
Frankly, however, the industry is going to change without substantial pressure from the FDA or Congress. As you referenced, many companies have a pending loss of exclusivity crisis. This will force the companies to reorganize. I think that, while the next few years may be more painful than we would prefer, in the end, the public will benefit from increased generic competition and a driving force pushing the innovators to . . . well . . . innovate again. Healthcare costs attributable to drugs will drop substantially in the first part of the next decade. I raise the question as to whether, in light of the full effect of the Hatch-Waxman Act, there is still ample incentive to do the basic research necessary for a high volume of medical breakthroughs . . . but at least we will be able to maintain the status quo at a reduced cost. Of course . . . this is speculation.
Jack
For products with known safety issues (the “black box†warning in the product’s labeling, for example), impose an additional rebate of 10 percent to create a State trust fund for treating adverse events and improving adverse event reporting at the point of service. Health care is about the only good or service where patients and insurers have to pay for mistakes - this would reduce the financial burden.
….That seems unfair to me. Drugs with a BBW aren’t necessarily bad drugs (it’s about risk v benefit) and often the BBW covers use in populations that never got FDA approval - so why “punish” the company that makes that specific drug? If the company markets inappropriately in that population that’s another story - but innocent until proven guilty.
• Register if not license all sales reps and other field personnel and impose a per capita license fee of $2,500 per year. If there are approximately 100,000 sales reps in the US this would generate $2.5 billion, if all states enacted such legislation, to provide essential drug services to children, low-income Medicare recipients and others without coverage.
….I don’t know if that will make much more than a dent in the size of company sales forces. Currently reps cost companies a lot more than $2,500 (especially with benefits and company expenses), so it doesn’t increase the cost/rep all that much.
James
Bob, why is the “solution” that you suggest to a market problem is to tax and regulate?
You lament the lack of innovation, questionable marketing and sales practices, troubling safety issues, international trade disputes over intellectual property and a slowing of real revenue growth.
What innovation has the government brought us in the last 20 (or 200) years? Our government certainly has engaged in questionable marketing and sales practices (WMDs ring a bell?). Safety issues? Katrina, Iraq, and failed FDA oversight. Int’l trade disputes? Daily w/ our gov’t. Real revenue growth? Only if you mean in terms of the tax and spend nature of gov’t.
This is a market problem. Getting the gov’t to levy new taxes and create new bureaucracies will only make it worse.
Nathan
The money generated by the sale of pharmaceuticals goes to one of 4 categories:
1) Research & development
2) Sales and Marketing
3) Cost of goods (negligible for most products)
4) Shareholders
I think what Bob is trying to do is quite simple: he’s proposing various taxes and regulations that attempt to shift some of the money that goes to category #2 into category #1.
However, you have to remember that there is a “return on investment” for each one of those categories (except maybe #3). For each one of those categories, you can reach a point of diminishing returns. Bob argues that we have already reached that point for sales and marketing. Here’s the tougher question: Have we also reached a point of diminishing returns for our R&D expenditures? If we have, then his proposals really won’t do much good. It’s far from certain that additional money pumped into R&D is going to result in additional output, especially given the regulatory environment we see today. (I hate to raise that point because I’m employed in pharma R&D)
I also agree with Jack – I don’t see how a $2500 “registration fee†per sales rep is going to do anything meaningful. I’m sure a sales rep gets paid at least $60-$120k / year. Tack on benefits and travel costs, and I’m sure it comes to $100-$150k per year. How would adding $2500 to that cost have any effect?
Jack
I don’t think it’s a blame game between government and the industry. It’s about what’s best for society. However…
Normally taxes are issued for one of two reasons: to generate revenue (eg income tax) or to discourage behavior (eg alchohol tax).
For example, I could understand increasing the tax on gasoline, since the extra costs to society (risk of oil spill, global warming) for using gas are not fully represented by the cost to deliver refined gas to a gas station.
In general, I don’t think the US government should tax drugs to create an additional incentive for citizens to become noncompliant with their prescribed prescription med (already a huge problem). And most economic models show any increase in costs (like taxes) get split 50/50 out of decreased profits and increased costs – so some of these costs will get passed on.
If you want to create a financial disincentive for certain actions (eg DTC advertising), fine. I can’t think of an analogous situation in any other industry where advertising gets taxed, but…healthcare’s a funny business where the payer (insurance), user (patient) and decider (doctor) are all different. I disagree with taxing price increases (that sounds like double tax since the company already pays corporate taxes on its revenue), or taxing BBWs (drugs with a BBW have a net value – or they’d be pulled from the market). I also think some issues (like taxing reps) hit grey areas (not everyone’s a full rep - and who pays for the license - most licensed pro’s pay for the license themselves - not the company) and administrative loop-holes.
Dan
Typical “tax and regulate” approach to the problem. First, add all the fees and taxes, and THEN limit the ability to have market-value pricing. How is this different from price controls that are practiced in the EU and Canada? Innovation comes from the ability to be rewarded for taking risks. Increased fees and regulation which are de facto ways to control price will just diminish the search for new therapies.
Nathan
It seems counterintuitive, but has anyone seriously considered EXTENDING the patent life of drugs in order to reduce costs? A longer patent life would allow companies to recoup the cost of investment over a longer period of time, and should (in theory) lower the cost of drugs as a result.
I’m sure LVS will chime in, but another way to seriously reduce the cost of drugs would be complete overhaul of liability laws. If someone is appropriately informed of the risks of taking a drug, then they should not be allowed to sue when one of those risks happens to them. (and companies should not be held liable for risks that they were unaware of – except in the case of negligent ignorance)
Michael D
Stay away from more government regs and taxes to solve problems in the private sector. Incentives will always be more effective and give the patient a choice.
The tiered co-pays have worked reasonably well in the insured market allowing a person to pay more if a specific item is wanted.
The same concepts need to be incorporated in the gov’t run programs (Medicaid, Medicare Part D). Higher co-pays on branded items will drive business to the cheaper item, when available.
Outsidethe box
I’m with Dan on this. The whole idea of using taxes, fees and regulations in an attempt to force the industry to change behavior simply won’t work. Are we going to try and enforce a similar tax and regulate approach on insurance companies and hospitals which have consistently demonstrated their own forms of “bad behavior” with regard to pricing and profit? Ludicrous.
I’m not suggesting that nothing needs to change, but this is absolutely not the way to do it.
Bob Freeman
Good afternoon to all of you and thanks for the feedback, pro or con. It matters not to me that we agree or disagree but that we’re talking about ideas.
I make no apologies for being on the left, some say the radical left, of the political spectrum. If the industry wants a free market for pricing and access, it has to pay its fair share or at least make some concessions. The patient is in no position to make rational choices driven by tiering so I am fundamentally opposed to shifting costs to patients.
As a producer of social goods it is the perogative of the government to regulate that industry.
Are these proposals likely to be enacted? No, pharma’s just too strong even at the States’ level. They may, though, in the face of a higher likelihood of regulation be more willing to make concessions.
Nathan
Ed, this was a nice idea. Although I didn’t agree with much of what Bob said, I thought it was refreshing to at least hear some constructive critisism of the industry from a well-qualified individual. I’d love to read other “op-ed” pieces on this site in the future.
James
Bob, thank you for taking the time, not only to pen this op-ed, but to respond in the comments section. However, I wish you would provide some support for your statements in your follow-up comment. For example:
“If the industry wants a free market for pricing and access, it has to pay its fair share or at least make some concessions.”
How is it a free market if one of the players must make concessions? Or, to put it another way, why is it not enough for you that the producer of goods employ thousands of workers, place products on the markets that can turn out unprofitable and lose the company money, and, ultimately, provide products that people want? Seems to me that the producer is already taking on substantial risk with no guarantee of success.
Further, to complicate matters, this industry in particular already has to jump through multiple compliance hoops–FDA, EPA, DoJ, DEA, Medicare, Medicaid–I can’t think of an industry that is more regulated.
When will it be enough? If you had your way, what would be the environment for drug and medical device manufacturers?
“As a producer of social goods it is the perogative of the government to regulate that industry.”
On what grounds do you base that claim? Is there some element in the Constitution that deems government (the U.S. gov’t in particular) is A) A producer of social goods, and B) Is empowered to regulate the government as you describe?
If you would, could you please give a better defense than the Interstate Commerce Clause or the phrase “promote the general welfare” in the preamble. The ICC says nothing about the gov’t being a producer of social goods, and has been far too extensively applied to many aspects it was never intended to do. The general welfare defense is so vague as to be meaningless–one could interpret it to impose complete gov’t ownership of all industries.
Thanks!
Bob Freeman
Jack, Nathan and others,
I’m on holiday and my laptop’s wireless isn’t working so I’m relying on the kindness of a relative who’s letting me potentially crash her desktop. I’ll do my best to get back to you with a reasoned reply Tuesday.
Apologies for the delay
Bob Freeman
Unfortunately for me and you readers I am still working on a “borrowed” desktop with a keyboard designed by the Marquis de Sade, so please bear with me. With that disclaimer let me try to respond to your comments:
I like the idea of imposing a threshhold-driven licensing fee on sales reps and other field-based (MSLs, e. g.) emplyees. Sales reps, often within the same corporation, are tripping over each other in the physicians’ offices that are still open to them. In spite of the higher-level sales focus noted by Ed, pharma still believes that saturating doctor’s offices with reps will drive market share. The last estimates I saw for the annual cost of supporting a rep was $200,000 (compensation, sales budget, fringes, incentives, car, etc.) Implicit in my recommendation is the inclusion of contract sales organizations’ personnel.
The pharma market may be “free” but it is inefficient: a small number of sellers (oligopoly) interacts with a small number of payers/buyers (oligopsony). Rebates (volume-driven) are offered to buy market share. This is good, in my view, that you encourage price competition among patented products and thereby reduce monopoly profits. What concerns me; however, is that formulary decisions are cost-driven and, contrary to statements about the clinical rationale behind these decisions, it benefits the manufacturer and payer more than it does the consumer. I have an obvious bias against tiered formularies which, in fact, shift costs to the consumer. Given that tiered formularies are here to stay, I would argue that full disclosure of financial information between pharma companies and payers should be required.
Although this is a subject for another time, use of the tax code and patent law is a viable alternative to the market for incentivizing innovation. These strategies include 1)patent buy-outs (Kremer), prizes (The Edwards proposal), grants (which we do use) and tax credits equal to the social value of innovation (Lybecker-Freeman, to toot our own horn).
To those who dismiss my comments as tax and spend, I respect your position but ask what the alternative is to make the market more efficient? Structural imperfections exist and we have few options for meaninful reform. The Medicare Part D law is a train wreck waiting to happen and pharma will find very unpleasant future scenarios (price controls, reduced reimbursement levels) unless reform starts now.
Bob Freeman
A few additional comments in reply to some of your points:
I recommend the use of supplemental rebates for one major reason: States already receive basic and supplemental rebates for their Medicaid drug programs. Since the audit system is already in place, I believe it is relatively simple to add on to these programs rather than to create new systems.
On drug safety, I also recognize the FDA’s assignment of a black box is imperfect, but it carries the weight of an administrative assessment that is based on evidence. I propose the creation of trust funds to treat serious adverse events (hospitalization, prolongation of an existing hospitalization and events requiring intervention to resolve and events leading to death).
Finally, DTC advertising is protected commercial speach. It is highly biased, incomplete information and contains misleading content. We do not have a GERD, Restless Leg Syndrome, ED epidemic. Some of these drugs may be third-tier in private plans or under strict prior authorization review in public plans; however, physician visits result from these ads and some control (in this case, supplemental rebates) are necessary to offset inappropriate utilization of both the drug and physician utilization.
Garden Lover
Garden Lover…
Although i totally disagree with you, i still appreciate you\’re post. (but you\’re wrong here :) )…
Bob Freeman
Hello, Garden Lover
Thanks for taking the time to respond. The purpose of the Op-Ed was to generate discussion about the impact of DTC on drug utilization and what remedies, if any, could be applied at the State level.