Regulatory policy

US pharmaceutical industry ‘bubbling’ over drug pricing policy

A representative of the pharmaceutical industry once told me that the United States was indeed subsidizing the health care systems of other countries because of high drug prices. Pharmaceutical companies, he said, can “let themselves loose” in other markets because US profits are so healthy.

The past recently Inflation Reduction Act in the United States will reveal if he was right. In fact, the industry’s reaction to the part of the law that allows Medicare – America’s largest health insurer – to negotiate the price of certain drugs based on their clinical benefits is a good test of the absurdity spouted by any vested interests where reasonable regulation threatens profits. .

Americans pay significantly more for pharmaceuticals than the rest of the developed world (see chart). This is largely because Medicare is prohibited by law from negotiating drug prices. In effect, this means the pharmaceutical industry can charge whatever it feels the market can bear for a product, regardless of its clinical value. (The United States is also one of the few countries where prescription drugs can be marketed directly to the public, naturally increasing demand, sales, and profits.)

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Spending (USD) on pharmaceuticals per capita, 2019 (Image: Luke Slawomirski; Source: OECD.stat)

This ban set the United States apart. So far.

Even though the changes are very modest – Medicare will be allowed to negotiate on 10 drugs in 2026, 15 in 2027-2028, and 20 drugs in 2029 and beyond) – the industry is not happy. Why? Because as in any financial negotiation, size rhymes with weight. With over 60 million enrollees, Medicare is the largest US insurer. Higher prices directly increase profits and have a ripple effect as the Medicare price sets the benchmark for small private insurers. (No insurer wants to be the one who doesn’t provide a cancer drug, no matter how expensive or beneficial it is.)

This is why the health care supply (providers, clinicians, hospitals, pharmaceutical companies) much prefer a fragmented insurance market and hate consolidation on the demand side, including insurer-provider entities.

The ban was also the crown jewel of epic lobbying – over US$5 billion over 25 years and by far the most in the entire industry (see chart below). No wonder they feel a bit ripped off.

USD spent lobbying Congress and federal agencies by sector, 1998-2022 (Image: Luke Slawomirski; Source: opensecrets.org)

In fact, the lobby isn’t just disgruntled, it’s bubbling. In a bizarre and threatening letter to Congress (including bizarre political threats), the top body warned that “passing the legislation would lead to fewer treatments and cures – especially for serious diseases like cancer and Alzheimer’s disease”.

This statement smacks of deeply unpleasant extortion. He is also easily discredited. If the current system is so good, why don’t we have a cure for Alzheimer’s disease? In fact, we might have if the money spent on lobbying and advertising was spent on research and development instead. Yes, drug discovery and development is expensive and risky, and because we’ve outsourced most of the two to capital, a decent return on interest is important. But the claim that price negotiations will result in less “good drugs” is a rant for two reasons.

First, linking the price of a drug to its performance is likely to lead to better medicines, not the worst (as expected) because the current provisions reward poor products. The new ones will prompt the most effective and beneficial ones. And guess what? If price is tied to profit, profits won’t suffer!

Moreover, the returns of the pharmaceutical industry are very beautiful compared to the others (only tobacco is higher!). In addition, profits were maintained despite industry productivity (measured in new drugs per research and development dollar) has fallen in recent decades. In other words, patients and taxpayers subsidized the shortfall.

Sum it up and the whole argument is an admission that the industry can’t deliver good products, which is perhaps why they resort to bullying Congress into vetoing sensible regulation and evidence-based.

The industry also says the changes will drive up prices around the world as companies seek profits in other markets. It’s bullshit. It just seems inconceivable that highly sophisticated companies – mostly publicly listed companies – would leave money on the table in Europe or Australia just because earnings are so good in the US. Shareholders would certainly want to know more if this were true.

In fact, other countries, including Australia, stand to benefit from one of the world’s largest health insurers focusing its attention on the real value of expensive drugs. Payers such as our own Pharmaceutical Benefits Scheme will be watching closely (although pharma will likely keep prices secret). Either way, the changes will encourage payers to negotiate harder. Patients and taxpayers will benefit (a good thing given our increased out-of-pocket costs).

Interestingly, the pharma industry’s dire predictions are no different from interests fighting regulatory change. Remember the big tobacco convulsions during the fight against the introduction of Australia’s (very successful) smoking laws. Then there are the extractive industry’s ongoing efforts to block, impede and undermine meaningful action on climate change.

Time will reveal the direct consequences of drug pricing on those who need them and who pay for them. If, as many expect, the effect will be positive (including for the pharmaceutical industry if it rolls up its sleeves), the larger lesson will be this: ignore the threats of vested interests and just carry on with a good public policy.

If nothing else, it’s nice to see the public interest win out for once.

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Pierre Fray

Pierre Fray
Chief Editor

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