Rising drug prices aren’t inevitable

By guest blogger Daniel Hoffman:

Matthew Herper has made many astute points over the years while covering the pharmaceutical industry for Forbes.  Late last month he wrote a piece that was probably intended to provoke when he discussed "Five Reasons Branded Drug Prices Will Keep Rising." After reading an AARP study about drug prices rising 8% last year, during a period of negative inflation, Herper made the case that constantly rising pharma prices are unavoidable. His five reasons, which actually boil down to three, don't stand close scrutiny.

The first of Herper's reasons concerns consumer behavior. He claims that people who are well maintained on a branded, prescription product prefer not to switch to an equivalent generic. Now that static inertia may characterize a certain segment of patients, but if it does, it represents a failure of the HMOs and other insurers to do their job of controlling costs.

The decision about using a brand or an equivalent generic typically occurs at the pharmacy counter. If the pharmacist presents a choice, as the insurer dictates, between a $10 generic copay and a $30 brand copay, inertia and other reasons will lead some people to stay with the brand. But make that copay choice $10 for the generic versus $100 for the brand, and static inertia will lose.

Herper's next two reasons for ever growing drug costs amount to one phenomenon. Basically, he notes correctly that the longer a brand remains on the market under patent protection, the more its parent company jacks up prices to extract higher revenues before patent loss. This is particularly the case during the last year of patent life and the first year following expiration, when the companies want to squeeze more money "from the people who believe (usually wrongly) that the brand is better." [Sic]

True enough, but Herper's explanation is tantamount to saying that a neighbor's house is a pigsty because his two-year old toddler makes a mess of the place. Parenting and good citizenship both demand some responsibility. Pharma companies are free to raise their price substantially during a deep recession because healthcare does not function as a market that punishes them by chopping their revenues.

Most countries address the problem with national pricing boards that carry the threat of "compulsory licensing," i.e., if a drug is not priced affordably, the country will break its patent and let other companies sell it as a generic. That's too draconian for the US, with our reverence for private property. Some people in Congress tried to restrain capricious price increases by giving Medicare and Medicaid the ability to bargain prices with the pharmas, the way the Veterans Administration does. But President Obama dashed that move in his belief that a castrated healthcare reform would enhance his popularity and his party's hold in Congress.

Other approaches such as payer/PBM purchasing combines and uniform formularies also offer opportunities for controlling these aggressive price increases, but they demand getting off the couch and disciplining some outfits that possess a two-year-old's lack of social conscience.

Herper's last two reasons deal with the fact that pharmas are devoting more effort to areas such as oncology and relatively rare, niche conditions. Annual, per patient drug costs in these areas typically run well into six figures.

But while this is precisely what the pharmas are doing, the trend is self-limiting. Insurers will not be able to pay such prices across all therapies without raising premiums to unacceptably high levels. At present, even in rare conditions such as Gaucher's disease, they make patients come up with a copay amounting to 20% of the $200,000 annual cost. As soon as drug companies try that approach on a condition such as breast cancer, where loud patient advocate groups are important stakeholders, the pharmas will fold like a bad poker hand. Only an egocentric baby can say, "Lady, you'll only live if you can pay $40,000 a year." If profit-making businesses try that, they will get caned.

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