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Biotech is down again this morning as financial news outlets zero in on the letter
Congress sent to Gilead
(NASDAQ:GILD) asking why the company priced its Solvadi hepatitis treatment at $84,000. Watching and reading some of the media coverage can be painful for anyone who knows anything about drug pricing in the US.
With the exception of some specific programs for veterans and other small groups, Congress has specifically prohibited Medicare and Medicaid from negotiating prices. Generally speaking, Congress has forced Medicare and Medicaid to cover any drug the FDA has approved, and that the medical establishment has placed in a "compendia", or a list of drugs and treatment modalities recommended for the treatment of a disease. The only pricing power Congress has given Medicare and Medicaid is the ability to refuse to pay any more than what "the market" pays for a specific drug.
The Affordable Care Act (ACA) didn't change this. In fact, Congressional prohibitions against price negotiation and mandates for drug coverage were restated and emphasized in the ACA. Thus, there is no legal mechanism for the Federal government to do anything about the price of Solvaldi.
Private insurers are limited from negotiating steep discounts by competitive pressures, the ACA, and state-level rules. What private insurers, and Medicare and Medicaid for that matter, can do is make choices about the order in which drugs are reimbursed. Private insurers will also shift drugs among "formularies," effectively governing reimbursement rates to the patient. More rarely than most people expect, private insurers and drug companies will negotiate lower prices for some high-use drugs (millions of patients covered) in exchange for prescribing preference.
So, what are Representatives Waxman, Pallone, and DeGette up to with their letter? They're using the only mechanism they have, given all the above: The Bully Pulpit. They're calling Gilead on the carpet in the hopes of drawing attention to runaway pricing of new drugs. They're hoping to embarrass Gilead (and likely, the next drug company that prices a new drug) into slowing the astonishing upward path of drug pricing. At the very least, they hope to slow the very common 5-15% per year price increases companies are laying on top of already high-dollar drugs.
There is no widespread will in Congress to institute drug price controls. The Republicans are certainly not going to go there. Democrats will likely avoid the fight even if some of the voter base may support the idea.
That said, I have no doubt we will eventually institute some form of price controls or permissions for Medicare and Medicaid to negotiate drug prices. Otherwise, drug pricing will bankrupt our healthcare system.
That said, it won't come in the remainder of the Obama administration. It also won't come in the next President's first term (at least) if a Democrat wins, and won't come at all in a Republican administration. It also won't initially cover oncology (cancer) drugs, and may not ever cover orphan diseases.
The Federal government instituting pricing controls is not this decade's problem and probably won't be the next decade's problem. All that's left is the Bully Pulpit. Those using it simply hope to scare drugmakers into bending the pricing curve.
Biotech has been on a heck of a run over the last few years and it's no surprise the sector is pulling back. If you think the stocks are declining because of worries over price controls, I'd humbly suggest you perform further analysis. It just isn't going to happen here in the US in the next decade.
No positions in stocks mentioned.
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