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Let the Market Control Pharmaceutical Costs


US consumers are being burdened with unnecessary costs that could be alleviated if worldwide prices were factored into the equation.

The recent shouting match (I'm not going to call it a debate) over health-care reform in the United States provided few coherent, cohesive ideas people from both sides of the aisle could agree on. Listening to the shouting, it seemed for all the world there was no common ground about how we should contain costs.

Lost in the shouting was sight of a central fact: We need to control drug costs or they will eat our economy alive. Health-care costs already consume a disproportionate share of our GDP. It's a horrifically regressive cost in that if you're poor, your health-care bill is not only a larger percentage of your income, it's altogether likely to be numerically higher given the relationship between poverty, food quality, and diet.

Those on the far left think strict drug price controls are the answer. Perhaps they are, but few people trust that any group of individuals created to determine prices will have the knowledge and foresight necessary to balance cost to society with sufficient profits to maintain rewards necessary to navigate one of the planet's riskiest R&D endeavors.

Those on the far right believe market forces will control costs. Perhaps they will, but we've seen little to no evidence of that among the most expensive drugs -- those for cancer or orphan indications. Companies can and do charge whatever they want in the US because, (1) The consumer doesn't actually pay for it -- a private or public insurer does, and (2) We have no mechanism that allows public insurers to negotiate prices.

Congress, not surprisingly, has navigated a middle road.

On one hand, it requires the Centers for Medicare and Medicaid Services (abbreviated as CMS) to cover every FDA-approved drug. It prohibits the FDA from considering cost or economics when making drug approvals. It bans CMS from using its considerable buying power to negotiate better pricing for taxpayer-funded plans.

On the opposite hand, Congress has directed CMS to never reimburse more than the average wholesale price available in the US marketplace. This policy is a subtle way around the negotiation prohibition because it essentially lets CMS piggyback on price breaks negotiated by private health-care providers, wholesalers, and insurers. CMS can get quite feisty when wielding this limited cost control club, taking drugmakers to court for fraud if they try to hide price breaks given to private parties. This system allows the US government to not pay "over retail," which pretty much everyone can agree is a wise protection of taxpayer dollars.

This system has one certain side effect. US drug consumers get the shaft. The price for any given drug is almost always higher in the US than it is in other developed economies. And it's not just the price. To get their blood cancer drug Velcade approved in the UK, Johnson & Johnson (JNJ) had to agree that it would rebate the government the cost of the drug if Velcade didn't improve the patient's condition.

Everyone raise their hand if they'd like that money-back guarantee on their own health-care expenditures!

Cost controls are more broadly used overseas. That's a fact. The effect of this on American consumers is we bear more than our fair share of drug company profits and R&D expense. When Pfizer (PFE) blew $800 million on its torcetrapib failure, someone had to pay for that. Americans, who pay more for a Lipitor pill than nearly anyone else in the world, paid for more of that R&D failure than anyone.

It should be noted that drug manufacturers go into these negotiations and cut their prices more or less willingly. Sure, some countries threaten to invalidate a patent if a drugmaker doesn't play ball, but to actually do so would ensnare the country in international patent and trade litigation and make them a pariah nation. Drug companies make deals like the makers of Velcade did with the UK because they know they can make up the difference in the US marketplace.

The solution to the unfair burden American consumers bear is pretty simple. In fact, Congress already thought of the mechanism and CMS has the procedures in place to make it workable.

All Congress needs to do is tweak its instructions to CMS. Instead of directing CMS to never reimburse more than the average price in the US marketplace, direct CMS to never reimburse more than the average price in the worldwide marketplace. If a drug company wants to cut a sweetheart deal with another country, that's fine. They just have to cut the same sweetheart deal here in the US.

Those on the right should have no problem because drugmakers are still free to make their own pricing decisions. The only difference is global decisions now have global consequences. Those on the left should equally have no objection. Giving CMS the ability to negotiate prices has been on their wish list for some time. The system I propose simply extends our current system of piggybacking on US private insurer price negotiations to piggybacking on negotiations with non-US insurers.

The benefit to US consumers would be a reduction in the burden of bearing the majority of worldwide drug R&D costs. No longer would drug manufacturers be able to "make it up in the American market" to the detriment of American private payors and American taxpayers. It would be a level, market-based drug pricing system cognizant of today's globalized economy.

There would absolutely need to be some common-sense controls and limitations. We'd want to limit the definition of "worldwide marketplace" to certain peer countries so a manufacturer's ability to provide, for example, discounted AIDS drugs to African countries or world health NGOs wouldn't be affected. We'd also want to at least examine price indexing according to GDP or a country's median income to recognize differing economic realities. Pricing would need to be readjusted only at set periods to reduce rapid shifts from currency effects and other short-term movements.

Importantly, the US government would have to agree to put its full weight and influence behind any drug company fighting patent revocations or other retaliatory threats used by another country to force unfair price concessions. Importing the result of unfair price negotiations isn't in the long-term best interest of patients worldwide because it decreases the funds available to create the next new drug.

Finally, we'd need to phase this in over a few years. This would match the duration of pricing agreements drugmakers make with foreign payors. It would also give both drugmakers and foreign payors time to think about any coming pricing negotiations.

With this modified system in place, Americans get a fairer deal. Drug companies continue to have full control over pricing. The world retains the benefit of a robust R&D system generating life-improving and life-saving drugs. I suspect drug companies will protest, but secretly appreciate the ability to say, "Hey, this is what everyone pays." Foreign payors are certain to have a cow as the net effect would likely be they would start bearing more of their share of R&D costs -- meaning higher drug prices in their country. I doubt foreign payors would have any legal recourse since all we're saying is we want the same deal they're negotiating.

I hear both the Democrats and Republicans are looking for good ideas this election cycle. What do you say we run this up the flagpole and see if either party notices?

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