Obama's Drug Price Proposals

The Battle to Control Drug Costs

Obama's Drug Price Proposals
March 21, 2016

The President's recent budget proposal to Congress received the most publicity for its proposed $10 per barrel tax on oil, but inside the health care portion of the proposed budget is a policy change that may end up being more noteworthy and controversial. The formal name: "Establish Transparency and Reporting Requirement in Pharmaceutical Drug Pricing." The message: "Justify the prices of your products."

The budget proposal, if enacted, would require drug manufacturers to disclose their research and development costs related to specific drugs along with discount programs to various payers. This mimics the insurance industry, which has regulated profit levels based on medical loss ratios and must disclose expenses on benefits and improvement initiatives as part of that calculation. Since drug costs make up a significant component of medical (and thus insurance) costs, the insurance industry backs the President's proposal.

Increased transparency alone has limited effect. Even if costs are transparent, pharmaceutical companies can still charge massive markups if they choose to do so. Further, the proposal is not an across-the-board deal according to the information supplied by the Department of Health and Human Services (HHS). HHS notes the proposal is required "for specific high-cost drugs that the [HHS] secretary identifies through regulation based on the public's interest." Translation: We want to be able to go after high-profile, high-value-added targets.

On the surface, this sounds great. Few people have sympathy for drug companies, and any goodwill that did exist may have evaporated thanks to the smirking and defiant Martin Shkreli, formerly of Turing Pharmaceuticals. Shkreli's company bought the rights to a critical but rarely used older drug for AIDS patients and defiantly raised the cost by 5,000%. There are costs involved in verifying that you can make this drug and limited return in the market for it, therefore Shkreli justified his price increase in business terms. The government would like the ability to verify such claims.

However, this puts government regulators in control of defining the drugs that are "in the public interest" and potentially inject politics into the situation by allowing the government to pick and choose targets. Some advocate opening up all costs, but that is also problematic. Research and development (R&D) costs cannot simply be allocated one-to-one against a particular drug, because R&D costs must account for the many failures that drug companies encounter along the way.

The bigger problem is that aside from shaming companies into changing prices, the government would have to get into direct regulation and price controls for drugs, which is not usually the most effective method of regulation. When there are limited or no alternatives to a drug, the pharmaceutical company still has leverage and will simply refuse to make the drug and sell the rights to others if it becomes unprofitable or barely profitable.

Another aspect of the President's proposal addresses this issue: Letting Medicare and HHS negotiate directly with manufacturers under Part D. Current law prohibits such governmental negotiations. Should that law be changed, a pharmaceutical company would then have to consider the effect on their entire portfolio of drugs when playing hardball on a particularly lucrative drug. Combine the purchasing power of Medicare with drug company transparency that gives HHS insight on costs and markup, and now you have a powerful negotiating force. This provides a more market-based solution to the problem.

Since this is a proposal from a lame-duck president to a hostile Congress, expect none of these proposals to be implemented this year — but at least the discussion has been set for future reforms based on some or all of these principles.


Photo ©iStock.com/Sezeryadigar

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Erin | 03.22.16 @ 14:31
Maybe with greater transparency there will be more pressure on drug companies to control the costs they are passing on to consumers. Unfortunately, with some drugs people do not have much of a choice, so the companies can charge what they want. It stinks all around.
Steffanie | 03.22.16 @ 14:31
I'm not sure I can agree with this one. I would appreciate better prices, but I don't appreciate more government control.
Sarah | 03.22.16 @ 14:32
well, if it ever comes around it's awesome. sadly, as stated, it's not gonna be anytime soon with the way things are running. nice to think about it though!
Irene | 03.22.16 @ 14:33
I can see the good and bad to this. While controlling ridiculously high prices may be good, giving the government control over which drug is in the best interest is not. I wish the government would leave the doctoring to the doctors.
Carla Truett | 03.22.16 @ 14:33
It is good to see that the government at least recognizes a problem with this. It is hard enough getting sick without figuring out how to pay for your medicine too.
Beverly | 03.22.16 @ 14:34
Government shouldn't be in healthcare. I'm not sure how disclosing costs will affect much, it's not like we can shop around for other options. Plus then the government will decide what is necessary and what isn't, instead of me the consumer.
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