Regulating Prescription Drug Costs

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Experts consider how regulators can make drugs affordable without hindering research and development.

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Prescription drug prices in the United States are notoriously higher than in other high-income countries. Unlike in other countries, the U.S. government does not directly regulate or negotiate the price of drugs. Instead, U.S. drug companies set their own prices, but insurers and pharmacies determine how much patients actually pay out-of-pocket.

Critics of U.S. pharmaceutical companies’ drug price inflation claim that the pharmaceutical industry profits from vulnerable patients. Pharmaceutical companies, however, oppose drug pricing reform and argue that lowering the cost of prescription medications will hinder innovation, which could ultimately lead to fewer options for patients.

Reducing costs could slow the development of new drugs, but research suggests that slowing innovation may not have a significantly negative effect on patients’ health. In a recent article researchers found that of the 46 new drugs approved in the United States in 2017, 17 provided no or minor additional benefits when compared to existing drugs on the market. Reducing costs may not necessarily inhibit innovation, as both the United Kingdom and Canada enjoy both low drug prices and innovative, profitable pharmaceutical companies.

The public has scrutinized the cost of prescription drugs for years, but attempts to pass drug cost legislation have largely failed. The COVID-19 pandemic has only exacerbated the situation as legislation has stalled, the use of prescription drugs has risen, and the price of prescription drugs has increased. In June, pharmaceutical company Gilead Sciences set the price of Remdesivir—the first drug approved to treat COVID-19—at $3,120 per treatment for privately insured patients, although health insurance could lower the out-of-pocket cost for patients. The cost once again sparked criticism of U.S. price setting methods, though the Institute for Clinical and Economic Review calculated that Remdesivir could be cost effective for insurers even if it cost up to $5,080 per treatment.

This week’s Saturday Seminar focuses on the regulation of drug costs in the United States.

  • The United States has been ineffective at tackling the rising costs of drugs, William Padula of the University of Southern California argues in an article for the Journal of Health Care Law and Policy. He asserts that an absence of a unified national approach to address drug prices has created a patchwork of state legislation. Padula argues that a state-by-state regulatory approach makes it easier for the pharmaceutical industry to litigate against anti-price-gouging laws. Padula notes that although bipartisan support exists for drug pricing regulation, any unified change will “ultimately continue to depend on federal action.”
  • The biopharmaceutical industry has used void-for-vagueness claims—which challenge laws intended to regulate drug prices by arguing that terms such as “excessive” or “unconscionable” are ambiguous—to attack drug pricing regulation and anti-price-gouging legislation. In an article for the Northwestern University Law Review, Michelle Mello of Stanford Law School and Rebecca Wolitz, a research fellow at Harvard Medical School, discuss how state and federal drug pricing legislation can survive these void-for-vagueness challenges by looking to other areas of law. Mello and Wolitz conclude that borrowing the standards of what “unconscionable” or “excessive” pricing means in consumer lending law, which have withstood industry challenges, may be the most appropriate model to guide future state and federal regulation.
  • In a study published in The Journal of the American Medical Association, University of Southern California’s Martha S. Ryan and Neeraj Sood analyze how lawmakers can increase price transparency throughout the drug supply chain. Although states have recently passed many new transparency laws, Ryan and Sood conclude that most of the existing laws are “insufficient to reveal true transaction prices.” They find that no existing state law creates price transparency across the entire supply chain. For drug price legislation to be effective, they recommend legislation that requires all supply chain participants to report true prices, including discounts and rebates.
  • Current regulatory policy fails to cultivate price transparency and negotiation, which allows pharmaceutical manufacturers to “charge whatever they please,”  University of California San Francisco’s Nisarg A. Patel argues. In an article published in the Journal of Law and the Biosciences, he urges Congress to create an “independent drug review board” that would use clinical trial outcomes to recommend baseline drug prices. Patel suggests that the review board could analyze drug efficacy data to determine the value of drugs relative to their competitors’ products. Based on that data, the board could adjust its recommended drug prices over time.
  • In an article published in the Minnesota Law Review, Rachel E. Sachs of Washington University in St. Louis School of Law examines the relationship between insurance reimbursement and U.S. Food and Drug Administration (FDA) approval, and how these two systems are “tightly linked by law” and ultimately impact the cost of prescription drugs. Sachs considers three potential effects of delinking the insurance reimbursement and FDA approval systems. First, if the two were delinked, Sachs argues, access to certain drugs would likely decrease because insurers would no longer have to cover all or most FDA-approved drugs. Second, Sachs claims that delinking would promote more thorough research and more transparent drug costs because drug companies would have to prove to insurers that their product justifies covering. Finally, Sachs asserts that delinking would ultimately reduce drug costs because insurers would have more information and negotiating power.
  • In an article for Health Affairs, Sean Dickson and Timothy A. Lash of West Health propose the “domestic reference price approach” to determine the cost of new drugs. Using the drug Remdesivir as a case example, they assess historical price data for similar drugs released in the United States and adjust the prices for inflation to determine the most reasonable price for Remdesivir. Dickson and Lash then model the profits for Remdesivir at different price points based on estimates of revenue, production costs, and research costs. Acknowledging that their model may not fully reward innovative drugs, they argue that manufacturers would still be able to prove that their product is worth more than what the domestic reference indicates. Dickson and Lash conclude that the domestic reference price approach would lead to savings by hindering the ability of pharmaceutical companies to set their own prices.

The Saturday Seminar is a weekly feature that aims to put into written form the kind of content that would be conveyed in a live seminar involving regulatory experts. Each week, The Regulatory Review publishes a brief overview of a selected regulatory topic and then distills recent research and scholarly writing on that topic.