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Free Market Still Hidden from Physician, Patient View

The United States operates on a capitalistic system, especially when it comes to drug development.

When the free enterprise works in full force, we theoretically benefit from innovation stimulated by the potential for making new drugs and selling them in the marketplace. In contrast, a government-run system of drug development might stifle innovation.

As a result, the laws of the U.S. offer that once a company spends money — from $1 billion $1.5 billion — for a new drug, they have patent protection for a period of time. They also are given leeway to establish pricing for those drugs with very little, if any, government interference.

Michael S. Saag

Historically, this process worked. Pharmaceutical companies profited well over the last 5 decades and new drugs emerged in a big way.

Michael S. SaagCiprofloxacin in the late 1980s and fluconazole in the early 1990s brought the first drugs priced on relative cost savings to the system for an oral drug taking the place of IV therapy.

Ciprofloxacin was several dollars per pill while fluconazole was roughly $10 per tablet, despite manufacturing costs of each being less than $0.25. There was some pushback, but costs were not outrageous. Unfortunately, this set a pricing trend.

Throughout the 1990s, this trend magnified. Some of the newer drugs weren’t as novel, but simplifying a regimen or creating a modestly different safety profile allowed market introduction at much higher prices.

After 2000, IV immunomodulators and cancer chemotherapies were introduced at even higher prices. Yet, there was no way to see how pricing related to drug development cost or manufacturing cost. The argument followed that this was an expensive process and the companies have to recoup their investment. And now come the HCV drugs.

Gilead bought Pharmasset’s HCV portfolio for $11 billion and, in my opinion, desired to make the investment back in approximately 18 months, pricing it as such. The uptake, though, may have been better than anticipated. Gilead reported $3.6 billion in the first quarter of sales of ledipasvir/sofosbuvir (Harvoni), which to my knowledge is the most for any drug in history.

While Gilead set pricing due to an unusually large investment, other companies like AbbVie mirrored those prices without the same degree of investment. They did not undercut the price of Gilead’s product as a free-market system would predict.

Now we have an estimated cost of goods of about $250 for a full 12-week treatment course being sold for $84,000.

That discrepancy, along with the high sales numbers, is garnering attention.

In the cover story, there are claims that the free market is at play due to behind-the-scenes negotiated rebates between pharmaceutical benefits managers (PBMs) working on behalf of payers and the drug manufacturers. Two problems exist: first, the deals are not in the public domain, so “free market” cannot exist because no one can see the pricing; second, the PBMs do not create true discounts off average wholesale prices (AWP), but create a rebate back to the payer. The PBMs are paid as a percentage of sale price, therefore they purchase the drugs at AWP and provide a rebate, rather than creating a true discount.

The bottom line is we cannot see the results of negotiations. A deal cut between drug company A and PBM company B is opaque to the market. What’s worse is that the deal is sometimes made with an exclusivity clause whereby the PBM promises to primarily provide company A’s products, further eliminating the free market.

Providers are upset because they cannot know what insurance company has a deal with which PBM. Providers don’t know what the preferred drug is or which exclusive drug is to be used or what the relative rebate is.

Patients are screaming because copays are in the range of $15,000 to $25,000.

Payers are pushing back because even though a drug is “cost effective” from a societal perspective because curing HCV saves money in the long run, paying for all of this at one time breaks the bank.

Everyone is screaming.

For the pharmaceutical industry to truly operate in a free market, the drug prices have to compete. Without a free market and transparent pricing, it is difficult for companies about to release new HCV drugs to enter the market, even if they had a product with significantly reduced pricing. The lack of transparency hurts patients, providers, payers and society.

How much is too much?

The pricing for HCV drugs is so far out of line with the cost of development and cost of goods that providers, patients and payers are pushing back. What if the HCV drugs cost $10,000 for a 12-week treatment course? Would there be much debate about treating every patient with HCV infection? I don’t think so.

An unintended consequence of pharma pushing the envelope so far with their pricing of cancer drugs, immunotherapies and HCV drugs is that they’re begging for governmental intervention. Congress and agencies government may intervene to regulate pricing.

Perhaps it is the role of government. The government is one of the largest payers and the government manages the regulatory process, which has accelerated approval pathways and shortened substantially the time from drug discovery to market release. This substantially lowers the cost of drug development and increases the duration of patent protection.

Yet, there is no ability for the government to weigh in on pricing. This is likely to change. Lawmakers in the House Committee on Oversight and Government reform have launched an Affordable Drug Pricing Task Force as of November 4, 2015. Stay tuned!