How Competition Can Bring Down Drug Prices

July 7, 2016 Courtney Tobe

This article originally appeared at http://blogs.wsj.com/experts/2016/07/01/how-competition-can-bring-down-drug-prices/ on July 1, 2016.

By Susan DeVore

Susan DeVore is president and CEO of Premier, a health-care performance improvement alliance.

Drug costs represent about 14% of our country’s $3 trillion annual health expenditure, and are growing rapidly. According to Health and Human Services, total drug spending increased by 12.2% last year, the highest in a decade. But while we hear rhetoric from the campaign trail about fighting high drug costs, the hand-wringing and discussions about solutions are lacking in specifics. They are ignoring modern solutions that fit the evolving nature of our health-care system.

So, what’s driving these increased prices? It depends on the drug.

Much of the increase (about 73%) is in specialty drugs. These are complex and fragile formulations derived from living cells that treat smaller cohorts of patients than the blockbuster drugs of yesterday. They have the potential to cure chronic diseases, but they are expensive to research, discover and bring to market. As such, these drugs tend to be introduced with high price tags. Take Hepatitis C drugs that cost $1,000 a pill, cholesterol inhibitors that cost around $14,000 a year and oncology drugs that are hundreds of thousands of dollars for a course of treatment.

Surprisingly, generic drug price increases are also contributing to growth in total pharmaceutical spending. There, the market has been in turmoil since 2008. That’s when 81 U.S. patients died when a Chinese manufacturer contaminated the blood thinner heparin with a counterfeit raw material. Rightfully so, this, in part, led to tighter FDA regulations, but it created a backlog of generic drug applications, multiplied from 1,500 at the beginning of 2008 to about 4,000 today.

This slowdown in approvals by the FDA has led companies seeking to enter the market to face waits of nearly four years before their application is reviewed. As a result, there are a number of generic categories where only one or two companies supply the entire country, creating “pharmanopolies” that take advantage of their market power to drive up prices. I, personally, deal with this in my work. When competition is lacking, my company aggressively seeks out quality manufacturers to enter the market to serve our 3,600 hospital and 120,000 other provider members at more reasonable prices. The result, however, is that these manufacturers, too, just end up waiting in line.

The most widely discussed remedy to this problem is giving government the power to “negotiate” prices. Government, however, does not negotiate, especially when there are just one or two breakthrough drugs on the market. This would require the ability to say “no” and refuse to contract for a drug priced too high, a decision that would face immediate backlash from voters. The reality is that government negotiation will translate into price controls. I have limited faith in the government’s ability to set pricing better than the market, or keep pace with innovation. Their solution will invariably set prices too low, creating a chill on research and discovery as talent and capital leaves the sector to seek a better return elsewhere.

Instead, we need economic levers that have the potential to improve pricing by unleashing the power of competition.

One part of the solution is speeding the FDA approval process. As noted earlier, Hepatitis C drugs were $1,000 a pill when Gilead Sciences was the only company in the class. But as AbbieVie and Merck were approved to introduce competing products, the price came down by 46%, almost overnight. The same holds true with generics. In December 2013, seven generic equivalents were introduced for the branded antidepressant Cymbalta. Within a month that price dropped 27%, and the addition of four more generic equivalents slashed the price in half by the end of 2014. Although the FDA has the authority to prioritize review of generic drug applications when only one manufacturer is on the market, too few drugs are getting that expedited review.

Another answer is the uptake of biosimilars, the biologic drugs that the FDA deems molecularly similar to the branded version. In essence, they are generic biologic drugs. Biosimilars are estimated to cut drug spending by $44.2 billion by 2024. In Europe, biosimilar competitors are typically priced 30% below their brand-name equivalents, savings that could be replicated here as specialty drugs come off patent. But the U.S. is about five years behind Europe, a gap that must be closed immediately.

Finally, we need a drug-purchasing, management and prescribing system that keeps pace with the transformation under way in our health-care system. Today there is a rapid growth of accountable care organizations – provider-led health systems taking responsibility for the cost and quality of the care they provide. These at-risk health-care providers will drive fundamental market changes. This will involve better ways to evaluate and garner real-world evidence on the value of the drugs and devices they use to treat their populations. It will mean risk-based contracts with manufacturers working with provider health systems to mitigate their financial exposure. It will mean better aggregation of purchasing power and evidence, and it will entail greater transparency around the actual price of the drugs.

Competition works and is working in health care. Policy should not lose sight of the fact that new treatments represent miracles to many patients, and should encourage more, not less innovation.

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