Price Controls on Meds Save Money for Feds, Not Necessarily Consumers

 While supporters of the prescription drug pricing proposal that is under consideration may position it as a benefit to consumers, the policy won’t offer meaningful savings for many and can drive up costs for the future. It encourages higher prices for new medicines and can crowd out private negotiation for lower co-pays. Furthermore, it runs counter to other policies intended to encourage investment in drugs that can improve life at a lower cost relative to other types of healthcare. While it won’t necessarily help consumers, this policy will secure savings to the government and a political victory.

First, consider how federal government price “negotiation” compares to current price negotiation between drug companies and insurers offering coverage in Medicare Part D. Drug companies give insurers discounts in formulary contracts for lower co-pays or fewer hurdles such as prior authorization. Under the price controls under consideration, the federal government sets a price according to a formula that grows bigger as the drug gets older, there is no requirement to put the drug on a favorable formulary tier.

So, consider Drug A with a list price of $600 per month and the pharmaceutical company provides a 30 percent rebate, or $180, for the preferred formulary and the consumer pays $42 per month (the average preferred co-pay for PDPs). The drug company offers this discount because more people have affordable access to the drug and sales increase. The health plan uses the rebates strategically, including to lower the co-pay and the premiums to attract more consumers to increase their business.

In the proposed policy, the federal government can set a price for Drug A of $300. If the drug company chooses not to offer the $180 rebate for the much less valuable drug, the insurer facing the loss of that contract would move Drug A to non-preferred formulary where the patient pays 40 percent (the average non preferred coinsurance for PDPs) or $120. Consider the policy also limits price increases. A new drug, drug B, that treats the same condition as A, can launch at $650 and offer a $350 rebate and get the preferred Medicare formulary placement for that big rebate with a co-pay of $42, but for the more expensive drug.

Additionally, the policy skews investment away from drugs that generate the most savings. It puts price controls on the biggest selling drugs in Medicare after nine years on the market for chemical-based pills, and thirteen years for complex biologics, which are often injectable. Because it reduces revenue for small molecule drugs after a shorter time, the policy makes complex medicines a relatively more favorable investment. Small molecule generics, which typically launch around 12 years after the original, are the biggest generator of savings in medicine, other than better health. This is a unique feature to these pills, consider that while in the not-too-distant future there will be multiple generic pills that achieve a 90 percent plus cure for Hepatitis C, there will never be a generic liver transplant.

Not only do small molecule generics create billions in savings for insurers and funders like the federal government, health insurers also often make them available for a few dollars to consumers. But this policy discourages development of small molecules relative to biologics, which have a longer period without price controls, tend to be costlier, and don’t experience the same degree of savings after patent expiration. Furthermore, by pushing the brand price down for the price-controlled drugs, this policy discourages generic entry at the end of patent life as it is difficult to compete with a low-price brand, the differential between the brand and generic price is what creates that incentive for generics to enter the market particularly right after patent expiration when there is a big financial prize for the first entrants.

Next, this policy discourages investment in new indications for existing medicines that are likely to be price controlled. While there are critics of expanding a drug’s use beyond an original intention, particularly when the drug received orphan status, it is much quicker and less expensive to develop an existing drug for a new indication rather than to develop a totally new medicine. But this policy discourages post-market study by reducing profitability near the end of the lifecycle.

Furthermore, the policy removes some small biopharma companies from the price controls, which means they may remain more valuable if they don’t integrate with bigger biopharma. This may increase costs for small companies who would need to develop commercialization infrastructure that typically focuses on research and discovery.

So, if this policy is implemented, consumers may see a significant change in what they spend on medicines today and tomorrow, but not in the direction they expect.

https://www.aei.org/health-care/price-controls-on-medicines-save-money-for-the-federal-government-but-not-necessarily-for-consumers/