Should the Government Regulate Prescription Prices, Part 1

Consider these recent headlines:

The cost of Biogen’s new drug: $750,000 per patient

Gilead’s New Hepatitis C Drug Approved by FDA, Priced at $74,760

Hospitals Furious at Cancer-Drug Price Hikes

Got Insurance? You Still May Pay A Steep Price For Prescriptions

There is quite a bit of unhappiness about drug prices these days.  One of the proposed solutions to the problem of high drug prices is to have the federal government negotiate or regulate prices.  In the next few blog posts, I’ll examine various arguments that support government regulation of prescription drug prices and some that oppose it.  But first, in this post, I’ll provide some basic background on the prescription drug market that I think is useful in understanding the arguments for and against government regulation of prescription prices.

It’s really three different markets

The market for prescription drugs is actually three different markets.  These include generic drugs, brand-name drugs with competitors, and brand-name drugs with no competitors.

The Quintiles IMS Institute indicates that the generic market accounts for about 91% of prescriptions dispensed in retail and mail order pharmacies, but only about 26% of spending (Quintiles IMS Institute, 2017).  It’s a commodity market subject to high price competition.  While there are some notable exceptions, high prices are not a major problem in this market.  An estimate based on the Quintiles IMS statistics indicates that the average generic prescription price is $29.

The second market consists of brand-name drugs with competitors.  These are not generic competitors, but therapeutic ones.  For example, Epclusa, one of Gilead’s patented drugs for Hepatitis C, has no generic equivalents, but competes against a number of drugs – such as Viekira Pak, Zepatier, and Harvoni  – that are therapeutically equivalent.  Price competition in this market occurs mainly through drug rebates (to be discussed below).  High prices are a concern in this market, but competition serves to moderate prices.  A rough estimate is that drugs in this category account for 7% of retail and mail order prescriptions dispensed and 41% of prescription spending.  Quintiles IMS statistics indicates that the average prescription price for this market is $593, but this does not reflect rebates.

The final market is brand-name drugs without competition.  The majority of these products are patented biologics or specialty drugs.  Quintiles data indicate that these drugs account for a little less than 2% of prescriptions dispensed in retail and mail order pharmacies but 33% of drug spending. (This is the estimate for spending on specialty drugs.  While some of these do have therapeutic competitors, this was the best estimate I could find for this market.) These products have few, or no, therapeutically equivalent competitors.  This is the market where high prices are the biggest problem.  An estimate based on the Quintiles IMS statistics indicates that the average prescription price for a specialty drug is $1,674.

Which price are we talking about?

Most prices that appear in news stories are either Average Wholesale Prices (AWP) or Wholesale Acquisition Costs (WAC).  The AWP is not an average wholesale price; it is a price assigned to the product by its manufacturer or distributor.  On average, retail pharmacies can purchase brand-name drugs for about 17% less than AWP and generics for far less.  The WAC is the manufacturer’s list or catalog price for a drug.  Neither is a final, net price.  They are simply starting points for price and rebate negotiations.  As a result, most prices stated in media reports are higher than the prices patients and third-party payers actually pay.

Generic manufacturers and distributors compete by offering price discounts directly to pharmacies and wholesalers.  Price competition in the brand-name market is more indirect; it occurs primarily through rebates to PBMs, health plans, and other payers (but not to wholesalers or pharmacies).  The Medicaid program has a mandatory 23.1% minimum rebate for branded products.  However, the Congressional Budget Office reports that that average Medicaid rebate on a branded product is 54%.

PBMs and health plans negotiate rebates in the commercial and Medicare Part D markets.  The size of rebates is based largely on the degree of competition in the therapeutic class. Quintiles IMS reports that rebates, discounts, and other price concessions amounted to about 29% in 2016.  A 2012 report indicates average rebates that range from 2% for Humira, a specialty drug that had little competition, to 61% for Nexium, a proton pump inhibitor with a large number of competitors.

Over 90% of prescriptions are paid for by a third-party payer.  Almost all brand-name third-party prescriptions are subject to rebates.  The large PBMs have considerable negotiating power due to the large number of prescriptions they cover.  Fein estimates that the top 7 PBMs cover 95% of prescriptions dispensed in retail, mail, long-term care, and specialty pharmacies and that the top 3 PBMs cover nearly 75% of prescriptions dispensed in these pharmacies.

Why should the federal government regulate prices?

Here are a list of reasons commonly cited to support government regulation of prescription prices:

  • Price does not effectively regulate supply and demand in the pharmaceutical market
  • The governments of other developed nations regulate prescription prices and they have lower prices
  • Both the Medicaid program and the Veterans Health Administration regulate prices and both have lower prices than the non-government U.S. pharmaceutical market
  • Pharma profits are too high
  • Pharma spends too much on duplicative, me-too products
  • Pharma spends more on promotion than on research and development
  • NIH funds the basic research that supports drug development

And here are some reasons to oppose government regulation of prescription prices:

  • There is already considerable competition in the pharma markets
  • Pharma research and development (R&D) is expensive and risky
  • Government regulation of hospital and physician prices isn’t that effective
  • Government control of prescription prices could politicize R&D spending

In my next posts, I will critically examine these reasons.

One thought on “Should the Government Regulate Prescription Prices, Part 1

  1. Jeannette Afful

    I couldn’t agree with you more Professor Norman, unfortunately this same trend is noticed even in developing countries like Ghana where I reside. But rather unfortunate most people have to pay out of pocket for these high priced drugs, making accessibility very challenging. I strongly believe that most government policies needs to be reviewed and like you mentioned most pharmaceutical companies and industry need to focus more on how best to curb these challenges. Then again pharma profits are way too high I must agree having worked in both retail pharmacy and with pharmaceutical industry. Competition within the industries with respect to generics and brands all goes a long way to affect the demand and supply and utilization of drugs by consumers. There really is quite a bit of unhappiness with drug prices and even worse in developing countries.

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