What is a reasonable price?
Drug prices are nuts. I am currently on a drug that costs over $24,000 a year. It helps control Parkinson’s’ symptoms. It works quite well, but is $24,000 reasonable? Under truly free competition, the market dictates the price. But the market for pharmaceuticals is far from being a classic economic free market. Patent protection, and the high degree of development and production regulation, fundamentally alter how the market operates and sets prices. While their drug is under patent, the pharmaceutical company can set the price with only public outrage being a limiting factor.
Pharmaceutical companies argue they need to charge high prices because a drug is typically only under patent for a few years by the time it gets FDA approval. In addition, because drug development is expensive, the financial reward for successful drugs needs to be high to keep investment money flowing.
Curtailed Patient Access
The way insurers have come to deal with high priced drugs is to either not cover them or require the beneficiary to pay most of the costs. Each health insurance plan has a formulary that lists of generic and brand name prescription drugs it covers. Consumers may find there is no plan available to them that covers the drugs they are on. Furthermore, as the drugs one takes change over time, a health plan that serves you well one year may not meet your needs the following year. If a drug is on the health plan’s formulary, it is typically assigned to a cost-sharing tier, with generics being covered at much high rates than specialty drugs.
A personal example
I recently was unable to find a health plan that covers the drugs I take. In searching for a Medicare Part D plan (drug coverage), I learned that the drugs I take for my Parkinson’s Disease are either:
-
-
- in a high-cost tier (Rytary),
- are not available in the form I take (extended release) (Pramipexole Dihydrochloride),
- or the drug is not on the formulary in any form (Nourianz).
-
Rytary and Norianz are relatively new drugs and under patent while Pramipexole is a generic.
Under my previous employer-subsidized private insurance, I paid $0 for Pramipexole. $480 for Rytary, and $240 for Nourianz for the year. So once I met the $1,000 deductible, my total annual drug costs were about $1,720. The chart below shows shows the added cost of each drug under Medicare Part D plans as compared to my old private insurance. The last data points include the premium costs. The best I can do from any Part D plan is get Pramipexole and Rytary for about $75 and $2,500 a year. As Nourianz is not covered by any Medicare Part D plan, I will have to pay the market price which is about $24,725 a year or not take the drug (there are no substitutes).While my employer-subsidized insurance was a good deal for me compared to Medicare Part D plans, the coverage of these drugs was not going to continue. Just before I switched to Medicare, they sent me a letter saying they were not going to cover Nourianz or Rytary going forward.
I take Nourianz to relieve severe muscle cramping so being cut off scares me. You may think so what, take some other drug, But, the drugs that are covered are over 40 years old and have well established limitations and problematic side effects. Will my life come to a halt if I don’t get the new drugs? No, but I doubt I will function very well.
Market power and negotiation
The drug patents give pharmaceutical companies market power as they shield them from competion for typically about 20 years. This gives them great latitude in setting the intial price of a drug. Medicare, as a major purchaser of drugs, potentially has enormous market power too. Medicare’s could use its demand-side market power to balance prices while a drug is under patent, However, Medicare Part D currently includes a “noninterference clause”. The Republican Policy Committee states that this clause “protects market competition and patient access by prohibiting the government from interfering in negotiations among insurers, drug manufacturers, and pharmacies (RPC Senate). But there is no competition to protect as this market is highly “interfered” through the use of patents and regulation.
It is time to let Medicare negotiate prices. The VA and DOD have used their market power to negotiate drug prices for the rest of the Federal sector medical systems. GAO found that in 2017 VA paid about half the cost Part D plans paid for select drugs. Similarly, the Congressional Budget Office (CBO has estimated that negotiating prices would save in the range of $450 billion in 10-year (2020-2029) savings from the Medicare drug price negotiation. CBO also estimated that the impact on drug development would result in about eight fewer drugs coming to market over the next 10 years, of the approximately 300 drugs expected to be approved during this period, and 30 fewer drugs in the subsequent decade (kff.org).
Over the past two years, numerous Congressman have proposed legislation to give Medicare the power to negoiate. Come together and get this done.