Prescription Drug Costs and the Specter of Rationing

Copyright © 2014 by Emily Friedman. All rights reserved

Publisher’s Note:  The following article is reprinted with the permission of  

Emily Friedman  an independent writer, speaker and health policy and ethics analyst based in Chicago.

We asked her permission to share this insightful perspective into the potential consequences if Pharma is successful in protecting the ‘safe haven’ provided in this country for its predatory pricing practices.  We are grateful that she has allowed us to reprint this article.

by Emily Friedman

Many new pharmaceuticals cost nearly $100,000 a year. Insurers are complaining and patients are priced out of the market. Will this lead to another debate about rationing?

Several years ago, during a contract dispute between professional athletes and team owners (it involved baseball, basketball or football — it's difficult to keep these conflicts straight), a sports broadcaster noted the widespread public apathy about the situation and commented, "I guess not that many people are interested in millionaires fighting billionaires over money."

I was reminded of that observation in June when Karen Ignani, president and chief executive officer of America's Health Insurance Plans, publicly commented that the price of a new, effective hepatitis C drug, Sovaldi, which, at retail, is about $1,000 per dose or $84,000 for a 12-week course of treatment, is simply too high. This was rare; health insurers usually do not speak out about what they consider to be price gouging, possibly because they have been accused of doing the same thing by critics.

Drugs That Cost More Than a Car

But, the fact is that some of the newer prescription drugs cost more than a Mercedes-Benz. For example, Provenge, which is not a cure but rather a life-prolonging therapy (averaging four months) for some men with terminal prostate cancer, and which is being heavily marketed on television with misleading ads, costs $93,000 for a course of treatment. (The ads are misleading because they do not make it at all clear that the drug, if it even works, will at most buy only a few weeks of survival, with some pretty miserable side effects.)

Sovaldi and Provenge are not even the priciest pharmaceutical products around. AHIP points out, based on data from Memorial Sloan Kettering Cancer Center, that 15 cancer drugs approved in the past five years cost $10,000 a month or more. A drug designed to treat an uncommon genetic disorder costs $311,000 a year; one pharmaceutical for treatment of cystic fibrosis costs $300,000 a year. AHIP also claims that inflation in prices for some existing drugs over the past seven years has ranged from 147 percent to 841 percent. The drugs have not changed; only the prices.

Brendan Buck, vice president for communications at AHIP, says that this situation may have forced "a tipping point." He explains, "In the past five or six years, the focus has been on access, and appropriately so. But now, attention is being focused on affordability as well. And one of the main elements in that discussion is the skyrocketing cost of some of the new specialty pharmaceuticals. Obviously, a drug like Sovaldi is a breakthrough that can be of great benefit to patients, but only if they have access to it.

"It is a problem for insurers, of course, but also for Medicaid, Medicare Part D and patients with high deductibles; if patients cannot afford the pharmaceutical, they cannot benefit from it. Already, we are seeing some Medicaid plans putting limits on the use of Sovaldi.

"We do not want to discourage research and development, which are obviously necessary. The issue is pricing, and finding a balance between the costs of bringing a drug to market and affordability for patients and payers. We would like to see pharmaceutical leaders sit down with representatives of all of the stakeholders and discuss how we might achieve that balance."

Buck says that health insurers operate on a 3 to 4 percent profit margin, on average, whereas pharmaceutical firms operate on an average 15 to 20 percent margin. Those numbers can be debated (and constantly are), but it's difficult to argue that pharmaceutical firms are hurting. In addition, insurer profits are limited, sort of, by provisions of the Affordable Care Act, whereas the market is supposed to regulate pharmaceutical prices.

Market Failure

The market usually can't. Why? For one thing, competitive markets do not exist for many pharmaceuticals, which are one of a kind. Also, certain products, known as "orphan drugs" — pharmaceuticals for treatment of rare diseases — also enjoy special benefits, including less rigorous clinical trial standards, longer periods of patent protection, federal subsidy of research (more on that later) and tax incentives. And most of us have heard about pharmaceutical firms that over the years have provided "incentives" (some of us would say "bribes") to generic drug manufacturers to keep generics off the market even after the patent has expired.

And, of course, all the drug manufacturer has to do when a drug is nearing expiration of patent is change a molecule or two, rename it and poof! Instant new drug with brand-new patent protection.

Other Voices

AHIP is not alone in protesting the astronomically high prices of pharmaceuticals. Last year, more than 100 oncologists from many countries published an article in Blood (the journal of the American Society of Hematology) criticizing the high cost of cancer drugs. One of the products they focused on is Gleevec, which started out priced at $30,000 a year when it was introduced in 2001 and now costs three times as much. Its newer competitors cost even more. In the conclusion of their article, the authors wrote, "Advocating for lower drug prices is a necessity to save the lives of patients who cannot afford them … . We believe drug prices should reflect objective measures of benefit, but also should not exceed values that harm our patients and societies."

The National Coalition on Health Care is also protesting drug costs through its "Campaign for Sustainable Rx Pricing." As was apparently the case with AHIP, the coalition seems to have been spurred to action by the price of Sovaldi. John Rother, the coalition's president and CEO, said starkly, "Sovaldi is the canary in the coal mine, alerting all of us that disaster is coming unless something is done to prevent it."

Jack Lewin, M.D., chairman of its board, added, "Our health care system cannot sustain these continued escalating drug prices. Stakeholders across the health care system need to work together to solve this problem — and pharmaceutical companies are going to have to come to the table and be part of the solution."

In the meantime, the coalition advocates four courses of action: Encourage the use of generic drugs, especially by those low-income patients who receive subsidies for their treatments; expand the program that requires drug manufacturers to pay rebates to Medicaid programs to include Medicare Part D beneficiaries receiving low-income subsidies; reduce or eliminate the financial and other "incentives" that generic manufacturers receive to delay introduction of their drugs; and reduce the cost of biologic (cell-derived, as opposed to chemically derived) drugs through a shorter patent protection period and changing existing inducements that prod physicians to prescribe higher-cost pharmaceuticals.

Unfortunately, as the New York Timespointed out in an article last month, the price of generics is skyrocketing as well; focusing on digoxin, the authors reported that its price has at least doubled in many markets. One 85-year-old patient found that her 90-day co-pay of $1.15 had jumped to $30.

Not all of the National Coalition on Health Care's members are on board with this initiative, partially because some receive financing from pharmaceutical manufacturers, and partially because disease-specific advocacy groups tend to oppose any limitations on access to drugs that might be effective, regardless of cost, because they are, after all, advocating for patients with serious conditions. In the case of Provenge, when the possibility was raised that Medicare might not approve reimbursement for the drug, the cancer patient advocacy lobby landed on the feds with many feet. The Centers for Medicare & Medicaid Services never had a chance.

Big Pharma Fights Back

It would come as a surprise to no one that Big Pharma has not taken this challenge lying down. In the face of AHIP's blistering attacks, the Pharmaceutical Research and Manufacturers of America accused health insurers of discriminating against patients with serious diseases, especially cancer and HIV, despite the ACA's prohibition against the practice.

A study conducted for PhRMA by Avalere Health found that many health plans sold on state and federal health exchanges require high cost-sharing for patients with conditions such as HIV, cancer, rheumatoid arthritis, multiple sclerosis and bipolar disorder. Among Silver-level exchange plans (the most popular ones so far), at least 20 percent require cost-sharing of 40 percent of the cost of the drug, which, needless to say, can be high enough to be unaffordable except for the very rich, who likely aren't buying Silver plans on the exchanges.

Marcia Boyle, president of the Immune Deficiency Foundation, commented on the report, "It looks as if some insurance companies have found yet another way of penalizing the sickest among us."

In May, the AIDS Institute and the National Health Law Program filed a discrimination complaint with Health & Human Services, alleging that four Florida insurers — CoventryOne, Cigna, Humana and Preferred Medical Plan — were discriminating against AIDS/HIV patients by pricing the best pharmaceuticals for their conditions out of reach through extremely high cost-sharing. Similar complaints are emerging in other states

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Each Side Has a Point

Both the insurers and the drug manufacturers have cogent arguments. The insurers — regardless of what their profit margins actually are, which is one of those great health care accounting mysteries, like hospital costs — say that if they are required to cover these drugs, especially without significant discounts, they have to pass the cost on to policyholders, whether through higher premiums or even more cost-sharing. A recent piece in Health Affairstheorized that if Medicare Part D paid for Sovaldi for only 75,000 beneficiaries — about 20 percent of all those thought to have Hepatitis C — it would raise Part D expenditures and beneficiary premiums by 8 percent in one year. AHIP jumped on that immediately and reminded visitors to its website that this estimate represents only one drug, and only a fraction of those who could benefit from it.

Furthermore, whether or not AHIP is correct in reporting pharmaceutical profit margins at 15 to 20 percent,Investor's Business Dailyreported in July that Sovaldi is certainly making its manufacturer, Gilead Sciences, happy; in the first quarter of this year, Gilead's revenue rose 208 percent over the same period last year, and revenue rose by 97 percent. The firm's after-tax profit margin was 49.8 percent. Not surprisingly, Sovaldi represented 45 percent of all Gilead sales in the same quarter.

On the other side of the fence, pharmaceutical manufacturers point out that they offer payment assistance to many patients who can't afford their products, and have sought to continue to do so even though there is a provision of the ACA that casts doubt on the legality of the practice. (That debate is so wonky I won't get into it here; it's another glitch in a glitchy law.) And they imply that insurers easily could afford to cover expensive drugs, but don't want to.

It is also important to remember that some pharmaceuticals, no matter how pricey, can be an improvement on existing therapies. Many people with hepatitis C contract cirrhosis or cancer and require liver transplants. But there are not nearly enough donor livers to fill the need, and patients die waiting. In addition, transplants do not always work and involve the use of therapies that have wretched side effects and can produce severe health problems down the road. Years of Sovaldi therapy would cost far more than a liver transplant but, as far as we know, it can cure the disease without risky surgery and therapies. Transplant surgeons may not be happy, but patients and their loved ones likely will be.

Furthermore, pharmaceutical manufacturers point out that they discount the prices of many of their products in other countries and in special circumstances such as epidemics or disasters. One must view this largesse in light of the fact that most developed nations, the United States excepted, regulate drug prices to some degree.

How Much Does R&D Cost?

The major argument that the pharmaceutical manufacturers make is that it is extremely expensive to create a new drug, that most potential products don't work out and that it takes years to bring a new one to market. That it takes a long time is a given; no one — well, almost no one — is excited about inadequately tested drugs being released onto an unsuspecting public. Remember thalidomide? If Frances Kelsey, an official with the Food and Drug Administration, had not dug in her heels and refused to approve the drug until it was proven safe, despite massive pressure from the manufacturer, thousands of children with extremely serious birth defects would have been born, as happened in Europe, where thalidomide had received swift approval. (By the way, Kelsey turned 100 on July 24 — happy birthday to her!)

But just how much research and development on a new drug costs is a matter of fiery debate. The industry claimed in 2000 that the average cost of bringing a new product to market was $802 million. Donald Light, a professor at Rowan University and longtime critic of the pharmaceutical industry, has written that the figure was derived by researchers funded by pharmaceutical manufacturers. He also points out that most drug industry data are confidential and proprietary and it is, therefore, impossible to verify them. However, in an analysis published in 2011, he and co-author Rebecca Warburton of the University of Victoria estimated that given questionable accounting, tax incentives and other benefits, the real R&D cost of a new drug to its developer is more like $149 million.

Light and Warburton conclude, gloomily, "Current incentives reward companies for developing mainly new medicines of little advantage, and then competing for market share at high prices, rather than rewarding development of clinically superior medicines with public funding, so that prices could be much lower … . The mythic costs of R&D are but one part of a larger, dysfunctional system that supports a wealthy, high-tech industry, gives us mostly new medicines with few or no advantages (and serious adverse reactions that have become a leading cause of hospitalization and death), and then persuades doctors that we need these new medicines. It compromises science in the process, and consumes a growing proportion of our money."

Doctors and the Drug Industry

There are two other issues. One is that pharmaceutical manufacturers often have a very cozy relationship with physicians, whether through funding of various activities, provision of free gifts, hiring of "consultants" or by other means, which in the past included paying for farcical "scientific meetings" where no one attended the sessions and everyone played golf instead.

Some of that has been cleaned up — the Henry Ford Health System banned gifts and perks from pharmaceutical representatives for its physicians in 2007, and many health systems, hospitals and medical schools have done the same since. That same year, it was estimated that the drug industry spent $12 million to $18 million on giveaways for physicians and medical residents.

The fact is that many physicians still benefit financially from their ties to Big Pharma, and altogether too many of them continue to prescribe brand-name medicines when perfectly effective generics are available. In a shifting health care landscape where patients are paying more of the freight, some re-education would appear to be in order.

One piece of good news is that the murky world of physician-pharmaceutical relationships may have more light shone on it soon. CMS has proposed that an exemption in the Open Payments program (which most of us know as the Sunshine Act) that allows drug manufacturers not to disclose money they spend on continuing medical education be revoked. Physicians are required to participate in the education as a condition of licensure, and the pharmaceutical industry continues to sponsor educational events. Knowing how much money is being spent on what would certainly help to inform the ongoing debate.

Voodoo Accounting?

The other issue in judging the costs of pharmaceutical R&D is how much the manufacturers actually pay for those activities, and how much is paid by others. In an editorial in March, the New York Timespointed out that the federal government is a big-time funder of all kinds of technological research, and that federal money was largely responsible for development of everything from the iPhone to pharmaceuticals. In 2009, the feds spent a staggering $165.5 billion on R&D in all fields. The Obama administration has proposed lowering that commitment to $135.4 billion for 2015, although it is possible that Congress will add a good bit of pork to that.

The pharmaceutical industry certainly benefits from this taxpayer generosity. A letter sent to the Times by Steven Knievel of Public Citizen in response to the editorial stated that the taxpayer-funded National Institutes of Health — an entity that has been plagued by scandal for years, not to mention the questionable decision made by its former head, the late Bernadine Healy, that it is just fine to patent human genes for private profit — spent $30.9 billion on R&D in 2012, representing more than 25 percent of biomedical research in the United States that year.

I have always held the view that the public should be reimbursed for its investment in the creation of products that are then taken private. I spoke about this years ago at a meeting of what was then the Association for Health Services Research (now AcademyHealth), at the request of the late John Eisenberg, M.D., who was then director of the federal Agency for Healthcare Research and Quality. My remarks were not taken very kindly by researchers whose work had been funded entirely by taxpayers, had patented the products created and, in some cases, had become extremely wealthy. Several of them came to me after the session to tell me that the public "generally benefits" from their work, although they were hard pressed to explain how.

Anyone for Enforcing Existing Law?

Ironically, there is federal law that could provide relief to taxpayers who are being ripped off by privatization of publicly funded products, if someone would bother to exercise the option. The 1980 Bayh-Dole Act allows federal (or other public) funders to reclaim the rights to products whose development they funded if the developers do not bring them to market in a competent manner or if the public's need for the product is otherwise not met. These "march-in rights," as they are weirdly termed, can be exercised if there is a pressing public health need, if the product is not made available to the public "on reasonable terms," if the developer fails to meet federal requirements, or if the developer does not manufacture the product in the United States.

In the 34 years since Bayh-Dole was passed, the NIH has been challenged to use march-in rights only four times, and it rejected all four requests. Two of them involved extremely high-priced drugs whose development was federally funded. Anyone who knows anything about how the NIH and many of the scientists it employs and funds operate would not be surprised in the least.

It's Not a Meaningless Fight

It would be tempting for the average person to dismiss this increasingly nasty fight between Big Insurance and Big Pharma with a wish of a pox on both their houses, but the fact is that what happens will have an effect on almost all of us. For people on Medicaid and the providers who treat them, the strain is already being felt. Buck of AHIP wrote an opinion piece in June (with the wonderful title of "Wow, This Drug Is Really Expens — Look! A Squirrel!"), accusing the drug industry of doing everything it can to shift the argument away from its prices, and pointing out that if all Medicaid beneficiaries in California who could benefit from Sovaldi got a full course of treatment, the state would spend more on one drug than it would for K-12 and higher education combined.

The state of Oregon, whose governor has had a longtime passion for rationing care for the poor (and only the poor), is trying to invoke a provision in its Medicaid waiver that would allow it to deny coverage of Sovaldi "in all but the most severe cases." State officials estimate that otherwise, this one pharmaceutical would cost the Medicaid program $168 million for one year. Other Medicaid programs have placed limits on access to the drug, or are considering doing so.

As for Medicare Part D, those in Medicare Advantage Plans can benefit from discounts negotiated by insurers. But for those in traditional Medicare who are required to pay retail prices for drugs (thanks to the Medicare Modernization Act — talk about a glitchy law!), the costs of many drugs are ruinous. Even for those with Part D private coverage, formularies are picky and cost-sharing can be backbreaking. And then there's always the notorious "doughnut hole," which, although ACA should eliminate it over time, still puts the onus on Medicare beneficiaries for prescription drug costs after a certain level of expenditure.

HealthPocket did a study last year of the 10 drugs on which Medicare spent the most, and found that for four of them, average beneficiary cost-sharing was more than $1,000 for one prescription. For Copaxone, average out-of-pocket cost was $1,432; for Humira, it was $1,395; for Neulasta, it was $1,264; for Remicade, it was $1,005. How on earth are people on fixed incomes supposed to pay that?

The answer is: They don't. They split pills, they skip doses, they don't fill prescriptions. Just live with your rheumatoid arthritis or ulcerative colitis or multiple sclerosis or chemotherapy-induced blood problems. Or die with them.

And then there are the folks who have (voluntarily or not) high-deductible health plans, in which cost-sharing can be $5,000 or $10,000. Some of them can afford the deductible; many can't. And in the majority of cases, providers are, in all likelihood, going to be the secondary insurers, in that the patients will seek necessary care but will be unable to pay for it. That will include pharmaceuticals, and it will raise hospital, clinic and physician visit costs for everyone else.

And if you're uninsured and have rheumatoid arthritis or cancer or hepatitis C or another serious condition, good luck to you. Those providers who care for the low-income uninsured can afford only so much. (And if you are uninsured and can afford insurance, but would prefer a new motorcycle instead, please excuse me if I don't shed a tear if you get sick and can't afford to pay for your medications.)

Rationing Raises Its Head

Buck may be right; maybe this is where the rubber will finally meet the road. On the other hand, I am old enough to remember when then Secretary of Health, Education, and Welfare Joseph Califano declared a crisis in 1977 when health care costs rose to 5 percent of the gross domestic product; in 2012 (the last year for which complete data are available), they represented 17.9 percent of the GDP.

Insurers, pharmaceutical and device manufacturers, and providers always seem to manage to wriggle out from under calls for price controls, regulation or anything resembling cost-containment. Given the inherent klutziness of government regulation, I can't say I blame them.

But we've got a problem. We've had it for a long time, and Gilead and its prized Sovaldi just happen to have been elected as the poster children for that problem. Health care is becoming increasingly unaffordable for public payers, private payers, employers and especially individuals. To me, the greatest flaw in the ACA is the almost total lack of any meaningful cost-containment.

So one of the chronically asked questions in U.S. health care raises its head again: How much can we afford? At what point do we incorporate rationing into policy, instead of sneaking it into programs in the dead of night, usually aiming only at the poor and helpless? Do we tell patients with hepatitis C that they should just die on transplant waiting lists? Do we tell men with terminal prostate cancer that they can't have four more months, which might be incredibly meaningful for them? Do we tell older people, many of whom have lived active and productive lives, that they will just have to cope with the pain and limitations of rheumatoid arthritis?

Even more important, do we tell people who could benefit from many types of therapies, but who cannot possibly afford them, that they should just go away quietly and die? Or do we force all of the stakeholders to sit down together and find a middle ground, which would include pricing of both products and coverage, not at the level that the market allows, but at a level that is reasonable?

In a society where Tiffany & Co. is reporting record profits while one in five American children goes to bed hungry and nearly 20 percent of us live in poverty, I realize that the odds of a just and compassionate solution are really long. The 1 percent are in control and have no intention of turning into Doctors Without Borders. But I can't help but hope that we can defy those odds and get it done.

The great ethicist Daniel Callahan wrote long ago that if we could all just rein in our appetites a bit, there would likely be enough resources in health care to go around. That should include the firms that manufacture pharmaceuticals, and the insurers that pay for them. The rest of us should take on the responsibility of seeing to it that they understand their obligations, as a matter of human decency.

Copyright © 2014 by Emily Friedman. All rights reserved.

Emily Friedman is an independent writer, speaker and health policy and ethics analyst based in Chicago. She is also a regular contributor to H&HN Daily and a member of Speakers Express.