In Search of the ‘Bad Guy’

Ed Schoonveld

Affordability of healthcare and prescription drugs is a serious issue, but there is not always a “bad guy” in societal challenges. Patient affordability of drugs is important to everybody; after all, medicines on a shelf don’t do anybody any good, certainly when patients go untreated.

Bernie Sanders’ theater

In STAT,¹ Rachel Cohrs called it “Sen. Bernie Sanders’ prescription drug pricing theater,” where Merck CEO Robert Davis, Johnson & Johnson CEO Joaquin Duato, and Bristol Myers Squibb CEO Chris Boerner were grilled with the same questions that were asked in a similar congressional hearing five years ago. Subsequently, the Inflation Reduction Act (IRA) of 2022 passed, under which Medicare was authorized to negotiate drug pricing with the pharmaceutical industry. Many might be wondering, why did Sanders need a sequel?

Complaints about company profits, CEO salaries, and price differences with other countries were the highlight of the event. With respect to company profits, an annual Deloitte analysis² shows that the internal rate of return on R&D investments for the top 20 companies by R&D spend was only 1.2% in 2022. We may run the risk of killing one of the last remaining US industries. High CEO salaries may raise some questions. However, this would be a general societal discussion about income distribution, as high CEO salaries are not unique to pharmaceutical companies.

Rising drug costs

The overall healthcare cost has been rising rapidly in the US, reportedly tripling from 6% to 17% of gross domestic product over the last 45 years.³ The cost share of prescription drugs has been very constant at 12% to 13% of healthcare cost since 2000. Drug costs carry the brunt of political attention, where they are only a small part of a broader healthcare affordability problem. Cost of healthcare cannot be simply blamed on a “bad guy.” Scientific advances create many opportunities, but also come with resource trade-offs.

Global price differences

US list prices for prescription drugs are often higher than in other countries. Net prices can be much lower. European countries, Canada, Australia, and Japan typically have government price controls for prescription drugs. They have a vested interest in using their monopsony power and price control legislation to minimize the government funded drug bill. That does not necessarily mean it is done fairly.

In England, the National Institute For Health and Care Excellence (NICE) is setting the maximum price at which a prescription drug can be reimbursed by the national health system. However, the calculation has not been corrected for inflation since its institution in 1999, 25 years ago. Correcting for cumulative inflation, the “acceptable” price levels are now less than half of what they were at NICE’s inception in 1999. On top of that, the UK government demanded rebates of 27.5% in 2023 to address budget overruns.⁴ Through international price referencing, this directly affects pricing in other countries. As another example, Canada has artificially reduced pricing by instituting compulsory licensing, which was only reversed in 1987 with safeguards that prices could not substantially increase from the then-established generic price levels.

Patient cost

Since drugs rebates are confidential, it is hard to know the exact cost to the managed care organization (MCO) or pharmacy benefit manager (PBM). Unfortunately, MCOs and PBMs don’t typically pass on rebates to patients, so, in some cases, the patient copay can even be higher than the cost of the drug. As a typical example, seniors pay a $205 copay for a 110-mcg inhaler of fluticasone propionate (generic Flovent; the least expensive option in the drug class) with WellCare Value Script, but pay $118 without insurance through GoodRx. Obviously, the health insurance company is making profit on each of these prescriptions.

With the increasing share of high deductible plans, the rapid growth of exclusion lists, and formulary design shifts to higher copay and co-insurance rates, MCOs and PBMs have shifted much of the increasing cost burden to patients. Who is the bad guy?

About the Author

Ed Schoonveld is a value and access advisor for Schoonveld Advisory and author of The Price of Global Health.

References

1. Cohrs, R. In a Showy Hearing, Bernie Sanders Gets Few Answers About Lower Drug Prices. Stat. February 8, 2024. https://www.statnews.com/2024/02/08/bernie-sanders-drug-prices-pharma-ceos/

2. May, E.; Gupta, L.; Taylor, K.; Miranda, W. Seizing the Digital Momentum: Measuring the Return From Pharmaceutical Innovation 2022. Deloitte Center for Health Solutions. January 2023. https://www2.deloitte.com/content/dam/Deloitte/ch/Documents/life-sciences-health-care/deloitte-ch-en-lshc-seize-digital-momentum-rd-roi-2022.pdf

3. Schoonveld E. The Price of Global Health: Drug Pricing Strategies to Balance Patient Access and the Funding of Innovation. Routledge Taylor & Francis Group. 2020. https://www.routledge.com/The-Price-of-Global-Health-Drug-Pricing-Strategies-to-Balance-Patient-Access/Schoonveld/p/book/9780367279400#:~:text=Description,aspects%20of%20the%20pharmaceutical%20industry

4. Cohrs, R. Pharma Group Blasts UK’s Drug Rebate Scheme Shortly After Lauding 'Landmark' Spending Deal. Fierce Pharma. December 5, 2023. https://www.fiercepharma.com/pharma/pharma-group-blasts-uks-statutory-drug-rebate-scheme-days-after-lauding-landmark-deal#:~:text=The%20Association%20of%20the%20British,the%20U.K.%20demanded%20in%202023