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Published On June 10, 2016

POLICY

The Sky Is the Limit

Drug prices are increasing at a historic rate. Should (and can) they be capped?

In The Octopus, a novel published in 1901, California farmers wage a bitter war with the railroad that carries their crops. Freight cars full of wheat are held hostage on the tracks, and the cost to get them moving again is set, as the most heartbreaking line in the book puts it, to “all—the—traffic—will—bear.” 

Early consumer agencies were established to curb such price gouging, and many wonder whether a recent congressional inquiry into hikes in drug prices will eventually lead to government intervention. Pharmaceutical companies, for their part, have blamed the industrywide increases in 2015—some of the largest in history—on the expense of bringing new drugs to market, a cost that has more than doubled in the past decade. But critics counter that pharmaceutical profit margins were more than 25% in 2015, double the average margin for other industries in the Standard & Poor’s 500-stock index—hardly the sign of an industry staggering under burdensome research costs. 

Whatever is driving drug prices, tempers are running high. In a recent national poll, 77% of respondents said that their top health care priority for the president and Congress was to make drugs for chronic conditions more affordable.  And while dozens of initiatives have been proposed—many, such as allowing Medicare more power to bargain for drug prices, have figured prominently in candidates’ stump speeches—few of these ideas, policy experts say, have much chance of making it through the political process. 

Most proposals to fix the problem ask the same two questions: What is a fair price for a drug, and how can a company be compelled to meet it? One argument is that the best answer to both might be the most direct: a government oversight board that would set a fair price for drugs.

Indeed, that’s often the way things work with government-supported monopolies, such as the railroad and electricity industries. “And we clearly grant monopolies to drug companies through patents,” says Stephen Schondelmeyer, a pharmacoeconomist at the University of Minnesota. Schondelmeyer, a former appointee to the congressional Prescription Drug Payment Review Commission, believes that a nonprofit commission, sponsored by Congress, should set reasonable prices for new drugs, prices that fairly reward the drug’s novelty and efficacy.

And thinking about what those fair prices might be has already started. The independent Boston-based Institute for Clinical and Economic Review (ICER) has started an assessment of many drugs, featuring the calculation of a fair price reflecting its clinical benefit and economic value to a patient. That’s an approach taken by other governments, such as those in the United Kingdom and Canada, that set prices for drugs. ICER also factors the broader need of the health care system into the equation—suggesting a higher price if a medicine might save the system money through reduced hospitalizations, say—as well as recommending price discounts that would accommodate national health care budget constraints.

The idea is not popular with the pharmaceutical industry. “The value of medicines is best established by a competitive market,” says Holly Campbell, senior director of communications for the Pharmaceutical Research and Manufacturers of America (PhRMA), the industry’s advocacy arm. The threat of price controls, says Campbell, might lead to a worse outcome—an industry that is afraid to innovate. It costs a great deal to bring a new drug to market, and without a competitive marketplace there could be fewer new treatments. 

And to be sure, the political road to federal price setting is a steep one. “An independent agency that would assess drugs based on their effectiveness and cost—it’s virtually impossible to imagine this Congress signing off on that,” says Rena Conti, professor of health policy and economics at the University of Chicago, who recently published an opinion piece on drug pricing in The New England Journal of Medicine. The health care industry may not oppose all attempts to price drugs according to their value, Conti notes. But the already heavily regulated industry “won’t want it to be a government-sponsored activity,” she says.

Just publishing information about what drugs should cost, however, may prove a powerful first step, says Conti. Efforts such as ICER’s may indirectly help lower prices by arming private insurers and Medicare with more information, helping them negotiate costs. “These programs are analogous to drug-pricing programs that exist in other countries,” says Conti. “They just don’t have the same regulatory teeth attached to them.” 

But regulatory teeth matter, says Schondelmeyer, who also runs the health benefits plan at the University of Minnesota. He cites a recent case in which Express Scripts, one of the largest companies that manage drug benefits, used an ICER report to try to negotiate prices on a new class of drug. The manufacturers didn’t budge, and Express Scripts chose other cost control measures, including restrictions on patient access to the drug. “How do I use a report to get a lower price?” asks Schondelmeyer. “We need to connect the findings of that report to real leverage in the marketplace.”

That leverage seems as far away as it is sorely needed. As prices continue to rise, the pressure builds. Whether newly elected officials can make any difference depends on the power of that pressure to challenge a deeply entrenched system.