Are Insurers Prevailing Over Drug Makers?
Less than a year ago, it looked like health insurers were sending up trial balloons to see if they could get the federal government to regulate the research-based pharmaceutical industry as a utility. This was a reaction to high prices for new drugs like Sovaldi®. Today, the issue is being dialed back:
Express Scripts, the largest pharmacy benefits manager in the U.S. initially refused to put Sovaldi® on its formulary. Now, it looks like both sides might have come to a businesslike accommodation:
That taught Amgen and other drugmakers a lesson. Avoiding hostility with insurers and PBMs is now a paramount industry goal. “Every company is saying, ‘We don’t want to replicate what happened with Sovaldi. So let’s sit down and talk,’ ” says Steve Miller, chief medical officer of Express Scripts. “It’s very clear that it has changed the dynamic in the marketplace.” (Arlene Weintraub, “Big Pharma and Insurers Play Nice,” BloombergBusiness, May 28, 2015)
Insurers’ newfound power is extending beyond drugs for Hepatitis C and cancer:
With the aggressive pharmaceutical benefits manager Express Scripts lying in wait for two new cholesterol blockbuster contenders expected to debut this summer, the highly anticipated price war appears to already be well underway
The price war can be attributed to the Gilead effect. After Gilead released its revolutionary hep C drugs at jaw-dropping prices, Express Scripts and other payers have made it clear that they intend to press hard for lower prices, pitting drug manufacturers against each other whenever possible. (John Carroll, “The Gilead effect,” FierceBiotech, May 26, 2015)
The challenge is that these manufacturers are not making exactly the same drugs, so personalized medicine suffers if insurers and PBS just pit them against each other.
If private insurers can offer enough countervailing power in these monopoly markets, great.
But there is, in economic theory, an intellectual foundation for interference in pricing by government, namely, the fact that these high prices are facilitated by artificial monopolies granted by government through patents, market exclusivity, prohibition of resale of drugs by buyers, including parallel imports).
When government grants such monopolies to private investors, it has not only the right but the duty vis a vis citizens to monitor and regulate what those granted the monopoly do with it.
I can’t see how an economist could disagree with that proposition.
Why couldn’t the government simply stop granting private monopolies?
I am always grateful for Prof. Reinhnardt’s comments. I think I’ll charge right into it: Michael Walker, former Executive Director of The Fraser Institute, taught me a contrarian but (I believe accurate) rebuttal of the notion that a patent grants a monopoly.
Here it is: Monopoly describes a market, not a product. Patents cannot monopolize a market.On the contrary, they increase competition by spurring innovation around the patent. For example, patents on lipid-lowering drugs did not give any drug maker a monopoly, but resulted in a competitive market. It was not a market characterized primarily by price competition, but differentiated products.
I think the relevant market here is the therapeutic class of drugs. If it’s a rare disease like Gaucher’s or a rare cancer or Hepatitis C, there may be only one drug in the market or one that is clearly superior to any alternatives. In those cases, the patent holder takes advantage of its monopoly status its patents give it and tries to charge payers what it thinks the market will bear. Medicare price negotiation won’t make any difference unless it is prepared to say no to coverage if the price is deemed too high and actually means it. It would probably have to employ QALY metrics to aid in reaching such a decision but I don’t think it is ready to go there at this time.
To the extent that payers can increase or build their countervailing power, it’s a good thing. Once UnitedHealth Group completes its acquisition of the 4th largest PBM, Catamaran, its Optum division will be about the same size as the current 2nd largest PBM, CVS-Caremark. Between those two and Express Scripts, the biggest PBM, the three companies will administer drug plans and negotiate prices on behalf of about 210 million people or two-thirds of the U.S. population.
Throw in growing concern among doctors regarding what some of them view as the excessively high and unsustainable prices for specialty drugs, especially cancer drugs and the tide might be starting to turn.
There is already more than one drug in the Hep C market. The patent attracts competitors to the market. It does not drive them away.