Hillary Clinton Wrong on Prescription Drugs
(A version of this Health Alert was published by the Washington Examiner.)
With perfect timing, Hillary Clinton’s presidential campaign announced a proposal to impose federal price controls on prescription drugs the day after Turing Pharmaceuticals declared it was raising the price of Daraprim, a medicine to combat the “toxoplasmosis” parasite, from $13.50 to $750 per pill.
Politically, Clinton may be on to something: In an August poll conducted by the Kaiser Family Foundation nearly three quarters of respondents said prescription costs are “unreasonable.” Four in ten favored government regulation to keep costs down. Daraprim’s huge price increase, which was condemned by the pharmaceutical industry, has nevertheless thrust prescription drug prices into the political limelight after years of calm. Starting in 2005, the federal government provided seniors heavily subsidized prescription drug coverage through the Medicare Part D program.
Soon thereafter a number of common blockbuster drugs — such as Lipitor, Plavix and Oxycontin — went off patent, meaning cheaper generic (copycat) versions became available. Chain pharmacies started offering a month’s supply for just a few dollars. The problem of high prescription prices was solved — for a while.
Then came the “specialty” drugs — medicines that treat less common conditions affecting fewer patients than the blockbuster drugs, but have equally massive research and development (R&D) costs. One recent study estimates the cost of the typical new drug at nearly $2.6 billion. Sovaldi and Harvoni, expensive new medicines that effectively cure Hepatitis C, are good examples. Given this background, Clinton raises a legitimate issue: What can be done to reduce high drug prices? But she offers the wrong prescription.
First, she asserts that prescription drug prices would drop if we curb advertising. That may be true, because patients are unlikely to demand medicines of which they are unaware. In other countries, where free speech is not constitutionally protected, it is not uncommon for governments to ban so-called Direct-to-Consumer (DTC) advertising of prescription drugs. This effectively curbs demand for cutting-edge new treatments that may be expensive. Ignorance is not bliss, however. Clinton asserts that DTC ads promote “confusing, misleading or incomplete information or exaggerated claims if not regulated effectively.” She appears unaware that the U.S. Food and Drug Administration (FDA) already regulates DTC advertising and that FDA’s Office of Prescription Drug Promotion must approve every ad campaign, along with its promotion to doctors.
Because the Constitution would inconveniently prevent a Clinton White House from banning DTC ads, Clinton proposes that pharmaceutical companies not be allowed to deduct ad costs as a business expense for tax purposes. Every other industry, we presume, would remain free to deduct advertising spending. This backdoor tax increase on pharmaceutical companies would have two effects: 1) It would increase government revenue, which Clinton would “invest in research, ” she says, and 2) It would reduce the amount of money available to pharmaceutical companies for R&D.
Clinton also would impose federally dictated prices on new medicines by forcing drug makers to calculate, using some sort of pseudoscientific formula, each new drug’s R&D cost. This is nonsense. A drug company’s management sees how things are going in the research portfolio and moves money around based on various scientific and business factors. Lessons learned from an unsuccessful drug experiment may be useful for another compound. A line of inquiry may dead end and be forgotten for a couple of years until a new scientist decides to have another look. Some research may be applicable to more than one new drug in the R&D portfolio. And if Clinton had any business background she might know that drug makers often buy and sell drugs that are still in the development process. Selling companies doesn’t tell buyers how much they’ve already spent on R&D.
Finally, Clinton ignores a legitimate way for the federal government to curb drug prices: By reducing needless FDA red tape and streamlining the drug review and approval process, which adds billions of dollars to pharmaceutical R&D costs and delays the introduction of many lifesaving and effective drugs. The House of Representatives recently passed a bill fundamentally reforming the FDA, the 21st Century Cures Act, with strong bipartisan support. The Senate will take up the legislation after Thanksgiving. The next president needs to lead this reform effort, not grandstand against high prescription prices.
I agree that Clinton is off base on this, especially with respect to the attempt to get drug companies to quantify R&D spending attributable to a specific drug.
With respect to the free speech issue, we’ve managed to keep cigarette advertising off the air since 1971 – 44 years and counting. There was also a time when DTC drug advertising was prohibited but the constitution guaranteed free speech then too.
I fault drug industry pricing of new drugs on two counts. First, they claim to be pricing based on value to patients and other healthcare costs avoided. However, they never quantify their assumptions regarding the value of a quality adjusted life year (QALY) or how many QALY’s a particular drug adds to a patient’s life on average. They also often charge far more for drugs in the U.S. than in other developed countries partly because marginal production costs can be extremely low and other countries use drug price controls and partly based on ability to pay as Gilead Sciences does with Sovaldi and Harvoni. Their proxy for ability to pay is per capita GDP.
The generic pricing issue can be mitigated by reforming the FDA to shorten and streamline the drug approval process and probably by adding more staff to process applications. Both solutions should be legislated and implemented as soon as possible.
Whether limits on advertising tobacco is constitutional I’ll leave to others, but you surely cannot equate tobacco with therapeutic drugs?
It is not the Rx industry’s job to quantify the value of a QALY. It is for the payer to decide. (Who the payer is – individual, insurer, or government – I will similarly leave aside for now).
But how many QALYs are added to a patient’s life and cost per QALY is now pretty standard in pharmaco-economic research.
I agree that payers are free to set their own QALY metrics in determining what they’re willing to pay for and how much. However, drug companies keep telling us that they price their drugs largely based on “value” to patients. Their estimate of the value of a QALY, which could vary considerably from one company to another, would be instructive to help doctors and the marketplace in general assess whether the drug’s price fits within a zone of reasonableness or not.
How about this simple legislative change: allow Medicare Part D to negotiate prices. CMS was prohibited by law from negotiating prices in the original bill.
It would also reduce Medicare expenditures.
It would be a very simple change. But it would backfire because it would reduce investors’ willingness to put their capital at risk in medical research. If you look at items in your life for which prices have gone down over the years, none of them are due to the federal government dictating prices, but more free enterprise and choice.
So your argument is that ridiculously high drug prices are justified by investor sentiment? Pharmaceutical companies are high margin businesses http://www.statista.com/statistics/314648/leading-global-pharmaceutical-companies-by-net-margin/
What CMS pays for its drugs in no way dictates prices elsewhere. CMS negotiating prices is no different than any other major buyer demanding a discount. When I purchase Synvisc from the supplier, I get lower prices based on volume. Why shouldn’t Medicare? If the manufacturer wants access to the Medicare population they can negotiate for it. From a manufacturer’s point of view, Medicare is just another customer.
Thank you. To be consistent, I think you’d have to advocate that seniors have HUD dictate their home prices and US DOT dictate their car prices. Would property developers and car makers not react to that?
The federal government should not be an agent for dictating prices of goods and services consumed by individuals. Rather than getting the federal government into drug pricing, it needs to get out of setting fees for hospitals and doctors.
You’re hung up on “setting” prices, something I never advocated. I think CMS should NEGOTIATE prices. CMS pays a certain amount for an MRI but that doesn’t in any way “dictate” prices elsewhere.
Using your examples, if HUD pays for the homes then they should be able to NEGOTIATE – not set – prices. If DOT buys cars it should be able to NEGOTIATE – not set – the price paid.
The prices are not “set”. The vendor can negotiate and either take it or leave it.
I’m just guessing here but I’ll bet when the local PD buys new squad cars they shop around. Does that mean the police set car prices?
When the Pentagon takes bids on new jets are they setting the price on jets?
About 10 years ago Alain Enthoven and Kyna Fong (then a grad student of his) wrote a piece for the Wall Street Journal explaining why CMS cannot negotiate drug prices. NCPA received their permission to adapt it for a policy brief (http://www.ncpathinktank.org/pub/ba575/).
Basically, negotiation is a take it or leave it proposition. The government can dictate prices (i.e. price controls). Or it can say “no” and deny its business to a drug maker. Enthoven was basically saying the only power to negotiate is the power to say no. He didn’t believe CMS could politically deny seniors specific drugs in the face of industry claims about rationing. By contrast, competing Part D plans can say no to specific drugs; seniors can always change plans if their plan doesn’t cover their specific drugs.
The best way to make drugs affordable is for the FDA to clear the 4,000 backlog of abbreviated drug applications and let generic competition thrive.
Even if CMS were authorized to negotiate drug prices, it still wouldn’t do any good unless they were also authorized to exclude a particular drug from the formulary if a satisfactory agreement on price can’t be reached or to at least subject the drug to a less favorable tier that requires patients to pay a greater percentage of the cost out-of-pocket. This is what the pharmacy benefit managers (PBM’s) do today.
However, current law, as I understand it, also requires CMS to cover any new drug that wins FDA approval which only means that it’s more effective than a placebo and not necessarily more effective than competing drugs already on the market. The VA does this and has a highly restrictive formulary. I don’t think most Medicare beneficiaries would find the VA formulary acceptable.
It seems like you’re arguing that the problem is with the law, and I agree with that. Why is Medicare denied the market privileges enjoyed by PBMs?
Medicare is forced to cover a drug and can’t haggle the price. What industry wouldn’t love a customer like that?
I would like to pass a law that says Medicare has to pay whatever I ask and can’t refuse to allow me to participate in the program due to cost. Unfortunately, I’m just a physician and can’t afford to purchase those kinds of laws from Congress like the pharmaceutical lobby does.
It’s not just the VA formulary. I don’t think many people find their private insurance formulary acceptable either. I fight those battles on a daily basis.
Quite frankly, sometimes their choices make no sense and I suspect there’s some questionable behavior going on. For example, I had a patient who wanted a Synvisc injection for knee pain. The insurer’s PBM said we had to obtain the medication from their preferred pharmacy, which wanted the full retail price of about $1200. Given the patient’s high deductible, this was out of his price range even if I didn’t charge for my services.
I told the insurer that I could buy Synvisc for 50% less and they wouldn’t allow us to do it. Eventually we found someone at the insurance company who could hit the override button.
It doesn’t make any sense to reject a lower price unless someone is making some money on the arrangement somewhere.
“Why is Medicare denied the market privileges enjoyed by PBMs? “
Right now, there is no such thing as a Medicare drug plan. All drug plans are either private, stand-alone Part D plans sold by an insurer or a PBM like Express Scripts or they are folded in as part of a private Medicare Advantage plan offered by insurers. By contrast, there are both standard fee for service Medicare and private Medicare Advantage plans available that cover Part A and Part B services.
While I’m certainly not an expert on this subject, I don’t see how Medicare can negotiate drug prices without also being able to offer its own Part D drug plan. To offer its own drug plan, it would not only have to negotiate with drug manufacturers or drug wholesalers but it would also have to negotiate reimbursement rates with drug retailers.
In short, I just don’t see how Medicare can negotiate drug prices without also being able to offer a stand-alone drug plan that people could sign up for through the Social Security Administration which is what those who choose standard fee for service Medicare Part A and Part B insurance do.
By the way, the biggest purchasers of generic drugs have considerable market power and can negotiate very favorable terms for those drugs, at least where there are enough manufacturers to ensure a competitive marketplace. For brand name drugs, though, nobody has very much power against the big drug companies. Their attitude is basically if the doctors are prescribing it, you have to carry it and the price is the price. Insurers and PBM’s try to create countervailing power by threatening to exclude the drug from their formulary if the price is deemed too high and there are acceptable alternative drugs in the therapeutic class.
Before even thinking how Medicare might negotiate with drug manufacturers, retailers, wholesalers, etc. It seems to me there’s a more fundamental issue. You mention it. It’s that Medicare does not have authority to establish a drug formulary, I.e., exclude a drug from coverage.
Medicare: we want a lower price.
Pharma: or else what?
Medicare: or else . . . never mind.
Exactly. It’s not that it can’t be done, it’s that it’s not allowed to be done.
Part D was a magnificent gift to the pharmaceutical industry, providing them a multi-billion dollar customer with no bargaining power.
“a multi-billion dollar customer with no bargaining power”
But don’t forget that Part D insurers still compete against one another on price. Evidence that this helps hold down costs is that Part D premiums came in less than the federales and other actuaries predicted in the first few years. It’s easy to say that Medicare would drive better deals, and maybe they would. But as John Graham points out, even Alain Enthoven was skeptical of that.
It was Devon who pointed out Enthovens reservations. My oops – sorry guys.
When you write “Medicare is forced to cover a drug” it sounds like a mysterious celestial force. It is politicians and bureaucrats making a rule, under the influence of various parties.
Of course. We have the best laws money can buy.
I was interested in what Hillary says about drug advertising. It was argued by leftist economists (though based less on economics than leftism) in the 60s and 70s that advertising serves no useful economic function, but merely creates artificial demand among consumers. (General Mills and Proctor & Gamble were particular targets. To the leftists, advertising created nonexistent distinctions among cereal and detergent brand products, allowing producers to gouge consumers.) There were actually proposals before Congress to eliminate the deductibility of advertising for any business. Fortunately, mainstream economists argued successfully that advertising conveys information that improves consumer welfare, and that product differentiation is beneficial. But old, discredited ideas never seem to die.
Mr. Fenbup, thank you for pointing out that an unfettered Medicare program such as Medicare Advantage can reduce costs. Of course, they do have some financial assistance from the government.
My policy is that a MA plan receiving a government subsidy should share the wealth. MA plans are HMOs that place a bureaucratic burden on me. If you want to make my life harder you need to compensate me. I won’t accept any MA plan that doesn’t pay more than Medicare rates to compensate me for the added expense of dealing with their bureaucracy.
And belated thanks to Mr Graham for advocating that Medicare physician fees should be the floor – not the ceiling – for physician fees. If a doctor wants to accept the Medicare fee, ok, but allow us to balance bill and let the market decide if we’re worth the extra cost. Otherwise, the worst doctor gets paid the same as the best doctor.
I don’t have contracts with Aetna or United but people still come to see me despite the higher fees for being out of network.
Part of the reason they see me is that I can often provide the same services for less money. http://mobile.cpr.comcastbiz.net/services.shtml scroll down to see cost comparisons.
Dr. Gorback – Congratulations for clearly posting your cash prices for the various services that you offer. Why doesn’t every doctor do that? How much more do you get paid on average from commercial insurers with whom you have contracts on behalf of the under 65 population? It would also be helpful if you could give us a flavor for the extra documentation required by Medicare Advantage plans as compared to standard fee for service Medicare and how much more than Medicare rates you would need to be paid to make it worth your time and effort to provide it.
As for balance billing, it could be a reasonable approach if patients are aware of the actual charges before services are rendered. The specific services that you provide lend themselves to that approach. As a patient though, I would hate to be subject to balance billing by a hospital when I have no idea what they will charge or even what services, tests and procedures they will do once I’m in there.
Chargemaster rates are off the charts and bear no reasonable relationship to either the cost of providing care or its value. If hospital balance billing for out-of-network care were limited to some reasonable percentage above Medicare such as 115%-125%, I might be able to live with it. If it’s going to be based on chargemaster rates, it’s a non-starter.
I second your question! A lot of physicians refuse to post prices because they assert it violates contracts with Medicare and private payers. In over ten years pursuing this issue, no physician has ever shown me a contract with such a clause, claiming that the contracts are confidential and they’d be sued if they did. (I re-iterate my oft-stated promise that you can mail it to me in a plain envelope and I will never disclose who sent it.)
Those are cash prices.
I’m not allowed to advertise contracted rates. The contracts have nondisclosure sections and the FTC frowns upon doctors comparing prices. When doctors collude to set fees the feds land on them with both feet. We’d be better off colluding to set LIBOR.
However, the insurance carriers have a database of all of my contracts. I found this out when Aetna tried to screw me with a “Silent PPO”. That’s when an insurance company decides that you cost too much to be seen out of network so they look for a contract that they can piggyback on. If you contact either plan about how it happened you get Sgt Schultz. All I knew was that suddenly my Aetna payments were “adjusted according contractual agreement”. Yes, they will enter into a contract with you without your knowledge. Texas outlawed this and they still did it.
My take on why ChargeMasters are so high: http://wolfstreet.com/2014/09/16/how-hospitals-and-health-insurers-collude-to-keep-prices-high/
By the way, there is no prohibition against advertising Medicare fees. CMS publishes the entire database on its web site.
The gag clauses of yesteryear forbade making disparaging remarks about the insurer to the patient or describing how their coverage was inadequate. The gag clauses have been de-fanged to some extent (laws have been passed regarding discussions of the insurance coverage) but have been reincarnated as “business agreements” to address sharing fees and terms with other doctors.
These contractual terms are not limited to fees or insurance; for example, EMR contracts have gag clauses that prevent someone publishing a screen shot of an error. ACOs will de-list doctors who protest too much about the internal workings of the organization.
Thank you. Such clauses are understandable.
Those were interesting comments about the chargemaster rates and the discounts advertised by the insurers and TPA firms. I hear, though, that in recent years, the bigger insurance companies are negotiating hospital rates up from Medicare rather than down from chargemaster. It shouldn’t be rocket science for self-funded employers to ask insurers seeking their business how their contract rates stack up as a percentage of Medicare as opposed to a discount from the chargemaster.
Out of curiosity, what percentage of Medicare rates do you think hospitals need to collect to cover their costs including their cost of capital? They all seem to claim that Medicare rates don’t cover their costs, especially for outpatient care, and Medicaid rates don’t come close to covering their costs. Also, to what extent do ASC’s cherry pick the lowest risk patients with the best insurance coverage and steer the higher risk patients and those with Medicaid or no insurance at all to the hospital?
Most hospitals don’t break even on Medicare and rely on cost-shifting from private plans. I suppose one could argue there’s a stealth Medicare surcharge on people with private coverage.
Insurers will try to negotiate lower rates with hospitals whether it’s their product or acting as a TPA. The repricing fee is just icing on the cake and it induces insurers to seek out high ChargeMasters. If you negotiate a hospital down from $10,000 to $1,000 you get a better repricing fee than getting the same price down from $5,000.
As far as I can tell, it’s the repricing fee that perpetuates the persistence of the high ChargeMaster rates. The fact that ridiculous ChargeMaster rates still exist indicates to me that it still makes sense to do so.
My office manager used to work for a TPA and when I asked her how they could pull off this repricing scam she said the HR people at self-funded companies didn’t understand what they were buying. The TPA shows the HR people that they can get a hospital’s price down from $10,000 to $1,000. Sounds good, no?
BTW, many self-insured employers are not really self-insured. They re-insure and I wouldn’t be surprised to learn that the insurer acting as TPA gets the nod. However, they still get the ERISA exemption from state regulation. How I wish I had the resources to purchase such regulations where I could be two mutually exclusive things at once and reap the benefits of both!
As I alluded to above with the Synvisc example, there seem to be scams within scams. I wonder what the self-insured employer would think about learning that their PBM was steering them to a “preferred” source that charged more than double my cost.
ASCs don’t really cherry pick by medical risk. That’s more of a medical decision. Either the surgeon or the anesthesiologist will determine that the patient is too high risk for an ASC. It’s a judgment call and it considers not only the patient’s health but the type of procedure.
Facilities seem to be more concerned about financial risk. There’s an ASC that won’t do spinal cord stimulator implants because they’ve been burned on payment for the hardware, which is very expensive. OTOH, the CFO of a for-profit hospital asked me not to bring Medicare intrathecal pump implants to them because they lost money on the pump hardware. I asked him to put the request in writing but unsurprisingly he never did.
I don’t know how many ASCs accept Medicaid. They will usually accept cash but not at some astronomical ChargeMaster rate.
Dr. Gorback — Thanks again.
Another reason to drive chargemaster rates as high as possible, as I understand it, is that they get factored into Medicare’s formula that determines outlier payments for the more complex cases. The higher the chargemaster rate is, the greater the net extra payment from Medicare.
As for reinsurance, I’m told that it’s pretty expensive unless the attachment point is very high so many of the larger self-funded plans absorb the risk themselves. Even a $250,000 attachment point is not considered very high these days.
I know that in the pharmacy benefit management business, they have four different ways to make money which are (1) rebates from drug companies which depend on volume and movement of market share, (2) profit from filling generic prescriptions by mail order, (3) administrative fees and (4) the spread between what they pay for drugs and what they bill clients and patients for them. The PBM’s want to make at least a certain amount of money from any given account and they don’t really care which bucket or buckets the profits come from.
I didn’t realize that profits from repricing negotiated rates for medical care were a source of profit for insurers and TPA firms on top of administrative fees in the self-funded, fee based, as opposed to risk based, health insurance market.
Any estimate of how much hospitals profit or lose from Medicare is meaningless for policy-making unless we think hospitals have a right to a taxpayer-guaranteed return on capital. I don’t think they do.
Look up “Disproportionate Share Hospital” to see how CMS trims up hospitals with a lot of Medicare/caid.
However, as a result of the ACA, the Medicaid piece will be significantly reduced.
Thank you, but the idea that posting a price so that your competitors can see it equals collusion is absurd. It is a legacy of the old days when the medical societies set fees. Wait a minute! Those are not the old days! That is the RUC! What I am getting at is the government effectively gives the societies the power to fix prices through the Medicare fee schedule. To hold that posting prices for cash payers would be collusive makes as much sense as holding that Safeway and Giant are colluding because they post prices, or BP and Exxon.
There is no prohibition against posting cash prices. I don’t know where you got that impression.
What you can’t do is post what insurers are paying you (if there’s a gag clause) or share that info with other doctors in an effort to determine a market price (FTC).
Yet somehow an insurer can control over half of a state’s health insurance market. Why is that?
Doctors tell me all kinds of things! Also, perhaps doctors are afraid to post cash prices that are lower than fees contracted with insurers, because insurers would then demand those prices?
Some of the cash prices I advertise are lower than my contracted rates from certain carriers.
If an insurance company asked me to match those fees I’d just tell them that I can’t because of the overhead I incur dealing with them. I have to pay employees to obtain pre-authorization, file a claim, fight over denials, etc.
I can pass those savings along to the cash-paying patient.
Thank you. I am not quite sure I’d characterize my position that Medicare fees should be the “floor, rather than the ceiling,” but that the government should get out of the fee-setting business. I’d bet there are plenty of services that would cost less than the fee schedule if the patients could pay directly.
Medicare only sets fees for Medicare, not the entire market. They offer a Hobson’s choice for all forms of providers, services, and supplies – take it it leave it.
Except for drugs.
As you can see on my web site I can provide the same services as a facility for a lot less money. However, despite calling and writing to many insurers over the years not a single one has shown the slightest interest in steering patients my way.
Why is that?
Because they are not actually interested in reducing the rate of growth of medical spending?
Perhaps they have a reason for wanting to pay higher fees, or to pay fees to hospitals. I don’t really know. It is completely baffling to me why they wouldn’t steer business to the least expensive source.
Following the logic of the PPO repricing fee, there’s a bigger commission on getting a hospital down from $10,000 to $1,000 than haggling me from $500 to $300.
Mr. Graham,
How would I go about sending you a copy of a gag clause? I decided to go through my contracts and I found one on the first try.
This contract is a nice illustration of what I’ve been talking about. The contract prohibits me from disclosing our financial arrangements but the insurer is allowed to share it with other parties.
I can also send you a copy of the revised contract to conform with Texas legislation enacted to address gag clauses. It pretty much protects me from punitive behavior for making disparaging remarks about a patient’s coverage but neglects to reverse the financial nondisclosure.
Please just send it to my email address: john [dot] graham [at] ncpa [dot] org. I would appreciate it.
Both John and Dr Gorback imply that we would see lower medical costs if we had a “Priceline.com” approach, where insurers were constantly responding to the least expensive qualified provider.
This would apply to foreign medical tourism also.
After all, ruthless price-shopping for raw materials and labor certainly is a main reason for low inflation or outright deflation in televisions, computers, steel, you name it.
Something is holding back health care from this trend, however. Health care markets are stubbornly local, and monopolies seem awfully hard to displace. We have yet to see an insurance company offer lower premiums if its customers agree to go abroad for surgeries.
Now, maybe the use of competitive bidding is just growing more slowly in health care, and it will spring forth someday. But I wonder.
There is already a growing domestic medical tourism market. Last year one of my patients showed me a letter from her employer – a large national retailer – that said if an employee required certain types of surgery the company would fly them to one of several centers around the country with whom they had contracted. I believe it also covered expenses for a family member.
OTOH, there’s the famous observation by Alan Shepard: “It’s a very sobering feeling to be up in space and realize that one’s safety factor was determined by the lowest bidder on a government contract.”
Insurers are definitely looking at international medical tourism. I can’t wait to see how they will screw up the health care systems of India, Thailand, Mexico, etc with unintended consequences.
BTW, there’s also cool stuff like this
https://insurancenewsnet.com/oarticle/2015/10/14/employers-offer-cash-incentives-to-shop-around-for-health-care.html