Rational Drug Prices Require Rational FDA Regulations

The House has passed and the Senate is expected to pass the pork barrel-bloated, 21st Century Cures Act. Aside from $6 billion worth of pork, the Cures Act would reform the drug approval process at the U.S. Food and Drug Administration (FDA). A rational path to drug discovery is badly needed. Once a drug finally makes it through the regulatory process to approval, it is guaranteed years of monopoly pricing due to the plethora of regulatory barriers that inhibit competition.

 When brand drugs face generic competition, the generic price falls precipitously. Research shows that when a brand drug faces generic competition from only one generic, the price of the competing generic is nearly as high (94 percent) as the brand name drug. However:

  • With two competing generics, average generic price falls by half.
  • By the time there are five competitors, the price is about one-third.
  • Having six to nine competing generics drops the price by three quarters compared to the brand drug price prior to generic competition.

These examples are generic competitors, but competing “me-too” drugs from the same drug class also reduces prices for all drugs in the class. A way to lower drug prices while increasing access to advanced drug therapies is, ironically, by making it easier to bring them to market. Moreover, boosting competition is also a way to prevent some of the egregious price hikes we’ve witnessed the past year.

Consider the recent example of the EpiPen. It experienced price increases of about 450 percent in the last 10 years despite being a 40-year old product. The EpiPen is a relatively simple auto-injector (drug delivery device) that administers roughly $1 worth of epinephrine. The current version of the EpiPen is under patent protection. But generic auto-injectors, used by diabetics to self-inject, sell for $30 to $40 apiece retail. Simple logic would suggest the EpiPen should cost $30+$1 or $40+$1. It doesn’t; EpiPens sell for $300 apiece due to regulations that make it hard to bring competition products to market. For example, the maker of generic auto-injectors cannot sell them pre-loaded with epinephrine.

Another problem that impedes drug development is the different divisions within the FDA use different standards for safe and effective. Whereas one division may merely look for a net benefit (benefits greater than risks); another division may require almost no risk and benefits much greater than risks. While one division may tolerate little risk, another may allow significant risk if the drug is the first in its class.

Rising deductibles have made it more difficult for drug makers to disguise high prices by passing them on to insurers. In response to public scrutiny, a drug companies have blamed “The Middlemen.” Middleman is an old boogeyman that all consumers have heard of. If a big retailer wants to convince customers its products are cheaper, it claims “we’ve cut out the middleman.” With respect to drugs, what drug makers call “the middlemen” is the referred to as “the supply chain” in industry parlance. Oddly enough, some drug makers cut out the middleman to charge higher prices. The strategy is to prevent drug stores from substituting a cheap generic in place of a high-priced drug for which a cheaper alternative exists.
Pharmaceutical benefit managers (PBMs) are the firms that administrate most consumers’ drug benefits. Insurers and employee health plans hire PBMs to manage pharmacy benefits and adjudicate drug claims for plan members. PBMs clients are employers and insurers — not drug makers. Drug plans do their best to hold down drug prices for plan sponsors (their clients) which occasionally makes them unpopular with drug makers and pharmacy owners. Drug makers blaming the middleman for high drug prices is a straw man. Drug makers set prices for their products based on the competition and what the market will bear.

A better way to reign in high drug prices is to inject more competition to the drug market. If it didn’t cost $1 billion to bring new products to market, new drugs would face numerous competitors. With more competition, high prices — such as prescriptions that cost $2,000 per month — would be impossible for drug makers to maintain. Competition works great in that regard. The 21st Century Cures Act would streamline the approval process for new drugs by allowing drug makers to take patient experiences into account and allow the FDA to consider aggregate anecdotal data as evidence. Rather than being limited to double-blind clinical trials that are rigid and costly, pharmaceutical companies could also track patient experiences and test out drugs’ effects using more evidence than just clinical trials.

But more needs to be done. Under current law the FDA can already consider anecdotal data in addition to clinical trial data. But the agency has not implemented the 2012 provision allowing it to do so. The bureaucracy within the FDA is rigid and many of the investigator are set in their ways. A benefit of Congress providing guidance would be prices for drugs Americans take.

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