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For drug price reform, follow the supply chain

February 24, 2019

There’s bipartisan consensus that spiraling prescription costs and drug shortages must be addressed. President Donald Trump called this his “next major priority” at his recent State of the Union address.

Physicians know the urgency firsthand. Consider a patient with markedly decreased vision. On examination, she had advanced cataracts but also significant retinal changes, uncontrolled hypertension, kidney failure and clouded judgment from complications of diabetes. Her condition was the direct result of stopping her diabetic medications when her insurance quit covering them. She simply couldn’t afford them.

According to a Consumer Reports survey, 1 in 7 patients don’t fill their prescriptions because they cost too much.

Contrary to the claims of some politicians, the answer is far more complex than simply legislating lower drug prices. Anyone trying to understand the root issue finds a bewildering maze of rebates, pharmacy benefit managers, backroom deals, exclusive access to formularies, and wild swings in price and availability for the same drug.

Last month, the Department of Health and Human Services announced a new rule that took an important first step toward lowering prescription drug prices by reforming the Soviet-style prescription drug supply chain.

Specifically, the rule would outlaw the roughly $150 billion paid by drug manufacturers to insurance pharmacy benefit managers, or PBMs, in the form of kickbacks, euphemistically called “rebates.” These are used to garner preferential positions on insurance drug formularies. These hefty kickbacks inflate the prices that patients pay and stifle competition. Middlemen expenditures are estimated to consume one-third of the cost of drugs.

Additionally, HHS proposed last fall tying U.S. drug prices to those in other developed countries. While it is true that part of America’s inflated drug prices offset the markedly lower prices negotiated by government-run foreign health care systems, such a move would counteract the administration’s drug channel simplification efforts by adding yet another administrative layer to the supply chain.

It could also threaten prescription drug availability. If drug manufacturers can’t match the price demanded by these foreign governments, that drug simply won’t be offered in that health care system. According to a recent analysis, only two-thirds of newly released medications are available in the U.K, half in Canada and one-third in Australia.

As a headline in the British newspaper The Guardian explained, “Drugs are too expensive for (Britain’s National Health Service) and people are paying with their lives.” The article details the many drug treatments that the government refuses to cover because of cost. Even for covered drugs, patients in other countries had to wait an average of 16 months after their launch to access them. No wonder Britain has higher cancer mortality rates than the U.S.

Price controls further threaten innovation and new drug development. Researchers from the University of Connecticut and the consultancy Thomson Medstat estimate that cutting prescription drug prices by 40 percent to 50 percent, roughly equivalent to Trump’s proposal, will lead to a 30 to 60 percent reduction in prescription drug development.

Anti-kickback legislation would provide a much more effective initial step in reducing drug prices by eliminating the 30 percent to 40 percent middleman fees. That move, coupled with transparent pricing reforms, would launch a new era of accountability and affordability.

Physicians and patients would know the cost of proposed and existing medications leading to a more rational utilization of health care resources. Insurance would have less of a role in attempting to dictate drugs to which a patient has access based on its financially interconnected middleman relationships.

We have an opportunity to take the first step in reforming the pharmaceutical portion of our health care system without disturbing the drivers of innovation and availability of drugs. More government distortion to the system in the form of price controls is not the answer.

Understanding the root causes driving the cost of drugs and the potential negative consequences of price controls leads to our best chance for reduced drug prices. Removing protections for the kickback structure inherent in the insurance PBM system coupled with transparent drug pricing would provide true market-based reform leading to competition and the best chance that our patients will be the recipients of the price breaks.

Dr. Jane Lindell Hughes is a practicing ophthalmologist and a clinical professor at UT Health San Antonio.