Where’s the Outrage?

November 17, 2015

What is behind the glaring lack of controls over prescription drug costs, even for everyday medications?

Allan Tasman, MD | Editor in Chief

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I’m referring not only to the double digit annual increase in prescription drug costs over many years, even for drugs that are in decreasing demand, but also the unconscionably huge increase recently in the prices of many prescription drugs by companies that have been bought by aggressive hedge funds.1,2 So far, I haven’t heard about this for the medications we most prescribe, but I’m worried that won’t be too far down the road given the epidemiology of the diseases we treat and the huge medication market.

The reason for my concern is that the increases haven’t been limited to exotic drugs for rare illnesses, but also to everyday medications. A pharmacist where I vacation said that the cost of the most commonly used antibiotic to treat the locally endemic Lyme disease, doxycycline, a drug that has been off patent for decades, had recently increased in cost well over 10-fold from $10 to $15 a day to $250 a day.

When the Obama administration unveiled the proposals for what the Affordable Care Act would entail, one of the major announcements included a comment that the pharmaceutical companies had already agreed to reduce costs by gigantic sums. Not that I’m cynical or anything, really (don’t ask my wife or friends), but my first thought was that there was clearly a quid pro quo that wasn’t being announced. We later found out the prohibition on Medicare from negotiating medication costs nationally would not be changed in the new law. I wondered what else was behind this glaring lack of cost controls. And of course the medication costs have continued to rise.

Don’t get me wrong, I’m not a socialist. My dad was a businessman with a strong entrepreneurial bent, and that definitely rubbed off on me. I even voted the same way he did one time. I grew up believing, and still do, that if you think creatively, work hard, and persevere, you should reap the rewards of your efforts.

I know it takes immense investments by pharmaceutical companies to bring a new drug to market, especially those that aren’t just copycat drugs made by tweaking a molecule. But I also know the basic and clinical research that is often done as part of that process is funded by all of us through federal grants, especially National Institutes of Health, and tax-exempt foundations. I don’t mind that the company that brings a new medication to market recoups its investment and makes a profit, but each of us has paid for some of that development and still suffers annual cost increases and decreases in our insurance medication benefits.

But, I know firsthand it doesn’t have to be this way. I’m the treasurer of a large nonprofit health maintenance organization (HMO) that cares for almost 300,000 people with an annual budget of about $1.5 billion. We spend about 92% of that in paying for care, a figure that is not matched by almost any for-profit health plan. I tell you these facts because we are presently preparing our budget for 2016.

I learned this morning from our chief financial officer that we are preliminarily projecting, once again, another large annual increase-this time it’s 17%-in our medication costs. Some of that is based on projections of new drugs coming to market, but the majority of the increase is because costs of presently used medications are rising all over the array, not just of highly specialized drugs like those for hepatitis C. Is that a reasonable expectation? I don’t think so.

I’m not an economist or a government insider, so I don’t know for sure why this is happening. But I don’t believe it’s coincidental that hedge funds are buying drug companies and jacking up the prices, and that the large traditional companies continue to raise them too. I do have an idea about a system change that could remedy at least this part of the health care system’s cost escalation. And, although I think this idea could apply to most aspects of the health care system, I’ll confine my comments here to pharmaceutical costs.

My idea is to create what I call a public utility model for pharmaceutical companies. Everyone knows how our electrical rates and water bills are determined. There are an array of state and local level review processes that determine the rates. The water or electric company provides the state or local government with reams of data about costs, and the governmental entity reviews the data and negotiates a rate with a guaranteed modest profit for the company. This system keeps everyone’s bills as low as possible in most situations and ensures that the companies make money. This is one reason public utility stocks are viewed as pretty safe conservative investments.

The HMO I mentioned has operated on just such a model with our state since its inception in the mid 1990s. We present the state with tons of data and negotiate a rate based on our costs, which also ensures a modest profit. Because we are mainly a Medicaid provider, the rates in our state are set to provide a very small profit for the companies-in the range of 1% to 3% in our case. This system has allowed us to focus on the quality of health outcomes and not worry about becoming insolvent, while saving the state tens of millions of dollars.

Although I know tremendous political obstacles lie in the way of implementing a nationwide public utility approach to medication costs, in theory it seems to me such an approach would work. Appropriate costs, including drug development, would be included in the drug cost, as well as a guaranteed modest profit-likely more than 1% to 3%. What this would accomplish is to keep a hedge-fund manager from buying a generic drug manufacturer, raising the price of a drug by 5000%, with the public hoping that public outrage, only so far modestly expressed, results in a price rollback.

Maybe it’s too ambitious to try this on a national scale, and in a presidential election year, there won’t be much thoughtful dialogue about this. I wish that there were a way to try local experiments like we did in setting up our HMO. I fear, though, that local experiments in this case of medication cost increases would result in costs shifting to other locations and raise medication costs for everyone else.

But I think of how much more care could be provided for the dollar in this kind of public utility model, especially for those with psychiatric illnesses that require complex care and that have always been severely underfunded. It’s what we’ve accomplished here in Kentucky with our HMO’s global costs (though the psychiatric expenditures are still in my view way less than optimal). Maybe my idea wouldn’t withstand scrutiny by the economic and business “experts,” but I haven’t heard too many other solutions to runaway medication costs. And of course, it’s our patients who suffer while corporations feather their nests.

References:

1. Rockoff JD, Silverman E. Pharmaceutical companies buy rivals’ drugs then jack up the prices. Wall Street Journal. April 26, 2015. http://www.wsj.com/articles/pharmaceutical-companies-buy-rivals-drugs-then-jack-up-the-prices-1430096431. Accessed October 7, 2015.

2. Walker J. For prescription drug makers, price increases drive revenue. Wall Street Journal. Oct 6, 2015. http://www.wsj.com/articles/for-prescription-drug-makers-price-increases-drive-revenue-1444096750. Accessed October 7, 2015.