The High Price of Staying Alive

In recent decades, medical science has madespectacular advances in treating life threatening diseases like cancer.  A growingpercentage of new chemotherapy treatments are now in the form of oral drugs, immunotherapy is being used more widely, and gene altering therapiesarebecoming ever more promising. Advances in other fields of medicine are just as spectacular.  But, and there always seems to be a but, these new treatments are incredibly expensive and getting more so.

Our ability to increase our knowledge about treating life threatening  diseases is outstripping our ability to make their costs reasonable.   This dilemma is ethically challenging as well as being a major public policy challenge. Some European countries use a cost-effectiveness standard to approve some very expensive cancer treatments. If a treatment costs hundreds of thousands of dollars but only adds a few months of life expectancy, it may not be approved.  As a society, we find this type of rationing abhorrent.  At the same time, we have not resolved how best to handle the high price of new life saving drugs which also are regressive and result in involuntary rationing.

Pharmaceutical companies probably come in for more criticism for high drug prices than they deserve.  Some price drivers are beyond their control.  Developing new drugs is expensive and some research suggests that only 1 in 10 new drugs prove safe and effective.  The cost of failures needs to be recovered or a company will go out of business.  The cost of drug development for companies that develop multiple cancer drugs can range from $2 to $5 billion per drug.

The largest cost in new drug development comes from regulatory requirements to prove a drug is safe and effective.  FDA requires preclinical testing and then three clinical trials before applying for approval.  This whole process can take 10 years.  After approval, a company has to monitor for side effects and conduct related tests.

Although there are a number of pharmaceutical companies, the only competition is in who can get to the market first with a FDA approved drug.  Once a drug is approved and under patent there is a legal monopoly.  Price is based on what the market will bear because there is no competition.  Manufacturers maintain a monopoly until their patents expire but too often generics are priced close to the patented drug price.  Again, no competition because usually only one firm is approved to  manufacture the generic.

Manufacturers give steep discounts—30% or more—to private purchasers like Sams, Pharmacy Benefit Managers (PBM) that administer prescription drug programs for employers, insurance companies and Medicare Part D, and hospitals.  With a lack of pricing transparency and poor communication, these drug providers can charge above competitive prices.  PBM’s for example, receive a share of the discounts they negotiate, so they have an incentive to keep list prices high. 

Since the price of these specialty drugs is less in many foreign countries than in the US, it is clear that lower prices can be achieved here.  

Since manufacturers are monopolies, they should be regulated as other monopolies are. The utility regulation model might be a useful approach. A body similar to State Corporation Commissions would approve prices charged and the rate of return that recognized risk and the need to recapture R&D expenses. Strong but reasonable returns would provide the incentive for continued investment.  

The cost of FDA approval is the major component in drug pricing.  But FDA is highly risk adverse. It doesn’t get blamed for the consequences of delays on bringing drugs to market but it does when a drug has unintended consequences.  Reducing red tape, streamlining the clinical trial process, modifying agency incentives would reduce approval costs.  In approving applications to produce generics, FDA should conduct a form of “dutch auction” where awards go to one or more firms that offer to charge the lowest retail price.

Insurance companies should be required to provide patients with information about the prices that a range of suppliers charge and explain better their formulary tiers and the rationale for drugs included in them.  Greater transparency about sources of supply and prices will engender greater competition.   The FTC should regularly review the vertical prescription drug structure to identify anti-competitive and anti-trust actions that are taking place.  Currently, each component in the supply chain has an incentive to keep prices high and to limit transparency.

Finally, barriers to drug importation should be reduced and Medicare/Medicaid should be allowed to negotiate prices like other sources do.

The insurance and drug lobbies are clear examples of Bootlegger and Baptist actions that result in poorer treatment for life threatening diseases.

A Rock and a Hard Place

The White House is pressing automakers to support its plan to freeze CAFÉstandards and roll back those promulgated by the Obama Administration which would have raised the CAFÉstandard to 54.5 mpg by 2025.  While on its face, auto manufacturer support would seem to be a no brainer but few things are as they appear on the surface.

The Administration is on firm ground in that the Obama regulations provided for a mid-course review of feasibility. Increasing the average miles per gallon to 54.5 is technologically feasible. Unless the mix shifts to compact, hybrid and electric categories, 54.5 mpg is an “aspiration”.  That would require a major change from what is taking place now with buyers moving to SUVs and pickups.  While CAFÉadvocates point to possible technology improvements in internal combustion engines, they down play the impact on the price of new vehicles. Estimates put the averageprice increase at $2000 per vehicle.

The biggest uncertainty is California which is threatening to sue if there is a roll back.  The odds of California prevailing against a Trump EPA are not great for two reasons.  First, CAFÉwas designed to reduce air pollutants; not greenhouse gases. Second, California has to apply for a waiver to set its own standards.  The effect on global warming if California prevailed in litigation is almost too small to measure even if the emission reductions of state that can opt-in to the California standards are included.  It fails any realistic cost-effectiveness test.

The problem for the manufacturers is that they prefer the rollback but can’t be sure that it will withstand judicial challenge given the Supreme Court’s decision on EPA’s ability to classify greenhouse gases as pollutants.  If the rule making is stayed pending judicial action, which no doubt will involve going all the way to the Supreme Court, there could be a new Administration before then and it would likely settle with California and re-establish stringent standards.  Being risk adverse keeps manufacturers from all out support.

If the Administration was not going forward with its E-15 ruling or if there was a chance of it being withdrawn, there might be stronger incentive for manufacturers’ support.  But that is not going to happen.  The Administration will not do anything to put Iowa at risk in 2020, so there is almost no possibility of not moving forward with the E-15n rule making. That is going to present auto manufacturers with a number of problems as most void warranties for vehicles using higher than E-10.