Health Reforms and Drug Prices

Oct, 2011 :

At a time when United States medical expenditure continues to be highest in the developed world and the federal deficit spiraling, the Patient Protection and Affordable Health Care Act, doesn’t seem to address one of the fundamental drivers of cost-high drug prices. By providing higher rebates on prescription drugs under both the Medicaid and Medicare program, it does not solve the problem of high medicine prices, an influential factor in pushing the United States per capita expenditure to almost twice the OECD average. i
The new law can foster competition among the drug companies by increasing the role of public-private partnerships in coming out with more affordable products. Competition induces innovation and innovation induces competition. One area where competition and innovation can play a vital role in lowering the cost is pharmaceuticals. The spurt in medicine prices also increases the overall out-of-pocket expenditure, especially for patients who may be suffering from chronic illness and are highly dependent on certain medicines. But ensuring lower prices without a concomitant drop in companies’ incentive to innovate remains a challenge. Already, the US Department of Health and Human Services invests massive amount in research by giving grants to universities, medical schools, hospitals, research organizations. Through its arm, the National Institute of Health, the budget for such research and development is $32 billion. More than 80% of the NIH’s funding goes to about 300,000 research personnel at over 3,000 universities and research institutions. In addition, about 6,000 scientists work in NIH’s own laboratories. iiDespite this substantial spending, the organization itself acknowledges lack of partnerships in product developmentiii, resulting in high private spending for advances in new products, thereby increased prices.
With a view to focus more on research and development that is geared more towards reaching the clinical trials stage, the organization will be setting up a National Center for Advancing Translational Sciences. So how can the new law create incentives for more public-private partnerships through which drug companies can lower their research and development cost?
One possible way could be creating incentives for private companies to leverage government funded research universities, hospitals and independent research organizations to be the hub for innovation and product development. The incentive could be well be ensuring a guaranteed access to markets for companies who partner with public institutions and are able to come up with products at a lower cost. Availing the existing public resources for research would lower the cost for companies to innovate, and ensuring access to markets and a certain volumes at a certain price would lower their marketing and other related costs. According to OECD estimates, United States retail drug prices exceed by the range of 127-134 percent of the average cost for its member countries.iv Therefore, pre-determined markets for products could help them lower the cost associated with marketing. This should lead to better pharmaceutical pricing. Considering the big role government now plays under the healthcare reforms, it surely has sufficient powers to grant such access to companies by deciding the preferred drug companies who could be a part of the insurance plans sold on the health exchanges.
Another way through which innovation could thrive is by linking a certain proportion of funding to research universities and medical schools based on the partnerships they build with pharmaceutical companies in product development. It is estimated that 90-95 percent of new compounds entering clinical testing do not succeed. Further, FDA approved drugs has declined to an average of 21 per year between 2000 and 2010 in contrast to an average of 37 per year between 1995 and 1999. The resulting discouragement is manifested in a 2007 survey which states that 10 out of 15 largest companies have either abandoned the process of product development for new drugs or shrunk their budgets in this field. And as recently as 2010, two companies had already decided to stop pursuing discovery for pain, schizophrenia, depression, anxiety among others. v The law could direct funding for universities such that there is a healthy mix between “basic” research and “applied” research when it comes to developing cost-effective solutions for new medicines.
i OECD Health Policy Studies, Achieving Better Value for Money in Health Care
ii National Institute of Health Website
iii National Institute of Health, FY 2012 Budget Request Documents
iv Pharmaceutical Pricing Policy in Global Markets, OECD, 2008
v National Institute of Health, Budget Documents, Fy 2012 Budget Request Documents
Additional reference
Vi Congressional Budget Office Study on Research and Development in the pharmaceutical industry
Vii Product Development Partnerships and the Health Impact Fund, 2010