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People or profit: What is the best system to regulate drug prices?

Published on 30/03/20 at 12:01pm

Conor Kavanagh investigates the role state healthcare institutions play in negotiating drug prices, and what steps can be taken for a more mutually beneficial relationship to exist between pharmaceutical companies and governments when it comes to the pricing of drug products.

Drug sales make up a large proportion of the revenue and profits of the pharmaceutical industry. The US dominates the pharmaceutical market in terms of consuming and producing drugs, with prescription drug spending set to hit $600 billion by 2023, up from an estimated $500 billion in 2019.

One of the biggest banes to a pharmaceutical company’s drug profits is state healthcare systems that negotiate drug prices to an affordable level for the public. The NHS is one of the most prominent state healthcare systems that has strict criteria in both accepting new treatments and negotiating prices. In England and Wales, it does this through the National Institute for Care Excellence (NICE).

On the opposite side of the spectrum is the US market, which is not hindered by a state institution limiting prices. Once a patent is secured, the government has no say in how much a company can charge for the product. While the US does have some institutions to negotiate prices with drug companies, like the United States Department of Veteran’s Affairs, Medicare or private insurers, it is largely far more unregulated than European countries. This allows pharmaceutical companies to jack up prices as they see fit. 

A system without drug price regulation

Due to the massive costs of developing new treatments, the pharmaceutical companies want little regulation on prices in order to maximise revenue, under the argument that this is necessary in order to fund research and development and recoup investment. This is no doubt an argument based in some economic reality; if the financial returns on their products start to dwindle, there will be less capital to develop new drugs and shareholders will begin to look elsewhere for better value investments. 

Dr Paul B Ginsberg, Director of the USC-Brookings Schaeffer Initiative for Health Policy, commented on this claim and said: “When regulation or market forces leads to lower prices, less resources going to R&D is likely.  But that does not mean it is a bad thing.  Trading off new drugs with society’s ability to afford drugs could find that we already have too much R&D.  The least promising projects surely will be the first to be dropped if R&D is cut back.”

Any corporation, not just the pharmaceutical ones, want little regulations on their pricing. But unlike luxury sportscars or video game consoles, people who take prescription drugs often need them to live a functional life. Having their pricing decided solely by the manufactures means they are at the mercy of those corporations who simply exist to make as much money as possible.

One of the countries where this manifest itself clearly is the US, where drug prices are dictated solely by drug manufacturers. The FDA does regulate what drugs come to market and what patents are given out. But Dr Ginsberg says that pharma companies work with the FDA to create monopolies on certain medicinal products through continually securing patents. They can’t just unleash drugs onto the market without approval, but once they get these patents they are free to increase the price as they see fit.

Groups like Medicare, Medicaid and the Department of Veterans Affairs negotiate prices for their patients, but many cheaper insurance plans will not substantially subsidise the cost of a drug, meaning the patient will have to pay far more. While there is significant public and political pressure to keep drug prices affordable, these considerations do not stop certain companies from raising the prices as they please.

Martin Shkreli, the ‘Pharma Bro’, is the perfect embodiment of what can go wrong when companies carve out a monopoly on a drug. In 2015, Shkreli’s start-up Turing Pharmaceuticals acquired the drug Daraprim, which treats toxoplasmosis. It’s an uncommon infection that can be fatal to babies in infected mothers or people whose immune systems are compromised due to suffering from cancer or AIDS. In August 2015, the company hiked up the list price of the HIV/AIDS drug from $17.50 to $750, an overall increase of 4000%.

The huge increase was defended by Shkreli, who argued that the company needed to turn a profit to ensure new versions of the drug could be developed, which was extremely expensive. The monopoly meant another company could not introduce an affordable alternative to Daraprim. While there are generic drugs to treat it, they are far less effective than Shkreli’s product and his company owning the patent meant that no one could compete with it even if they wanted to. 

The lack of price regulations meant Shkreli could legally hike up the drug by an extortionate amount, and people would face the choice of either paying or suffering without the treatment. In the US system, people who rely on life-saving medication are at the mercy of corporations which seek to maximise profits from their products. Currently 29% of Americans cannot afford prescription drugs, so it is clear that the limited regulation on US drug prices is not in the interest of patients.

NICE and the regulation of British drug prices

The argument to regulate drug prices is a compelling one which has led to state healthcare systems across the world negotiating affordable prices. China, Germany, Pakistan, Britain and many others all have such a system in place. How it generally works is that the drug manufacturer and the government regulator will meet, and the government will decide whether the drug can go to market and at what price, often dependent on whether they are a cost-effective use of existing resources. There are many nuances in the different systems, but they are generally in place to make sure patients can either purchase affordable drugs from pharmacies or get prescriptions subsidised by the state body.

Pharmaceutical companies feel that many of these institutions make significant profits unviable in certain markets. Pakistan is an area experiencing this currently. Over 60 medicines that the World Health Organization categorises as ‘essential medicines’ are either in short supply or are not available in Pakistan. Much of this has been put down to pricing issues. The Drug Regulatory Authority of Pakistan (DRAP) implements price controls on the country’s drugs, but it is often inconsistent. Between 2001 and 2013 there was a virtual prize freeze; this policy was of course designed to make drugs accessible to Pakistan’s poor. The government has kept drug prices relatively low, despite some increases. 

Drug manufacturers have said it is not viable to produce the drugs at the prices determined by DRAP, and they have pulled products like Acetzolamid, Phenobarbiton and Hydroxyure. DRAP officials have blamed the greed of the Pakistani pharmaceutical companies, believing they should take a loss on creating some drugs due to the profit they make on others. But the companies simply say the profit margins do not make the cost of developing and marketing the drug feasible.

In England and Wales, NICE negotiates on behalf of the state funded NHS for affordable drug prices. It was founded in 1999 by the Blair government. When a new drug is brought for review, NICE assess the cost-effectiveness of medications, procedures and other treatments and makes recommendations to the NHS about what to cover and how. This system immediately frustrated some pharmaceutical companies.

The first drug it considered was Glaxo Wellcome’s (now GlaxoSmithKline) Relenza, an antiviral medication to treat influenza which was expensive at $60 a dose. There wasn’t compelling evidence it was effective in vulnerable subgroups like the elderly or asthmatics, and the drug was rejected. NICE’s founding chair, Michael Rawlins, said that in response Glaxo went “berserk” and its chairman went to Downing Street and threatened to take his research out of the country. Tony Blair and his Health Secretary Frank Dobson stood by its decision and NICE forced Glaxo to produce evidence that the drug helped the elderly. When they did, the drug was approved.

This type of regulatory body relies on strong political backing. It is clear that some pharmaceutical companies are prepared to try and circumvent NICE’s stringent criteria for accepting new drugs: during the British election cycle of 2019, there were revelations about secret meetings between the Conservative Government and US pharmaceutical industry on the issues of drug pricing: Global Justice Now obtained the minutes of a meeting between George Hollingberg, the former Trade Minister; John Saville, HM Consul General; and Bill Reid, the Senior Director of Public Policy at pharmaceutical firm Eli Lilly in 2018. They showed Reid was aiming for greater market access as well as data exclusivity and improved IP standards for its products. He was also looking for longer patents for their drugs to allow them to charge higher prices.

Labour Leader Jeremy Corbyn also revealed documents from 2017 that showed US officials conveying to the government that the UK does not pay enough for drugs, and that they were pushing for changes to their pricing policy to be included in any post-Brexit UK-US trade deal. These examples provide a glimpse at how much of obstacle pharmaceutical companies can find regulatory bodies like NICE and DRAP.

Some in Britain want to take further steps to reduce the power that drug companies wield over prices. In September 2019, Jeremy Corbyn said a Labour government would create a state-owned drugs company to supply cheap medicine to the NHS. This would force drug companies to compete with a publicly owned drug maker. A Labour government would also legislate to force pharmaceutical companies to make their medicines affordable for all if they wanted public research funding, and would also use compulsory licensing to secure generic versions of patented medicines. 

They also proposed delinkage. This would help mitigate the need for huge profits to cover the costs of developing drugs. Instead of these prices and patent monopolies as the incentive to invest in R&D, delinkage models would combine expanded government funding for drug development with cash reward incentives to researchers and successful drug developers. With competition replacing monopolies, prices for product should approach marginal costs of production. This would help expand access. 

These types of policies have been criticised as something that would again threaten the industry’s profits, and in turn innovation, and would discourage companies from launching new medicines in the UK. However, James Love, the Director of Knowledge Ecology International, believes the Labour Party’s proposals are a step in the right direction. He said: “Government manufacturing of some products is a good idea.  But it does not address the incentive issue.  The delinkage proposals by the UK Labour party were the more meaningful reforms in that area.”

A compromise? – the German system

The British and American systems are two ends of the spectrum, but German regulators may be a type of middle ground that would be a suitable compromise for pharmaceutical companies and patients.  While Germany relies on health insurance companies like the US, it uses collective negotiations to keep drug prices substantially lower.

Prices for new drugs are established in Germany through collective negotiations between a single buyer, a seller and a drug maker. Of course, it cannot be expected that every single patient can negotiate with the other parties so the Sickness Funds negotiate on the patient’s behalf. This organisation contains 110 health plans, and this covers health expenses for 90% of the population and another 48 indemnity insurers cover the remainder. 

The negotiations between the parties begin when a drug has received market authorisation from the European Medicines Agency (EMA), and then talks begin. They are based on an assessment of the clinical benefit offered by the new drug compared to treatments already in use.

There is potential to create a situation where gridlock occurs with insurers wanting lower prices while manufacturers want to make as much revenue as possible. However, both sides negotiating with Sickness Funds are under strong public and political pressure to come to an agreement. If the negotiations break down, the drug price is then established by an arbitration panel, which the manufacturer can refuse and then withdraw its product. In the short term, this will limit their access to the German market and in the long term will tarnish their reputation as a company that is uncooperative. A feature that helps the public and politicians put the pressure on those involved in negotiations is that they themselves are not confidential. 

A key principle of the German drug pricing system that differentiates it from the US system is that there will be no increase in prices without incremental benefit. This is decided through the Gemeinsamer Bundesausschuss (G-BA) – a quasi-public entity governed by the national associations of physicians, dentists, hospitals, sickness funds, and patient advocates – carrying out assessments which are based on patient-relevant clinical endpoints such as overall survival, functional ability, and reduction in symptoms, rather than on intermediate endpoints such as reduced tumour size or a change in biomarker levels.

Once this organisation of sickness funds negotiates the price of a drug, the manufacturer is prohibited from unilaterally raising the price in subsequent years. Prices can be adjusted over time only if the G-BA conducts a new comparative effectiveness analysis, followed by a new round of negotiations.

Overall, this type of system means that drug prices in Germany are not low in comparison with Europe, but they are substantially below US levels, and the G-BA insures that drug companies can’t just increase the price of their drugs on a whim; they must prove incremental benefit in their product based on data from patient-relevant clinical trials. 

Weighing the pros and cons

The three systems offer both patients and industry different degrees of security and control in terms of drug pricing. 

The US system offers pharmaceutical firms the highest degree of control over prices. When a patent is secured, there is little legal framework to stop price increases nor is the price of the drug regulated by the FDA. The public, government and insurance company’s pressure can affect them, but it still allows room for people like Martin Shkreli to create exploitative prices through their de facto monopoly on certain drugs. 

The British system is one of the stricter models based on its required criteria. Not only does it feature a review process for the safety and effectiveness of the drug, but NICE assesses the cost-effectiveness of medications, procedures and other treatments before recommending them to the NHS. These negotiations on price help keep things affordable for people in need of drugs and prescriptions in general.  

The German system has regulations on prices like the British, but it also resembles the US system due to health insurance companies factoring into the negotiations. Many in the US feel the German system is the one to imitate, rather than the British system. However, James Love does not agree: he feels de-linkage is the path forward for the future of drug pricing. He said: “I think you need to do something new, and delink R&D incentives from prices (fund market entry rewards), and deal with freeloading on R&D subsidies, not focus so much on intellectual property rights and high prices to fund drug development. Larger subsidies for R&D can be a better policy than just letting prices go wild.”

It is clear that a move away from profits being tied up in R&D funding is something to be addressed in the future. The pharmaceutical companies’ pursuit of profit is often at odds with the wish of the public and governments, and can often manifest as an antagonistic relationship. Reforms like delinkage seem to be a way to change that relationship into one of symbiosis, where there is incentive to help the government development new affordable treatments.  

Conor Kavanagh

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