We’ve Been Here Before
Public concern over the high cost of prescription drugs is not new. Over the last 30 years there have been several legislative attempts to force drug prices down and most have failed, but there have been notable exceptions. For much of the late 1980s state Medicaid officials reacted to high drug costs by either limiting access through formulary restrictions or by persuading manufacturers to voluntarily agree to pay rebates to the state in exchange for access to Medicaid recipients. The Pharmaceutical Manufacturers Association (PhRMA, before the name change in 1994) resisted legislative attempts by states to mandate rebates, while member companies quietly entered into negotiations with individual states to promote the practice.
It all came to a head in 1990, when Congressional proponents of Medicaid rebates appeared to have enough support to legislate their solution. The manufacturers saw the writing on the wall and began to negotiate a trade. Manufacturers would agree to pay Medicaid rebates if sponsors would agree to providing a presumptive right of access to Medicaid enrollees. At this time Medicaid agencies had the authority to keep manufacturers off the Medicaid formulary if they deemed the drug was not sufficiently better than drugs that were already on formulary. This action by manufacturers would change that and allow manufacturers to have their drugs included on the formulary as long as they signed the master rebate agreement.
Then, as now, manufacturers had considerable legislative clout. Though it was not clear if manufacturers could have prevailed in a recorded vote on rebates, the manufacturers didn’t want to risk accepting a deal that didn’t give them anything. The deal was done and language in the Omnibus Budget Reconciliation Act of 1990 (OBRA’90) became law. Medicaid got rebates and the manufacturers didn’t have to negotiate access.
This Wasn’t the First Time
We take for granted the idea that when a brand-name drug’s patents expire another manufacturer can obtain relatively easy approval for a generic version. This was not always so. Prior to the 1984 passage of the Hatch-Waxman Act generic drug manufacturers were required to submit new drug applications (NDAs) that duplicated the studies that were the basis for the approval of the innovator drug. The legislation created a new approval mechanism for generic drugs, known as the abbreviated new drug application (ANDA), which was much less expensive and time consuming than filing an NDA, resulting in much faster and more cost-effective approvals for generics.
Prior to passage of passage of Hatch-Waxman, endless litigation accompanied attempts by generic companies to produce less expensive versions of older drugs. As with the OBRA’90 history, the pharmaceutical manufacturers recognized that they couldn’t avoid patent reform forever. The public was becoming restive and there was a clear Congressional consensus that this needed to be fixed. Manufacturers decided they couldn’t risk a wholesale restructuring of intellectual property laws, so they decided they might agree if they could get something of value in return.
What the manufacturers were able to obtain was extended exclusivity for new drugs based on clinical and regulatory delay from the time the drug was patented until final FDA approval. This provision was worth billions to the manufacturers and was considered an adequate tradeoff for bending on allowing a streamlined path for generic drug approval.
Does This Apply to the Current Debate?
So, do these past two events look anything like the debate that rages today? Manufacturers are coming under increasing fire for high introductory prices for their medications and are vilified even more for price hikes on approved drugs. The criticism is bipartisan and PhRMA has been forced to deplete nearly all the industry’s good will to keep drastic reforms from being enacted. If forced to gamble on passage of a legislative solution that offers them nothing in return, PhRMA and the industry may be ready to consider alternative options that result in some benefit to them.
The consumer is arguably more engaged in this debate, since more consumers are exposed to high-deductible health benefits and they feel the pain of higher prices at the drugstore.
Building on Hatch-Waxman and OBRA ’90
What if manufacturers were offered the option of voluntarily reducing prices in exchange for a marginally longer period of exclusivity? If average prices (weighted by volume) within a therapeutic category were, for example, $500 per month, the manufacturer could receive a predetermined extension of market exclusivity if they agreed to price the product at some percentage below the target price (e.g., $400). Once agreed to, the manufacturer would be limited to annual price increases at or below inflation and all line extensions (e.g., extended release formulations) would be subject to restrictions that could subvert the intent of lowering prices for a predictable period. The federal government could also add additional incentives, including exclusion from Medicaid prior approval restrictions or other formulary preferences within federal health programs.
This agreement would be voluntary, so manufacturers would make a pricing decision based on their assessment of the product’s value. For example, if a manufacturer has an application for a novel blood pressure medication that shows efficacy with fewer side effects, it may choose to participate. Another manufacturer that introduces a major advance in the treatment of Alzheimer’s disease might decide to forego price restraint on the notion that the blockbuster nature of the medication will more than offset any potential impact of additional exclusivity.
An Even Bigger Impact
Critics of the pharmaceutical industry have also extended their criticism to international price controls. They argue that prices paid by other developed countries (Europe, Canada, etc.) unfairly shift the cost of development to US consumers. It is true that other countries negotiate with a heavy hand and citizens of those countries pay far less than we do for modern medication.
We already have a mechanism to help fix this. The mechanism exists within the OBRA ’90 legislation and refers to the rebate formula that determines the size of the rebate paid to Medicaid by pharmaceutical manufacturers. These manufacturers are required to pay a minimum of 23 percent of Average Manufacturer Price (AMP) to Medicaid for the drugs consumed in the program. The maximum rebate is the difference between AMP and the lowest price for which the drug is sold to eligible accounts in the US. As a result, manufacturers’ rebate liability expands as they offer discounts within the US. They often politely decline to offer price concessions below a certain level simply because of the effect these prices will have on their rebate liability>
So, what if we extended this rebate “best price” liability to developed countries around the world; for example, members of the Organization for Economic Cooperation and Development (OECD). While we might expect manufacturers to object loudly to this requirement, many may find this appealing. Explaining to European payers that major price concessions are no longer possible due to the impact these concessions would have in the world’s largest drug market.
Could this Work?
I don’t know, but there is some precedent, as noted above. Would Congress agree? Would they object to “rewarding” big pharma for its past pricing behavior? Does pharma believe they aren’t yet facing an existential threat? All valid questions. But maybe the time has arrived to give it a try.
See a more detailed version of this concept belowPrescription Drug Price Moderation: A Voluntary Approach (63 downloads)