Using Free Markets to Make Medicines Affordable: A Response to the National Academies Report

Editor's note: The following is testimony delivered by Dr. Tom Coburn before the U.S. Senate Committee on Health, Education, Labor and Pensions in a hearing entitled “The Cost of Prescription Drugs.”

Thank you Chairman Alexander, Ranking Member Murray, and members of the Committee for inviting me to testify about the new National Academies of Sciences, Engineering, and Medicine report, “Making Medicines Affordable: A National Imperative.

As the title suggests, expanding access to affordable medicines is a crucial policy question our country faces today. As a physician and a three time cancer survivor, I am particularly concerned about ensuring access to the best medicines for all Americans.

In order to implement any effective policies, we first need to make sure we identify the real problem with drug prices. In may surprise you that the average patient out of pocket cost for all prescriptions in 2016 was $8.54.  The average out of pocket cost for generics in 2016 was $5.54.  Yet in spite of accounting for around 70% of all prescriptions, generic drugs account for only 27% of total prescription spending.[1]

The real pricing problem lies with branded specialty medicines, which account for 30% of total medicine spending despite making up 1% of total prescriptions – drugs like Sovaldi, whose initial list price garnered national attention. When specialty drugs are this expensive, access becomes problematic.  The question facing the country is: how do we assure access to such specialty medicines, while also ensuring new breakthroughs continue to come through the pipeline?

For personalized medicines being developed that will be life changing for chronic diseases, rare diseases, and cancer, we can’t stop at ensuring access – we also have to ensure that drug makers are rewarded for the financial risks they take when producing these drugs.

In 80% of our economy we allow market forces to allocate scarce resources, and let individuals use prices, quality, and value to assess decision making. However, we have disrupted this process in health care.  Until you are handed the bill, there is no true “price discovery” for prescription drugs.

How will we assess value when it comes to prescriptions? That is the question, to my mind.  Unfortunately, as long as we lack true and transparent markets in health care, the real questions will be pushed to the side, and we will continue trying to regulate what market forces naturally accomplish.

For the most part, the recommendations made by this report will fail to adequately address the drug pricing problem because they do not go far enough in addressing the lack of transparency and competition in the biopharmaceutical space. There is no solution offered to eliminate or lessen the middle men in the pharmaceutical distribution chain who purport to make drugs more affordable by negotiating rebates or discounts. These discounts are rarely passed along, and only serve to obscure the true price of medicines.

A personal example: the medicine I take for my atrial fibrillation, which is branded and starts at $480 for a 90-day supply, is partially covered by my insurance. After discounts and coupons, the price drops to $60. What is the true price of that medicine? No one knows – maybe the next time, there won’t be a coupon. The price is impossible to determine – and I don’t even use a PBM.

In my mind, the solution is simple: reintroduce true markets to pharmaceuticals, and many of the pricing and access problems will diminish significantly. This will not require any difficult maneuvering. We simply need to allow market forces to work as they do in the rest of our economy. 

Imagine how quickly the middlemen would be eliminated if we had true price discovery, where you could open your phone and find the best price for your prescriptions online.  There would be price competition for your business as well as a service parameter to your decision making. Pharmacies would have to compete for your business like everyone else and prices for all prescriptions would decline. We are seeing this happen now with ancillary medical services throughout the country, except in states that require certificates of need.

The first recommendation offered in this report aims at increasing competition, but in order to enact it, we would first need to revise the patent laws.  I do not support “pay for delay” or “ever greening,” tactics used to delay introduction of generics. However, we must be careful not to further impede market forces by regulating the actions of private businesses. Yes, market forces are imperfect - but in the long run, they are better than any government market manipulation at bringing forth further innovation and lowering overall prices.

I agree with the report that pharmaceutical monopolies should be prevented, but only by vigorously enforcing the antitrust regulations already on the books that prevent anticompetitive mergers and acquisitions. 

I significantly disagree with report’s conclusion that there are serious barriers to entry for generic drugs.  As I see it, the only thing standing between generic drug manufacturers and the market is the FDA.  If the FDA modernizes its drug approval process and eliminates inefficient regulations, there will be an incredible increase in the number of generics on the market.

Fortunately, this committee’s leadership led to the passage of the 21^st Century Cures Act, which gives the FDA the means by which to do this. This past June the FDA announced the development of a Drug Competition Action Plan to encourage production of generic drugs- a step in the right direction.[2]

I would also be remiss if I did not offer a strenuous objection to the suggestion that state legislatures enact policies that restrict the use of so-called “dispense as written” practices by physicians.  Most physicians do not write prescriptions with this nomenclature, but when they do, there is usually a good medical reason to do so: not all generics are as effective in some patients.  The government already practices too much medicine. This is well intended but will harm patients in the long run.

Giving more control to government will not make drugs more affordable, or solve any of the problems at hand.  Consider the report’s recommendation to implement value-based payment plans.  I think this is an excellent idea, especially for the wave of gene therapies and other novel cures that are currently being developed.  The pharmaceutical companies have been in favor of value-based pricing plans for a long time. The reason these plans have not be implemented thus far has been the interference of the federal government. 

Regulatory barriers like Medicaid Best Price and Stark anti-kickback rules have prevented these companies from experimenting with value-based pricing and other innovative payment arrangements. Pricing programs could be negotiated at the patient level and be truly based on outcomes, not regulation. Of course, they would include a safety net for those presently without coverage or access.

Unfortunately, this report goes even further in offering suggestions for government control with the attempt to limit tax deductibility of direct to consumer pharmaceutical advertising as a business expense.  I will tell you that as a physician, I hate direct to consumer pharmaceutical advertisements, which are often attempts to sell people what they do not need. But the fact remains that these companies retain their First Amendment right to do so, whether we like it or not.

In addition to being illegal or unconstitutional, these recommendations simply obscure the real problem at hand.  To implement them is to ignore our failure to create a true free market for drugs, and attempt to rectify this error with another error.

This brings me to my biggest problem with the report: all of the recommendations made are post hoc attempts to reform the market.  If we simply mandated transparency and competition, these policies would not even be on the table.  This is most clearly demonstrated in the report’s recommendation to require pharmaceutical companies to disclose prices, discounts and rebates on a quarterly basis. Publishing this information does not go far enough: net prices should be available online at all times. This would lead to the creation of a live, true market- like the market that exists in the rest of our economy.

I have three recommendations to offer, all of which I have already touched on.

First, mandate that net prices of pharmaceuticals be made available both at the point of sale, and in an easily accessible online database.  This is the most important thing we can do to restore a free market for drugs. It will allow patients - not insurance companies or PBMs - to decide what is best for them, and let them shop for value. Once we empower patient choice, we will see an increase in competition and a decrease in prices.

Second, promote regulations that allow manufacturers to develop more cures faster, and at less total risk and cost.  In addition to streamlining the approval processes for both branded and generic drugs, this means avoiding things like price controls, profit ceilings and other policies designed to prevent market forces from working. 

Finally, address the regulations that impede the development of value-based pricing and other novel payment arrangements.  Government agencies prohibit the development of new drugs and treatments in precision medicine because they do not allow flexibility on payment for value.  Working together in free markets, patients, their physicians, and pharmaceutical companies will come together and find ways to deliver these new, creative and curative therapies at a fraction of the expected cost.

We do not need to jump through hoops to make medicines more affordable. By changing the system to better reflect the free market principles that guide the rest of our economy, we can find ways to provide patients with effective medicines at reasonable prices, without breaking the bank or stifling further innovation.

Thank you.