Blog Center for Advancing Health Services, Policy & Economics Research

Drug pricing: Where do we go after the election?

Written by Rachel Sachs, associate professor in the School of Law

Martin Shkreli. Valeant Pharmaceuticals. Mylan. Just a year ago, most Americans devoted little time and attention to the question of pharmaceutical pricing. Now, after a series of highly publicized scandals involving individuals and companies who hike the prices of products like the EpiPen or Daraprim with impunity, public awareness of these issues has dramatically increased – and policymakers are taking notice.

Importantly, to the extent that high drug prices are a problem, it is not an easy one to solve. As academics have argued, there are many different reasons why a drug may have a high price. We may simultaneously want to reward companies who come up with new, innovative cures for chronic conditions while preventing companies from raising the price of older generic drugs without good reason.

Coming up with policy interventions that would target only the latter activity while at the same time providing certainty to innovators up front can be challenging.

At the same time, policymaking around drug prices is politically difficult. Strong pharmaceutical interest groups oppose seemingly any action in this space, arguing that even actions targeted at generic drugs would decrease innovator companies’ incentives to invest in new cures. Although I and others have argued that this concern is oversimplified, it nonetheless has had a significant impact on the debate.

Despite this opposition, the growing appetite among the public for doing something, anything, about high drug prices has led to a proliferation of policy proposals on the subject. These proposals would affect different drugs and would act on different institutions within the drug pricing ecosystem. As we approach Election Day, it is worth thinking about which of these actions would be implemented at different levels of government.

Reforms at the Federal level

Many of the most commonly discussed reforms would take place at the federal level. Although there are greater political challenges to enacting change at the federal level, the potential effects are also much broader than for reforms enacted at the state level.

Allowing Medicare to Negotiate Drug Prices. The most commonly proposed drug pricing reform would give Medicare the authority to negotiate drug prices. The thinking is that because Medicare has such purchasing power, it will be able to demand discounts for the tens of millions of Americans covered by its plans. This solution is so popular that it has been praised by both Secretary Clinton and Donald Trump. And yet, it wouldn’t work on its own.

Here’s the problem: not only is Medicare itself legally prohibited from negotiating drug prices, but it is also legally required to cover certain prescription drugs. Medicare can’t get up and walk away from the bargaining table if it doesn’t like the price the pharmaceutical company is offering, which significantly limits its ability to demand discounts from companies. If Medicare were given the authority to decline to cover a drug if its manufacturer did not provide a discount, that would improve its bargaining power – but that would also prevent Medicare beneficiaries from accessing the drug in question, which is highly unpopular. Although some scholars have proposed creative ways around this problem, none have yet made it into the political discussion.

Constrain Price Increases. Much of the public outrage accompanying high drug prices has come in response to companies who raise the prices of old drugs, seemingly only to increase their profits. As such, a number of proposals would constrain the ability of drug companies to increase their prices over time. In fact, one of these even became law in the wake of Martin Shkreli’s activities around Daraprim, enabling Medicaid to recoup additional rebates on a drug if its price rose faster than inflation.

Recently, Secretary Clinton has put forth a plan which would prevent such price hikes more broadly, outside of just the Medicaid program. At the same time, Secretary Clinton’s proposal would account for the reasons behind the price increase, allowing increases where they’re needed to address situations like manufacturing problems. Because this proposal is limited to older drugs, it may face less political opposition, although its passage will surely not be easy.

Reforms at the State level

The federal government is not the only entity interested in curbing high drug prices. Many states are currently considering other measures that would take effect only within their borders, although some might have follow-on effects more broadly.

State Drug Price Cap Laws. California and Ohio are currently considering ballot initiatives that propose to cap what drug manufacturers can charge to public payers in the state (such as Medicaid) at the price the VA pays for them. Because these initiatives don’t distinguish between different kinds of drugs, we should carefully consider their real-world impact, and there are persuasive arguments on either side. My bigger concern, however, is that these initiatives would not actually work to accomplish their stated purpose. Not only are the prices the VA pays often confidential, but as with Medicare, state Medicaid agencies must cover most FDA-approved drugs and do not generally have the ability to demand price concessions in favor of coverage. Removing these two legal obstacles would have additional policy consequences not contemplated within the current policy discussion of these initiatives.

Transparency Laws. Several states are considering bills which would require pharmaceutical companies to report information on their research & development costs, marketing and advertising costs, and prices charged to a number of different purchasers. Vermont is the first state to have officially enacted such a law. Different states have crafted their bills in different ways, to apply to different classes of drugs at different times and to require the disclosure of different pieces of information. These bills themselves do not directly constrain drug prices. However, they may serve to enable states to gather information which they can use to make such policy going forward. Alternatively, states like Vermont, which require justification for price increases, may use the laws to serve a “naming and shaming” function which has been demonstrated to hold down prices at least to some degree.

These are just a few of the many proposals that have been discussed with the potential to curb high drug prices. Others would tackle the issue indirectly, by attempting to speed FDA approval of competitor products or by limiting consumers’ out-of-pocket expenditures. In addition, the private sector is taking action on its own to encourage different types of value-based pricing for pharmaceuticals, with groups like the Institute for Clinical and Economic Review analyzing and providing critical public information on the value of many new products. But in the near term, these four proposals have the greatest possibility of becoming law and deserve our attention going forward.