Former Louisiana governor (also former HHS secretary) Bobby Jindal and Charlie Katebi wrote an editorial in the Washington Examiner explaining how to rein-in high drug costs. To start with they don’t like the Inflation Reduction Act (IRA). President Biden championed the IRA as a way for Medicare to lower drug costs for a small, insignificant number of hyper expensive drugs. For the uninitiated, the IRA allows Medicare to identify 10 high-cost drugs and negotiate the cost down, using punitive excise taxes if drug companies refuse. Jindal and Katebi have a point. The IRAs price negotiation formula is a Rube Goldberg-type of policy mechanism that only Democrats’ legislative writers would think up.
One alternative to heavy-handed government price controls is to streamline the path to generic competition. This has already been done for medications like pills and capsules (small molecules). In 1984 Congress paved the way for generic drugs and the results have been tremendous. Today about 90% of drugs dispensed are generic, accounting for only a 20% of drug expenditures.
The FDA offers a simpler pathway for small molecule generic competition: five-year exclusivity, public patents, low-cost equivalence studies, and pharmacists can dispense. This process costs $1 million to $4 million and takes two years.
Although most drugs used today are generic, nearly half of drug spending is on a few, high-priced specialty drugs, often biologics made from living substances.
By 2018, biologics accounted for 0.4% of prescriptions but nearly half of spending.
The vast majority of biologics have no generic competition.
FDA barriers prevent biosimilars, generic biologics, from competing: expensive clinical trials, 12-year exclusivity, patents not disclosed, and burdens for pharmacists to dispense. This process costs $100 million to $300 million and takes six to nine years.
Unlike European countries, the U.S. does not allow pharmacists to substitute biosimilars for branded biologics (even the name is political. The industry lobbied to call them biosimilars, rather than biogenerics). Jindal and Katebi point out that the U.S. gives biologic drugs longer exclusivity than other countries. In the U.S. biologic drugs get 12 years versus 5 in Australia and New Zealand, while the EU provides 10 years.
Another point Jindal and Katebi make is the convoluted way pharmacy benefit managers (PBMs) work. Most drugs Americans take flow through these middlemen who work with health plans and insurers to shape drug benefits and negotiate with drug makers for better deals. The industry is highly consolidated with the three biggest PBMs controlling 85% of the market. They are also owned by health insurers.
However, the Robinson-Patman Act prohibits PBMs from receiving direct discounts. Congress should allow PBMs to negotiate discounted drug prices rather than relying on complex indirect rebates and kickbacks that seemingly benefit intermediaries.
The worse possible way to negotiate discounts on drugs is through rebates. Employers have no way to verify whether their employee drugs costs are the best deal or the deal that comes with the highest rebates to the PBM. Consider this: who can pay the biggest rebate? It’s not cheap generic drugs, it’s the high-priced name-brand drugs. Thus, employers and their workers could be paying too much so the PBM gets more rebates.
Jinal and Katebi have two final recommendations:
Congress should require pharmacies to allow patients to transfer prescriptions easily, and the FDA should convert prescription drugs to over-the-counter status as appropriate.
The second is an especially good one. Currently the U.S. Food and Drug Administration only switches an Rx drug to over-the-counter (OTC) if the manufacturer requests it. Once requested the process is long and arduous. The FDA should not be in the business of protecting drug makers’ business model, which is usually to sell their drugs as prescription-only because Medicare, Medicaid and insurers only reimburse Rx drugs. Once drugs are moved to OTC prices fall by 90% or more within a couple years due to competition. OTC drugs save consumers a lot of money, even though health plans rarely cover them. The criteria for OTC should be whether a drug is safe enough to self-medicate, not that a drug maker prefers Rx status. Finally (this is my recommendation, not Jindal and Katebi’s), Congress should consider allowing a third class of drugs, sold behind the counter, that are dispensed by pharmacists (rather than requiring a physician’s prescription). This would get more drugs in the hands of patients.