Drug pricing here makes Americans into patsies

An analyst at Seeking Alpha recently wrote that U.S. drug pricing should encourage the rest of the world to call us, "The United States of Saps."  He supported this disparaging view by citing an article in The Economist to show how drug pricing in the U.S. exploits the public here compared to residents of other developed nations.  The U.S. government won't use its purchasing power and the implied threat of compulsory licensing (i.e., breaking patents) to negotiate prices and that means consumers and taxpayers here, in effect, subsidize drug purchases in other countries.

The loudest ruckus over outrageous U.S. drug pricing at present concerns Sovaldi, a medication developed by Gilead for hepatitis C.  Sovaldi represents a genuine breakthrough for the standard of care in hep C but, to their shame, Gilead decided to charge $84,000 for the 12-week course of treatment, the equivalent of $1,000 per pill.

Insurers and pharmacy benefit managers have berated Gilead for its pricing, but pharma always has its flatterers and jackals who try to justify its behavior, no matter how outrageous.  One writer who seeks to perform this task for Sovaldi is Dr. John LaMattina, a regular contributor to Forbes who used to head R&D at Pfizer.  When LaMattina sticks to matters of R&D management of the sort he conducted at Pfizer, he often provides useful insights.  When it comes to matters of public policy, on the other hand, he is typically wrong, wrong and wrong.

That assessment definitely applies to the three arguments he makes in defense of Gilead's pricing for Sovaldi.  His first point is that Sovaldi pricing isn't so onerous because the Veterans Administration was able to negotiate a reduction to the $84,000 price, down to $47,000 per patient, a figure that's even lower than the prices Canada, Germany and the UK were able to obtain.  Although LaMattina's figures are accurate, the fact remains that the VA's deal only covers veterans, not the hundreds of thousands of non-vets who are hep C positive.  Moreover, the VA was able to obtain its favorable pricing because the law allows it to use its purchasing power to bargain prices, a capability explicitly denied to Medicare.

LaMattina next makes the point that by the end of this year or early in 2015, it's very likely there will be equally effective medications available from AbbVie and Merck to compete against Sovaldi.  In his view this competition will drive down prices.

While markets are supposed to work that way, pharma doesn't.  For the vast majority of products and product categories, pharma has been able to maintain a pricing cartel.  Price competition remains limited to marginal differences.  Responding to LaMattina's claim, blogger Corey Nahman -- a self-described pharma loyalist -- wrote:

"Look to insulins or DDP4's (two classes of drug with no generic) for a model.  The prices are very close.   AbbVie is not going to sell it's medicine for $500 a pill when Sovaldi gets $1,000 per pill.  $950 per pill or $975 per pill sounds more realistic."

LaMattina's third reason for optimism comes from his belief that physicians are starting to constrain pricing.  He cites the example of Sanofi's Zaltrap, a cancer medication that oncologists at Memorial Sloan-Kettering refused to put on formulary because of its high price.  Sanofi responded to this boycott action by cutting the Zaltrap price in half.

If the case of Zaltrap and Sloan-Kettering represented the general rule or even a rising trend, then perhaps LaMattina might have a point and it would offer some encouragement.  The fact is that Zaltrap was an isolated incident and, in no way, does it offer a precedent for something like Sovaldi.  For starters, the oncologists were able to rely on Sanofi's own clinical data to see that Zaltrap was no better than existing, less expensive medications.  That enabled them to shun the new product and still offer their patients alternatives that were equally effective.  On the other hand, nothing will be available to treat hep C as well as Sovaldi until competitors are approved.

Aside from Zaltrap, LaMattina and other Dr. Panglosses would have a real problem citing cases where providers forced substantial price reductions.

The exorbitant pricing of medications is one of those things that don't really affect most people until something unexpected occurs.  Then those enormous prices disrupt one's life.  In this respect the American public is even worse off now than it was thirty years ago.  As a West Chester health care consultant wrote in a personal communication recently, "With exploding prices and high deductible health plans, consumers now stand a real risk of going into major medical debt and even bankruptcy if they run into just moderately serious health problems. There wasn't as much risk of that thirty or forty years ago."

If prices for brand name drugs, doctor visits, hospital stays and almost any other health care product or service are 30%-50% higher in the U.S. than anywhere else in the developed world, then the question is why this is so?

The answer is that the health plans and employers—the people who are supposed to be looking out for average consumers—have basically been asleep at the switch for several decades.  Then too, the fact that they're also a fragmented bunch, rather than a national health ministry, means the lack of unity gives providers and manufacturers the upper hand.  So while the Centers for Medicare & Medicaid Services (CMS), the federal agency that runs those two programs, does a halfway decent job of managing prices for Medicare patients, CMS is completely hamstrung at controlling utilization as a result of rules enacted at organized medicine's behest.

Despite a lot of really slick PR about "patient centered care," there's really no one to actually give a damn about patients.  Once again, a study published last week showed the U.S. health care system ranks last among eleven western, industrialized nations, despite spending far more per capita (see here).  In what's supposed to be a republic, that means Americans have to take the initiative by electing people who will fix a thoroughly dysfunctional system.  Health care is just too important to remain in the hands of people who have profited from it, at everyone else's peril.

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