Why Big Pharma Is Winning the Drug Price Wars

(Bloomberg Opinion) -- Robin Feldman is a law professor at the University of California Hastings with a particular expertise in antitrust and patent issues. She is also one of those professors who are unusually good at explaining complex issues in terms laymen (like me!) can understand. Her 2012 book on how to fix the patent system, “Rethinking Patent Law,” is considered one of the more important contributions to the field in recent years.

Feldman then turned her attention to the problem of skyrocketing drug prices. “Economically,” she says, “it doesn’t make sense. So I decided to look into it. It took years of research.”

That research has culminated in a new book: “Drugs, Money and Secret Handshakes: The Unstoppable Growth of Prescription Drug Prices.” I spoke to her a few days ago about drug prices — and what might be done to halt their inexorable rise. What follows is a lightly edited and condensed version of our conversation.

Joe Nocera: When did drug prices really start to ratchet up?

Robin Feldman: One key moment was in 2006 when prescription drug coverage became part of Medicare. But all along there has been what I like to call the inventiveness of drug companies outside of the lab.

JN: In other words, the creativity of drug companies’ legal departments to come up with ways to game the system?

RF: Exactly. In the last 10 to 15 years, they have developed strategies to maintain their power position in the market, to keep cheaper drugs from entering, and to make sure that when they do enter they don’t gain a foothold in the market.

JN: Wasn’t the Hatch-Waxman Act of 1984 supposed to prevent the big pharmaceutical companies from having that kind of control over the market?

RF: Yes. Hatch-Waxman was intended to usher in the rapid entry of generic drugs and to ensure prices would fall dramatically when that happened. It worked for a while. Innovation takes time, not just in the lab but also in the legal department.

JN: A lot of your book is about how even well-intended parts of the system have been perverted to increase drug prices. For instance, you write about pharmacy benefit managers — so-called PBMs like Express Scripts Inc. Why have they not worked to lower drug prices, as they were intended to do?

RF: It is very simple. Drug companies are able to pay PBMs — as well as hospitals and some doctors — to make sure cheaper drugs are left out. It’s as simple as that. Drug companies pay everyone along the way so that lower-price drugs lose.

JN: How does that work?

RF: The PBMs negotiate discounts from drug companies and then help determine patient access to drugs. In theory, that is supposed to encourage PBMs to drive prices down on the drugs. But drug companies have very cleverly turned the system on its head. Before they give a discount to the PBMs, they raise the price each year. It is like a department store raising prices before a sale so that the sale price looks more appealing. Then the PBM can claim to have negotiated a great deal, and will pocket the rebates. In return, the drug companies want the PBM to make sure their competitors are disadvantaged.

There is another part of the system that too often gets glossed over. The high prices might not be so bad if the patients never actually paid that price. But millions of people do. Thirty percent of people with employer health plans have to pay 100 percent of costs up to a deductible. They pay the high list price. Many people have co-insurance, which is calculated as a percentage of the high list price. Many people don’t have drug coverage even with health plans. And of course lots of people have no health plans at all.

Also, the high prices serve as an umbrella. Generic drug prices can also be high — so long as they are less than the branded drug.

JN: How do the drugs companies buy off hospitals?

RF: Drug companies pay rebates to hospitals. The same is true of doctors, by the way. The hospital charges the patient the sky-high list price. Later in the year, the hospital gets a shiny rebate check from the drug company and pockets the difference, even though you and I have paid the list price.

JN: What do you think of the idea that part of the solution is to just get rid of the PBMs?

RF: I don’t think it will change much. What you are talking about is a transfer of value from drug companies to others down the line. If you kill the PBMs without changing the system, you’ll just see drug companies entering into various types of agreements with the health plans instead of the PBMs. The drug companies will still have the incentive to make sure the truly cheap drug never gains traction.

JN: You also write about the importance of volume.

RF: Volume is the name of the game. A drug company that has a lot of volume with a PBM or a hospital can offer a better deal as a temptation to exclude rival drugs. There are some amazing examples about this. For instance, in 2017, Shire sued Allergan over its blockbuster dry-eye medication Restasis. The allegation is that Allergan used bundled volume rebates to preserve its dominant market share. And here is the great quote from the complaint: “According to one Medicare plan administrator, given Allergan’s bundling scheme, a competitor could give [its new drug] for free and the numbers still wouldn’t work.”

JN: How does the patent system exacerbate the problem?

RF: Where do the drug companies get the power and the volume to make those deals? The government gives it to them in the form of patents. When their drugs have a patent-protected monopoly, the companies use that period of exclusivity to solidify their position and hobble the generics.

And then they repeatedly add years to their monopoly by gaming the patent system. One of the things I show in the research for my book is that drug companies are largely recycling and repurposing drugs rather than inventing new ones.

JN: You have an amazing statistic on that.

RF: Yes, 78 percent of the drugs associated with new patents are not new drugs. They are existing ones. Instead of innovation, we are seeing secondary protections piled onto old drugs over and over again. They make minor medical modifications by adjusting the dosage or the delivery system.

Here’s the most important point: When a drug company makes a secondary change to a drug, the R&D investment is minimal compared with what’s required for the drug’s initial development. Also, the change may mean little from a therapeutic standpoint. So we are lavishing expensive rewards without getting true innovation. It is not a good situation.

JN: So why is this allowed?

RF: It is the way the system operates now. And really, one can’t blame the drug companies. These are profit-making companies. We can’t expect drug companies to behave differently. Imagine if a CEO went to his board and said, “I have decided to lower prices and reduce our profits. It’s the right thing to do.” That CEO would be fired.

JN: You offer a series of solutions in your book. Let’s talk about them.

RF: First of all, there needs to be true transparency. Companies can’t compete with each other if they are flying blind. In general, secret deals are bad for competition. If we want to see true competition, we need to let the sun shine into the system. It lets competitors figure out how to compete and it lets regulators see where the bad behaviors occur.

JN: What is your second solution?

RF: The second solution is what I call one-and-done. Each drug should receive one and only one period of exclusivity. You should not have companies piling periods of protections on one after another. Once that period of exclusivity ends, you can’t extend it. And you can’t keep generics off the market. That’s one-and-done.

JN: What is your third idea?

RF: Ruthless simplification. And I will tell you I don’t think government is moving in this direction at all. But complexity breeds opportunity. Our drug price system is so complex that the gaming opportunities are endless. We need to have simpler and more streamlined systems of regulation and approval.

JN: Makes sense to me.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”

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