Medicaid Is Right to Demand Lower Drug Prices

(Bloomberg) -- Last week, as President Donald Trump delayed announcing his plan to bring down high drug prices, about a dozen physicians, pharmacists, actuaries and economists in Albany, New York, tried to make a difference. The state Medicaid program’s Drug Utilization Review Board voted 10-0 to lower the price New York would pay for Orkambi, Vertex Pharmaceuticals’ cystic fibrosis drug, to $83,000 per year, from $250,000.

As a lung physician, I appreciate that Orkambi does have benefits — it eases breathing and prevents some of the acute episodes that can land cystic fibrosis patients in the hospital. It is an improvement over what we had to offer when I was in my medical training.

But like many other states, New York is having trouble affording prescription drugs for Medicaid patients. From 1991 to 2014, the share of New York Medicaid dollars going to nursing homes, hospitals and doctors fell by 30 percent, 12 percent and 4 percent, respectively — as drug spending rose 75 percent.   

While medicines are indeed improving, their prices are rising faster than ever. In the early 1990s, a cancer drug that prolonged a patient’s life by one year cost about $50,000 (in today’s dollars); today, medicines that offer the same benefit cost five times as much. 

So New York passed a law to manage the expense. If drug spending rises too quickly, the board can propose discounts, called “supplemental rebates,” for certain drugs. In 2018, drug spending can rise 2.4 percent before the board needs to act, but it is on track to go up 15.1 percent. The board zeroes in on drugs that are “priced disproportionately to [their] therapeutic benefits.” The state can then ask for discounts to lower the price to a reasonable level. The board’s action on Orkambi is the first test of New York’s new law.

Pharmaceutical companies do not readily acquiesce to discount demands. In the U.K. and the Netherlands, Vertex denied patients access rather than price Orkambi in line with the value those countries assessed. When asked to provide discounts in France, Vertex shut down clinical studies there. Like all drug companies, Vertex prices its products to maximize profits. Hours after the New York State Medicaid meeting, the company announced that its first quarter 2018 net profit margin was 33 percent.

The companies argue that market competition is enough to keep drug prices under control, leaving out the fact that drugs such as Orkambi have no competitors. They argue that a $250,000-per-year price is reasonable — though that much money could buy health insurance for 14 families of four. Companies also say they need high prices to support research. Vertex does spend a lot on research, but it has also scheduled a half-billion-dollar stock buyback.

Drug companies love talking the market talk, but they talk only half the story. New York State is a purchaser like any other, and in any well-functioning market, purchasers get to decide how much they’re willing to pay for things. But when it comes to states, drug companies complain about government price controls, even though the New York board — made up of clinical and economic experts, not budget cutters — only wants to pay a fair price for Orkambi.

During the board meeting, the Institute for Clinical and Economic Review, a nonprofit that assesses the value of prescription drugs, presented its report on Orkambi. ICER found that the drug’s list price amounts to $1.3 million per additional year of life it provides, or $900,000 if you take into account the improved quality of life Orkambi brings. Those numbers are more than four times the current benchmark for cancer drugs.

Oh, and those prevented hospitalizations? ICER found that the state had to spend about $326,000 on Orkambi to prevent each one of them. (Disclosure: ICER is in part funded by the Laura and John Arnold Foundation. My research is, as well. Our grants are unconnected.)

ICER proposed to New York a range of reasonable prices from $72,000 to $83,000 per year, and the board chose the upper end. That would be a 67 percent discount off the drug’s list price, and half what the state is currently paying (given its built-in Medicaid discounts).

The idea that a drug should carry a fair price is novel one in the U.S. Drugmakers have been able to charge whatever they want, and they call any alternative strategy rationing — sometimes sensationalized as “putting a price on a human life.” But a state measuring value for the dollar is not rationing, it’s rational.

As a society we should be thrilled to devote some of our shared resources to providing Orkambi to people it could help. But our shared goals extend beyond cystic fibrosis patients, to people who need housing and education and those who need other medical treatments. New York State has to make sure it can provide all of this. The first step is to pay a fair price.

To contact the author of this story: Peter B. Bach at

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