Why Big Pharma’s Case to Congress Comes Up Short

(Bloomberg Opinion) -- Seven senior executives from leading pharmaceutical companies went in front of the Senate Finance Committee Tuesday to answer for their industry's excessive drug-pricing practices. They struck a fairly conciliatory tone: The CEOs of Merck & Co., Pfizer Inc. and others all pledged to work with lawmakers on ways to keep down costs, offering several industry reforms that they support. 

It marked a shift from the industry's sometimes more combative stance, and reflects mounting pressures from increasingly bipartisan scrutiny. But that softer tone is hard to trust. The group continued to rely on old arguments that support the status quo, largely favored minor and distant tweaks, and offered little in the way of concrete detail or explicit commitments. That’s insufficient in an environment where patients in the world’s richest country are rationing medicine because they can’t afford it. 

Why Big Pharma’s Case to Congress Comes Up Short

There were a few memorable moments. Democratic Senator Ron Wyden compared AbbVie Inc.'s patent strategy for its best-seller Humira to Gollum's possessiveness of the One Ring in “The Lord of the Rings,” to the chagrin of AbbVie CEO Richard Gonzalez. But that might have been the high point of the hearing. The executives emerged largely unscathed.

All seven executives expressed support for the Trump administration’s plan to overhaul how drugs are paid for in  Medicare Part D, which helps more than 40 million older Americans afford medicines. Currently, drugmakers pay large rebates to pharmacy benefit managers – the companies that negotiate drug costs for health plans – in order to gain market share. These PBMs derive a portion of their revenue from the rebates; under the new plan, all of those discounts would flow directly to consumers.

This shift could have real benefits. The current system incentivizes drugmakers to increase list prices – and consequently rebates – to gain PBM favor. That increases costs for people who are on high-deductible plans or have to pay co-insurance for drugs. 

But the industry supports the new policy for a reason. It doesn’t harm them, and hampers their biggest drug-pricing rivals. In fact, the plan could actually increase profits at pharma firms, if they don’t reduce list prices to the currently negotiated rate. (Executives at the hearing wouldn’t explicitly commit to doing that.)  Several executives said that lower list prices would have to wait on reform extending to the larger private market, something that might not happen for years or at all, because they’re reluctant to lose market share or sales. That’s an attitude that will maintain the status quo. 

Multiple firms mentioned support for value-based pricing, a system under which they would pay discounts when a drug doesn’t work as expected. Such deals are relatively uncommon in the U.S., and these types of discounts tend to be quite modest. There are regulatory issues in the way of doing more, but senators should be hesitant to trust that removing those barriers is a solution to the pricing problem. Such plans often don’t address the fact that medicines are priced excessively to begin with. A discount based on an inflated price where pharma sets the terms isn’t likely to be much of a deal.

The panel universally opposed policies that would substantially curb prices and hit their bottom line, like granting broader negotiating power to Medicare, changing generous patent laws, or tying certain drug prices in Medicare to the generally lower prices charged in other countries (something the Tump administration supports). The executives trotted out their usual reasoning, claiming as they have before that such policies would stifle innovation and reduce access. Merck CEO Ken Frazier obliquely referred to some of the more aggressive proposals under consideration by the Trump administration as "outrageous," saying they would mean we would get fewer groundbreaking medicines. This contrasts with his earlier statement that the industry had a "duty to do better."

These companies do spend billions on research and have developed important medicines. But the idea that there’s not room for bigger reform is pretty silly. All but one of the seven companies represented at the hearing were among the 15 most profitable health-care companies in the world in 2018. Only two of the firms on that list, UnitedHealth Group Inc. and Medtronic Plc, don’t make drugs. The other 13 – from AbbVie to Roche Holding AG and Sanofi – generated $100 billion in net income last year at a higher margin that most other industries dream of, and sent more than $100 billion back to shareholders in the form of stock buybacks and dividends. Bottom line: The incentive to innovate isn’t going to vanish if prices come down, nor are these companies likely to remove medicines from the massive U.S. market. 

The industry put on a friendly face today, which makes sense in an environment where even traditionally friendly Republican lawmakers are asking tough questions.  But its unwillingness to consider real change is going to cost it in the long run.  

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

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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