Maryland last month became the first state to establish a board to set maximum prices for drugs purchased by state and local governments; shortly thereafter, Maine became the second.
According to a survey by the National Academy for State Health Policy(NASHP), attempts to establish price-review boards in two states (Illinois and Connecticut) failed, but in five others (Massachusetts, Minnesota, New Jersey, Oregon, and Missouri) legislation has been referred to relevant committees.
The structure of the review boards is similar in all these states, so let’s take a close look at one of them. Legislation passed the Maryland House of Delegates, 96-37, and the Senate, 38-8. Maryland’s governor, Larry Hogan, a Republican, declined either to veto or to sign the bill, so after a prescribed waiting period, it became law.
Maryland, like five of the other seven states where review boards have been up for consideration, is staunchly Democratic. Only one of its eight members of the U.S. House is Republican, and Hillary Clinton beat Donald Trump in 2016 by 60% to 34%.
Still, a state price control board is significant for any state. As Health Care for All, an advocacy group, put it, “The Prescription Drug Affordability Board will be the first government entity in the United States created to lower the cost of drugs.”
‘Damaging, Unintended Consequences
But there are problems. Big ones. Christine Hodgdon, a Baltimore resident who was diagnosed with both breast and thyroid cancer at age 34, wrote in the Annapolis Capital Gazette that, while a review board “may sound like good news for patients, [it] would have damaging, unintended consequences to innovation in Maryland, dimming the hope for potential breakthrough treatments without reducing the cost patients pay.”
Martin Rosendale, the CEO of the Maryland Tech Council, believes that the board will “have a negative impact on our local businesses.” With 41,000 Marylanders employed in high-paying biotech jobs, the state is sending a signal that biopharmaceutical companies are unwelcome – especially at time when far more is spent on other segments of the health care system, such as hospitals, that are immune to this kind of scrutiny and when Medicaid drug spending is flat (issues we explore below).
As Rosendale notes, “Price controls limit access to needed medicines. Capping prices or profits within the drug supply chain would restrict patients’ access to medicines and result in fewer new treatments.”
What Maryland and the other states are trying to do is import the model of government-as-payer – prevalent in such countries as Canada -- to the United States. A major means for government agencies in these countries to hold down prices is denying their citizens access to drugs – especially the most innovative and effective. A Wall Street Journal editorial last year pointed out that of 74 cancer drugs launched between 2011 and 2018, some 95% are available in the United States. “Compare that to 74% in the U.K., 49% in Japan, and 8% in Greece.”
In a paper earlier this year, Avik Roy, president of the Foundation for Research on Equal Opportunity, pointed out that “not all foreign countries have access problems to new medicines.” He produced a chart, based on data from the WHO European Observatory on Health Systems and Prices, that show that such nations as Germany and Denmark…
enjoy rapid and frequent access to innovative medicines, comparable to that of the United States. In Denmark for example, after a drug is approved by the European Medicines Agency (the European equivalent of the FDA), it takes an average of five months for that drug to reach patients. This is, in large part, due to the use of free pricing in these high-access countries.
Denmark does not regulate drug prices at all, Roy notes, and Germany allows free pricing for the first year after launch, “which has encouraged manufacturers to rapidly enter its large market.” By contrast, in Belgium and Italy, where prices are tightly regulated access takes an average of 15 months. With its price-control board, Maryland is moving in the direction of Belgium and Italy, with predictable results.
Limiting access to the best medicines has life-and-death consequences. Compare, for instance, survival rates for cancer in the U.S. and the U.K., where the National Institute for Clinical Excellence (NICE) serves as the kind of board that Maryland is setting up. According to the U.S. Centers for Disease Control (CDC), five-year survival rates for four out of five different kinds of cancers studied were higher in the U.S. than the U.K.: breast, colon, lung, and prostate. The only exception was childhood leukemia, where the U.S. rate was 87.7% and the U.K. rate was 89.1% For lung cancer, nearly twice as many Americans survived than U.K. residents.
If you have cancer, this study and others have shown, the best place to be is the United States. Price-control boards like the one Maryland is implementing could change that situation.
Rosendale make a final point. The law, he said,…
could also create a “gray” market of companies that buy and resell medicines to each other before one of them finally sells the drugs to a hospital or other health care facility. As the medicines are sold from one secondary distributor to another, the possibility of counterfeit medicines entering the legitimate medicine supply increases, thereby threatening patient safety.
How the Review Board Works
According to the text of the legislation, the first assignment of the five-person board -- whose members are appointed individually by the governor, the two legislative branches, and the attorney general – will be a study, to be completed by the end of next year, of the drug distribution and payment system and of what other states and countries are doing “to lower the list price of pharmaceuticals.” (Why list price and not the actual cost to the state and consumers is not explained.)
After that, the board will target branded drugs, including biological products, that are launched at a Wholesale Acquisition Cost (WAC) – that is, list price before discounts and rebates -- of $30,000 or more a year or that, after launch, are registering price increases of more than $3,000 a year. Also targeted will be generics with a WAC of $100 or more a month or that have increased in price by more than 200% in a year.
Finally, under the law, the board has an open-ended mandate to pursue “other prescription drug products that may create affordability for the state health care system and patients.”
After identifying its targets, the board next conducts a “cost review” to determine whether a drug will lead to an “affordability challenge” for Marylanders. The review can look at 10 factors (such as the WAC itself, rebates, the price of “therapeutic alternatives,” and restrictions to access), as well as “any other factors as determined by the board.” In all these matters, the board works with a 26-person “stakeholder council” that includes physicians, nurses, representatives of drug companies, advocates for seniors, and the like.
The board can also look at a drug manufacturer’s research and development costs, its direct-to-consumer advertising costs, plus virtually anything else it wants to consider. Then, starting Jan. 1, 2022, the board can set “upper limits” on drugs that are purchased for state-run hospitals, colleges, and prisons, state employee health plans, and Medicaid (the Maryland Medical Assistance Program, whose threshold income requirement for a family of four is $34,000 a year).
What Is the Right Price for a Drug?
Exactly how the board will come up with the correct maximum price for a drug is left vague in the law. A big question is why a group of political appointees has more pricing wisdom than the market-based real-life transactions that determine the net price of Medicaid drugs (in the first place.
Once the price does get set, drug manufacturers can appeal and then take the state to court. The constitutionality of the law is still an open question because it could be interpreted as an attempt to regulate interstate commerce, a federal responsibility. The Baltimore Sun, a supporter of the price-control board, said in an editorial,
This bill treats manufacturers no differently whether they’re in Maryland or Virginia or California. The question of whether this measure would survive a legal challenge is certainly legitimate, given that a federal court recently struck down Maryland’s attempt to limit generic drug price spikes.
The law may be more important for what it signifies than for what it will ultimately do. Politicians at both the state and federal level seem to what to dosomething about drug prices – even if those measures deter innovation and ultimately harm the health of their constituents.
Attacking Spread Pricing
A survey by the NASHP for that, as of July 7, “47 states had filed 269 bills to help control prescription drug costs.” Nearly half those bills were directed at pharmacy benefit managers (PBMs) – especially at a practice called “spread pricing,” a practice that has also caught the attention of the federal Centers for Medicare and Medicaid (CMS), which issued guidance in May to fight abuses. According to CMS:
Spread pricing occurs when health plans contract with pharmacy benefit managers (PBMs) to manage their prescription drug benefits, and PBMs keep a portion of the amount paid to them by the health plans for prescription drugs instead of passing the full payments on to pharmacies. Thus, there is a spread between the amount that the health plan pays the PBM and the amount that the PBM reimburses the pharmacy for a beneficiary’s prescription.
If spread pricing is not appropriately monitored and accounted for, a PBM can profit from charging health plans an excess amount above the amount paid to the pharmacy dispensing a drug, which increases Medicaid costs for taxpayers.
Spread pricing is a real problem, and one that can be addressed effectively. In 2018, Ohio moved all state contracts with PBMs off the spread model and onto a simple pass-through model after the state determined that PBMs were raking off 9% of Medicaid prescription costs. Kentucky reported that PBMs earned $123 million from spread pricing last year.
Medicaid Net Drug Spending Flat
Medicaid spending is a serious concern of all states. Although the federal government pays about three-fifths of the cost, the state’s share is typically one of the two overall budget items, along with education. Total Medicaid costs arerising at about 4% annually, but, according to a Kaiser Family Foundationreport on May 1, net spending on Medicaid pharmaceuticals after federal and state rebates has been flat for the three most recent years of data (2015-17) and, in fact, declined between 2016 and 2017.
States are not required to offer pharmaceutical coverage under Medicaid, but all of them do. (After all, medicines keep people out of hospitals and physicians’ offices, where total spending is five times that of drugs.) Medicaid provides reimbursement to pharmacies for what amounts to the national average price of the drug. To cover some of the cost, according to a KFF primer,
federal law requires manufacturers who want their drugs covered under Medicaid to rebate a portion of drug payments to the government, and in return, Medicaid must cover almost all FDA-approved drugs produced by those manufacturers.
Most states also negotiate for rebates. In 2017, federal and state rebates totaled 55% of total drug spending, up from 46% in 2014. Overall, net Medicaid spending on prescription drugs after rebates totaled $29 billion in the most recent year for data; that about 5% of total costs for Medicaid, a program that spends $119 billion on fee-for-service long-term care alone.
Drugs a Small Portion of Medicaid Costs Compared to
Long-Term Care, Hospitals
So the mystery is not merely how state boards are going to determine whether a drug costs too much but why the politicians who create the boards are so fixated on medicines rather than on much larger budget items, such as hospitals and long-term care.
One answer may be that ideological interest groups are also fixed on drugs. For example, a national group called Patients for Affordable Drugs Now played a key advocacy role in securing the Maryland price-setting board, including running television ads encouraging Governor Hogan to sign the bill. The group received $950,000 last year from the Action Now Initiative, which is funded by Laura and John Arnold, Houston-based philanthropists who made drug-price reduction a cause.
Another answer is simply that practically every elected official has at least one hospital providing employment in his or her district while pharmaceutical manufacturers are national and global companies. It may make political sense to overlook the sharply rising cost of hospital care – and even lavish benefits on hospitals. In an article earlier this year in National Affairs, Chris Pope wrote about what he called “hospital protectionism” by state and federal governments:
America's hospital industry is already one of the most politicized sectors of the nation's economy, and its shape and structure are the product of decades of deliberate legislative and regulatory actions.
Price-Setting Boards Can Damage Health
The real danger in creating state price-setting boards, however, is the damage they can do to America’s health. Pharmaceutical innovation has entered a kind of golden age, with more and more innovative drugs being developed for diseases that, in the past, ruined lives or put an early end to them.
The death rate from cardiovascular disease has dropped by two-thirds since the 1970s, in large measure because of cholesterol and blood-pressure medicines. HIV/AIDS was a death sentence before antiretroviral drugs were developed. In 2013, the Food & Drug Administration approved an actual cure for Hepatitis C, which kills more Americans than any other infectious disease. Last year, the FDA approved 59 new drugs, a record. These medicines treat such conditions as smallpox, melanoma, rheumatoid arthritis, cystic fibrosis, breast cancer, acute influenza, and many more. Cancer breakthroughs are multiplying.
Putting political limits on the cost of medicines – especially when these costs have been flat in recent years – could have significant negative consequences. Drug companies need to spend vast sums on research and development to bring drugs to market (the total cost per approved medicine is close to $3 billion); if the revenues fall, so will R&D, and so will the opportunities for Americans to benefit from innovation.
Frustration at the costs of medicines may be understandable, but the best way to limit pharmaceutical expenses is not top-down controls from governments but competition in the marketplace. The Trump Administration has already shown what can be achieved by easing the pathway for approval of generic drugs: an overall decline in the average price of medicines.
The Bureau of Labor Statistics (BLS) reports that prescription drug prices have fallen in eight of the past 14 months. Express Scripts, the pharmacy benefit manager (PBM) for 83 million Americans, reports that during 2018 the average cost per prescription for members of its commercial plans fell by 0.4%. For Medicare plans, the decline was 1.4%. CVS Caremark, another giant pharmacy benefit manager, says that last year, the prices of specialty drugs for its members rose just 1.7% and those non-specialty drugs fell 4.2%.
Much more can be done to intensify competition and to reduce the out-of-pocket costs of patients – for example, regulatory changes to improve the chances of getting biosimilar drugs to the marketplace. Political price controls are a blunt instrument, bound to do a lot of damage, intended or not.
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