Congress expert Norman Ornstein on what the debate over the debt limit says about dysfunction in Congress, and his ideas for how to fix it.
Prescription drugs account for one tenth of the nation’s health care spending. Most drug prices have been rising slowly, but the cost of specialty drugs, including those used to treat some neurological diseases, cancers and hepatitis C have become much more expensive. For the most part taxpayers and healthier insured patients are picking up the tab, but some say drug companies need to do more to reduce prices: Please join us to discuss the cost of prescription drugs.
- Kimberly Haugstad Executive director, Hemophilia Federation of America,
- Richard Harris Correspondent, science desk, NPR
- Lori Reilly Executive vice president, policy & research, PhRMA
- Stephen Schondelmeyer Professor of pharmaceutical economics, College of Pharmacy, University of Minnesota
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Americans are spending more than ever before on prescription drugs. More than a half million people in this country take more than $50,000 worth of drugs every year. The drugs advocacy is not in dispute, but many do question why prices are so high.
MS. DIANE REHMJoining me to talk about rising prescription drug costs, Richard Harris of NPR, Lori Reilly of PhRMA. Joining us by ISDN from Minnesota Public Radio, Stephen Schondelmeyer of the University of Minnesota. And by phone, from Milwaukee, Wisconsin, Kimberly Haugstad of the Hemophilia Federation of America.
MS. DIANE REHMYou are, of course, invited to be part of the program. Give us a call at 800-433-8850. Send us an email to email@example.com. Follow us on Facebook or send us a tweet. And Richard Harris, I'm going to start with you. You had a piece recently about a patient with multiple sclerosis. Tell us about that situation.
MR. RICHARD HARRISYeah, good morning, Diane. It was an interesting excursion. There was a paper actually in the "Journal of Neurology" that was talking about the cost of MS drugs and I found a woman in Portland, Oregon, who had developed MS some years ago. And when she first got on her drugs, it was costing her about $10,000 a year, the sticker price of the drug, if you will.
MR. RICHARD HARRISAnd as she -- over the years, she noticed the price tripled. The same drug and, in fact, by 10 years, the cost was three time as much. Fortunately, she was not paying for this out-of-pocket because the drug company realized that it would be an impossible financial burden for her, but the price was passed along to her colleagues where she worked, you know, in the form of healthcare premiums.
MR. RICHARD HARRISAnd in the context of this, is there are a bunch of drugs that have been around -- some have been around for a very long time and this study in neurology, the journal found that some of them have increased in price by six times. And it goes against what you expect in terms of supply and demand. You expect when more drugs come on the market that that would bring down prices.
MR. RICHARD HARRISBut every time a new drug came on the market, actually, what happened was the prices for all of the drugs went up and so that was the genesis of the story and trying to understand what's going on with drug prices.
REHMAnd Kimberly, it's not just MS patients, but indeed those with hemophilia, the drug prices have changed over the years.
MS. KIMBERLY HAUGSTADCorrect, yes, absolutely. And as consumers, we feel that we're faced with a completely unfair pricing mechanism. It's just discriminatory. Healthy people fall into that flat rate co-pay category. You may have a prescription and you pay $10 a month for drug X, but other people, including those born with genetic diseases like ours, require a specialty drug over a long period of time and they fall into this higher priced co-insurance category.
MS. KIMBERLY HAUGSTADAnd this includes people with hemophilia and other bleeding disorders that I work with, but other chronic diseases, too. Juvenile diabetes, immune deficiency, rheumatoid arthritis, MS, Lupus, it goes on. So by having to pay this co-insurance instead of a flat co-pay, you're looking at a much, much different scenario.
MS. KIMBERLY HAUGSTADAnd co-insurance means you pay a percentage of the total cost of the drug. So, as an example, a person with severe hemophilia, the monthly cost of treatment can easily be $40,000 a month, even with the protection of your out-of-pocket maximums. Families must meet their full annual out-of-pocket. That can be up to $6600 individually or $13,000 for families just to get their first shipment of medicine.
MS. KIMBERLY HAUGSTADAnd they can't get another shipment in month two unless this is paid. So it's just steep bill due and families aren't in the position to do it.
REHMStephen Schondelmeyer, in some instances, you've got a brand new drug and the cost is high. But at the same time, you've got older drugs with higher prices. What are the trends that you're seeing?
MR. STEPHEN SCHONDELMEYERGood morning. Well, with respect to drug prices, we see prices continue to go up year after year and they go up faster than the general rate of inflation and the economy even. For example, in 2013, prescription drugs made by brand name companies averaged about 12 to 13 percent increase. But the drugs we're talking about, the MS drugs, were averaging greater than 20 percent increase a year.
MR. STEPHEN SCHONDELMEYERAnd it's not just specialty categories for people with unique diseases, but diabetes drugs went up 20 to 30 percent in the last couple of years each year. So we're seeing drugs increase dramatically. But if a person's drug price goes up 20, 30 percent, does their diabetes get 20 or 30 percent better if they're on the same drug? No. It's the same drug, the same effect, but the price simply goes up.
REHMBefore we go any further, define for us, Stephen, what specialty drugs really are.
SCHONDELMEYERWell, specialty drugs is a term of art that doesn't have a clear definition, but it includes drugs that are either injected or infused, but sometimes it does include oral medications that are self-administered. There are also sometimes high cost medications, therefore very complex, difficult diseases. Sometimes they require special treatment. So it's a set of drugs that we're kind of setting aside from the traditional drugs you would get at your normal drug store and we see a whole new channel of distribution of how these are passed out.
SCHONDELMEYERYou may occasionally get these at your corner drug store, but more often than not, you'll get them at your hospital or physician's office. In fact, earlier, in your opening to the show, you said that drugs are 10 percent of the healthcare dollar. That's really only outpatient prescription drugs. If we take into account these specialty drug we're talking about in the hospital and the physician's office and in the clinic, drugs are really about 18 to 20 percent of the healthcare dollar.
REHMInteresting. And Lori Reilly, as an executive vice president for PhRMA, explain to us why drugs that perhaps have been on the market for a long time, not just specialty drugs, are becoming so expensive.
MS. LORI REILLYWell, thanks, Diane, and thanks for having me on the show today.
REILLYThere was a lot that was brought up that I'd love to respond to, including that particular question. I think, oftentimes, when we see the reports in the neurology study as just one example, what we see listed are average wholesale prices, which, honestly, don't mean a whole lot to people. They aren't necessarily the price that an individual pays and they also don't take into account things like discounts and rebates that pharmaceutical manufacturers offer to pharmacy benefit managers and insurers that actually lower the overall price that those institutions are paying for medicines.
REILLYDr. Schondelmeyer mentioned the diabetes space. If you look at the diabetes medicines and a lot of what the analyst reports say, what they have found is that almost all of those price increases have been offset by significant rebates and discounts that manufacturers provide.
REHMBut to whom?
REILLYThey provide those to the PBMs and the insurers with the hope that those ultimately get passed onto patients. But a point that Kimberly raised is a really good one and that is what we see from medicines, which is very different than other healthcare is that patients that have significant healthcare conditions, whether it's hemophilia, rheumatoid arthritis, they're paying much higher co-pays or co-insurance as compared to patients that need to have, for example, a surgical intervention.
REILLYSo, for example, patients that rely on a medication, maybe it's a chronic condition where they're going to be taking that medication month after month after month, often face either co-pays or co-insurance that oftentimes exceeds 40 percent of the cost of the medicine. It's very different compared to patients that instead need to go into the hospital where there co-pays or co-insurance may be significantly less.
REILLYAnd in that way, we need to look at how the insurance system is treating patients that rely on medicines which is often very differently than how they treat patients that rely on other forms of healthcare.
REHMCan you talk about generally how drug prices are actually determined?
REILLYYeah. Well, I think, you know, when you look at how a company looks at how to price their product, they look at a variety of different things. You know, there's a lot of debate right now about the cost of bringing a drug to market and, of course, that's part of it. But it's not everything. Companies look at the safety profile that their product brings.
REILLYThey look at the efficacy it brings relative to other products. They look at whether that medicine offsets other medical expenses, whether it increases productivity, the value that it brings to the healthcare system. So there are a lot of factors that a company considers in terms of how it prices its medicine, but also keep in mind that what a company ultimately starts in terms of its price isn't necessarily what an insurer, PBM, is willing to pay because we have a very competitive market where you have payers and PBMS.
REILLYThe top three pharmacy benefit managers control 80 percent of all prescription drug sales in this country. They have significant leverage and they use that leverage to drive down costs and to provide competition in the market.
REHMBut can you explain, for example, the price increases in drugs or hemophilia?
REILLYWell, again, oftentimes, what we see is the average wholesale price maybe going up so that sticker price, if you will.
REILLYThat doesn't take into account, though...
REHMWhy? Why is that wholesale price going up?
REILLYWell, again, that doesn't necessarily mean the price that's paid because it doesn't take into account things like discounts are rebates. And one of the trends that we've seen over time is that the rebates and discounts that companies are providing to insurers and to PBMs continue to go up. And they go up by 20, 30 percent. Right now, I think, on average, in the Medicare Part D program, we're seeing discounts in the neighborhood of 30 percent off that price.
REILLYAnd in a way, the PBMs use that as leverage for formula replacement. So they will say to a manufacturer, we're not gonna pay that price. If we're gonna pay, we're gonna pay a 30 percent discount and you're gonna be on this level of the formulary or we will use these different utilization techniques to control the price.
REHMLori Reilly, she's executive vice president for policy and research at PhRMA. Short break here. Your comments, questions when we come back. Stay with us.
REHMAnd welcome back. We're talking about the price of drugs, how they are increasing, who's paying for them, and whether they've been on the market for a long time or are brand-new drugs. Stephen Schondelmeyer, you've heard Lori Reilly talk about some of the justifications for rising prices, high prices in drugs. What's your reaction?
SCHONDELMEYERWell, I didn't hear her explain how the drug companies set the price. What she did say is drug companies give rebates and discounts to various players in the marketplace. And her claim was that those offset these 20 and 30 percent a year increases. But let's take, for example, Medicaid. As she said, about 30 percent of the amount spent on drugs by Medicaid is returned as a rebate to the Medicaid program.
SCHONDELMEYERSo in one year their total rebate is enough to offset one year's increase of diabetes medicines of 30 percent, but it doesn't take care of the accumulative 20 to 30 percent a year increase in insulin. So frankly, the drug companies, in their contracts with the various Medicaid programs or insurance companies and PBMs, prohibit the disclosure of their rebate and discount amounts so that we don't know that they are. We have no way to verify what she's telling us.
SCHONDELMEYERBut frankly, the expenditures and the market just don't show that rebates and discounts offset this. The list price also is very relevant because the price that -- I work for a number of employers and manage their drug benefit plans. And the price that an employer pays for drugs, along with the co-pay of their employees is based off of list price. So, yes, we get a 15, 20 percent discount off of the list price, but as that list price goes up 30 percent, we pay 30 percent more. And so list price is a very relevant measure.
SCHONDELMEYERAnd, in fact, the article, "Looking at Multiple Sclerosis Drugs," took into account the Medicaid discounts and still showed that in the U.S. we're paying anywhere from 30 to 80 percent more than other countries in the world, such as Australia or the United Kingdom or Canada for the same drug.
REHMAnd how do you account for that, Richard Harris?
HARRISWell, I can't really account for that. I think -- but it does bring open a broader issue, which is as expensive as these drugs are in this country, around the world where they are so much more needed in many instances, this situation is -- goes from be -- a matter of life and death, really. And here it's a financial pain for us.
HARRISBut I think that that's a really tough question about, you know, like new drug for hepatitis C, which is -- which can cost $80,000 for a course of this drug. And that becomes really unaffordable. Difficult here, really completely unaffordable in so many other parts of the world where hepatitis C is a problem.
REHMNow, explain, Lori, how that price on the hep C drug was reached.
REILLYWell, thanks for asking that, Diane. And I think, you know, hepatitis C, I think it's important to take a step back and look at that disease as a whole. This is a disease that kills five times more people than HIV-AIDS. It's the leading cause of liver cancer. The reason why liver transplants is on the rise. So there's -- clearly was a crisis at hand in dealing with hepatitis C. I think one of the things we've learned from the hepatitis C experiment is just how competition worked in this area.
REILLYWhile that $84,000 quote that Richard used is the quote that we hear all of the time, the reports that we're seeing now are that the prices are now 50 to 65 percent less than that in the United States as a result of market competition entering. Express Scripts, Dr. Steve Miller, who's been on the record, who was a very adamant proponent or critic, I should say, of that drug price when it first launched, is now saying it is at a price where it is affordable, that they can provide these medicines to all of their members that have hepatitis C.
REILLYAnd this as a result of competition in the market working.
REHMSo on average, what would the yearly cost of a drug for hep C be now?
REILLYSo now, you know, if you look at published reports, they're saying the discounts are anywhere from 50 to 65 percent off of that initial rate. So…
REHMSo still 40…
REILLYRight. But it cures a disease. It's a disease that, you know, today, just the hospitalization cost in 2011 were over $30 billion for patients with liver disease.
REHMI still would like to know why a drug for hep C started out costing $80,000 or $84,000 a year.
REILLYWell, I don't work for the company that made that product, Diane. But what I can say is that, again, this is a medicine that is curing a condition. And that is a factor that companies take into consideration. Within, you know, 12 weeks' time, a patient that's taking this medicine -- it has an over 90 percent cure rate.
HARRISYeah, that's true for the hepatitis C drug, but it's not true for the MS drugs, which are taken for a lifetime. And those can be $60,000 -- the sticker price can be $60,000 a year or higher. And so it's, I mean, I think there's a significant difference if you're talking about a drug that at least has, you know, provides a large opportunity for a cure, as opposed to one that people will take for the rest of their lives.
REHMRichard, when you talk with drug companies, how do they justify these prices?
HARRISIt's what the market will bear, basically. It's not, I mean, some of the issues are American taxpayers have funded a lot of basic research that has, over the years, led to these drugs. And so some people say there's a moral obligation to honor that and say, look, American taxpayers helped fund the basic research that the drug companies then took and with a lot of hard work and time developed into drugs.
HARRISBut that's an issue that comes up. And basically, it's a -- we are in a market that basically is broken market when you look at how drugs are priced compared to many other products in America.
REHMI want to turn to you, Kimberly, and get you to describe for us what the price increases have meant for people with hemophilia.
HAUGSTADRight. So it really, for us, goes back to -- and I work with a patient community and hear from there every day. And these are the American citizens that are living in this country with chronic conditions. And I think cost-sharing, as a concept, is interesting. And I heard from the, you know, heard what you said about the drug company perspective and the pharmaceutical company perspective, but we forgot the patients and the consumer who is actually taking this drug. And what is that out-of-pocket cost to that patient?
HAUGSTADWe're finding folks that these expensive conditions, it's just not financially possible to pay these out-of-pocket cost-sharing elements that we're responsible for. There are multiple, multiple studies that show that patients paying a high cost for a drug leads to non-adherence. So what happens to our chronic families who have an expensive chronic condition is we see these families not able to pay.
HAUGSTADWe see them ending up in the emergency room. We see them having severe medical crises that require even more expensive treatment and a lengthy hospital stay. There's just no win for a patient here in sharing the extreme cost of this for their quality of life.
REHMNow, here's what I don't understand, Lori. You talked earlier about hep C and how competition has brought down prices. What about a drug meant for people who have hemophilia? Why isn't the same competition bringing the drug price down, as opposed to having it, as Kimberly has said, going up?
REILLYWell, I think, you know, the point that Kimberly was raising was with regards to co-insurance and co-pays. Those are amounts…
REHMBut, no. I want to talk about why drug price is going up.
REILLYAll right. Well, I think, you know, again, Diane, you have to look at -- and I want to go back to a point that Richard made a minute ago, saying that the pharmaceutical market is broken. And I would challenge that notion that the pharmaceutical market is broken in the United States. Look no further than the Medicare Part D program. This is a program that Congress passed in 2006. Four-hundred billion dollars under budget…
REHMKimberly, I mean, Lori, you're not answering my question. Specifically, in regard to hemophilia, why are the drug prices going up?
REILLYAnd it goes back to the point that we were talking about before, Diane. That oftentimes the list prices that you see publicly reported appear to be going up, but oftentimes there are significant discounts and rebates that continue to grow. And for products that are on the market for a very long time, like some of the MS drugs, and some of the hemophilia drugs -- Dr. Schondelmeyer mentioned Medicaid.
REILLYAn important provision in both Medicaid and a lot of commercial payers are adopting this, too, where they have an inflationary rebate policy. So in Medicaid, the longer a product is on the market, if your product is rising higher than CPI, you pay an inflationary rebate. And for many drugs in Medicaid, particularly the older medicines, the rebates are 60 to 70 percent rebates. Express Scripts recently announced they're doing the same thing and have been since 2008, where they're imposing an inflationary rebate on companies that raise their prices above a certain level.
REHMAnd you're saying to me that that is then being passed along to the individual patient?
REILLYWell, that's getting passed along to the PBMs and the insurers with the hope that it does help lower things like co-pays and co-insurance.
REHMOkay. Kimberly, tell me what these price increases are meaning for people with hemophilia. How much are they going up?
HAUGSTADSo we're definitely not seeing them go down. We watch our EOBs, our Explanation of Benefits and we see what these drugs cost the -- a person with hemophilia, severe hemophilia, can easily spend several hundred thousand dollars a year in medication. So we're not seeing a change. When we do see some of the newer drugs on the market and we see some drugs that are actually increasing year over year that are drugs that have been out for a while.
HAUGSTADThe really unfortunate part here, in my opinion, is that patients really get put in the middle of this as a ping pong ball, back and forth between insurance and drug companies. And we're, you know, we're here in a situation where we just need these life-saving medications.
REHMSo, Stephen, who is actually paying for our drug costs?
SCHONDELMEYERWell, that's an interesting question. Some people think insurance companies do because they're kind of in the middle and set some of the rules. But really, insurance doesn't pay for anything on drugs. They're the intermediaries. Ultimately, it's the end payer, who is either a government, for Medicare and Medicaid, or it's an employer who pays for their employees, or it's an individual who's self-insured.
SCHONDELMEYERAnd we often confuse what payment for drug costs means. Often we focus on out-of-pocket costs and just those co-pays and coinsurances that Kimberly's talking about. And those are important. But even the total cost of the drug is included in the total experience for a group of individuals and it affects the premium they pay the next year. So I think we shouldn't focus only on out-of-pocket costs and lowering those. Certainly we, as a society, try to lower out-of-pockets costs so everyone has access to drugs at the time that they need them, and that's important.
SCHONDELMEYERBut the total cost of the drug affects the amount of the premium that we pay the next year, in a way that affects all consumers covered by a given plan. For example, I help manage a drug benefit plan for a 40,000-employee organization. And last year the MS drugs accounted for about 4.5 percent of the total drug spend. And they're only .01 percent of the patients. And the hepatitis C drugs we've talked about accounted for another 4.5 to 5 percent of total drug spend. So two drug categories alone accounted for nearly 10 percent of the drug spend, for only 2 percent of the patients that we cover.
SCHONDELMEYERAnd if we have more of these new specialty drug categories come along and they each claim or add an additional 5 percent, we're gonna see our drug spend easily increase by 50 to 100 percent over the next five to ten years. So individuals pay for the drugs, ultimately the premium is what counts, not just the out-of-pocket costs.
REHMWhat about generic costs and how do you see those affecting the cost of drug prices generally, Stephen?
SCHONDELMEYERWell, generic drugs have been an important part of our pharmaceutical market. And they do help to hold costs down. Generic prices are actually competitive. And by competition there, we mean prices go down. The actual price to consumers and payers in the market typically go down. But in the last few years we've seen a disturbing trend where some generics have begun to go up. And not just go up at the rate of inflation, of 2 or 3 percent a year, but go up at 10 percent or 50 percent or even some generics have increased their prices 100 percent…
SCHONDELMEYER…to more than 1,000 percent in price. And often…
SCHONDELMEYER…these are cases where there were several generic manufacturers in the marketplace, but through competition or mergers and acquisitions or other things, we end up with only one generic company left in the market. And then they suddenly realize, hey, we're the only producer. We have a monopoly, at least a functional monopoly. We can raise the price and get away with it.
REHMAnd you're listening to "The Diane Rehm Show." I have a tweet here from Deborah, who says, "Last month my 90-day generic drug was $63 at a local pharmacy. From the insurer's own mail-order, it was $323. How does that make sense?" How do you explain that kind of disparity, Richard?
HARRISWell, it's a crazy market. And I can't -- certainly cannot explain that circumstance. But, I mean, the point is that, you know, the prices are fluid. We don't know what anyone's paying. There's so much confidential information. We, you know, we know that Americans in general pay more than people in other countries. But it's a -- the whole -- it's like a -- you push on a balloon and, you know, you push on this end, it bumps out this end. And the whole market is just really beyond comprehension, at least to me.
REHMYou said you believe the market's broken. What do you mean by that?
HARRISWell, I think that there's no transparency. There's -- actually, I -- this comes from a conversation I had earlier with Dr. Schondelmeyer, and perhaps he would like to pick up on this point, but I think that part of the issue is that we don't have good information. A good market -- the individual has information about purchases that they may or may not want to make and there's sort of a balance of information on this -- by the people who are selling stuff.
HARRISAnd if you have a good market, people have transparency and they can see all of this stuff. That does not exist in the drug market at all. It's a black box. And, plus, you throw in the, you know, the insurance companies and all of these other people who sort of smooth over and hide from us the real costs of things and share them around. It makes it even harder for consumers to be good consumers. It's almost impossible.
REHMAnd what about bargaining power on the part of the federal government -- Medicaid, Medicare -- for drug prices?
HARRISLet's ask Dr. Schondelmeyer that. I think he would be…
REHMAll right. Briefly, sir, 'cause we're coming toward a break.
SCHONDELMEYERSure. Well, on the one hand we ask for the marketplace to work to set drug prices. But we tie the hands of the government, who is the largest purchaser of pharmaceuticals, and say you can't negotiate or be a prudent purchaser of drugs. You cannot negotiate prices or set prices anywhere in the marketplace. So we have prevented a market from working by saying you can't negotiate.
REHMYou can't negotiate and you prevent the market from working. It is kind of, you know, it's a crazy system and one that clearly is going to need some kind of reform. We're going to take a short break here. When we come back it's going to be your calls, your comments, questions. I look forward to speaking with you.
REHMWelcome back. We're talking about the price of drugs, who controls those prices and why they seem to be going higher each year. Let's open the phones now. First to Tampa, Florida. Sharon, you're on the air.
SHARONHi Diane. Thank you for taking my call.
SHARONI am the parent of a child with a rare chromosome disorder. He has sever epilepsy, so we deal with drugs daily. He's on three different medications at the moment. Our problem with the list price of drugs is that the list price creates a tier level. And certain drugs become more expensive based on the tier level and the insurance company's answer to me is the reason for that is pharmaceutical prices. So I heard a few minutes ago, a few minutes back, the pharmaceutical rep there, blaming the insurance companies for not passing on discounts.
SHARONSo, the frustration for me as the patient or the parent of the patient is that the insurance company is blaming the pharmaceutical prices. The pharmaceutical company is blaming the insurance companies for not passing on discounts. But as a patient, we're still left with incredibly high costs, you know, being a regular family on a regular budget that I can't even give my son several different epilepsy medications because of the cost each month.
REHMWow. What do you think, Lori?
REILLYWell, first of all, I'm sorry to hear about your son. As a mother of four, I know how passionate moms are about their children. And I can certainly appreciate the situation you're in. I think, you know, it goes back to a couple of points I wanted to make. One, when you look at the fact that in this country, we know that there is a relatively small amount of people in this country that are very sick, who need significant forms of healthcare, whether it's medicine, surgery, medical device, whatever. I think the most recent statistic I saw was about one percent of patients in the US consume about 20 percent of healthcare costs.
REILLYAnd it is for those patients that we should have a healthcare insurance model that works for patients. That is the purpose of insurance. To spread cost amongst a large population. And I think there is a frustration that patients have when they need healthcare and they need, for example, medicines, that the costs that they're being asked to pay are significantly higher than the cost they might be asked to pay if their child or parent needed another form of healthcare. Where we see the co-pays and co-insurance significantly less than we do for people that depend on medicines.
REILLYParticularly chronic care medicines, where you're taking that medicine month after month, year after year.
REHMSo, as far as you're concerned, is it the insurance companies or is it PhRMA? She says she's being tossed back and forth between the two.
REILLYRight. Understood. Well, I mean, look at patients with, and this was something Kimberly mentioned before, whether it's HIV, rheumatoid arthritis, what we've seen with a lot of healthcare plans today, they put every single medicine, brand and generic oftentimes, in the highest tier co-insurance. Which I think is a discriminatory practice that says to a patient that has one of these conditions, we would rather you not sign up for our healthcare plan. And that's concerning to me. I wanted to get back, Diane, just to a point that was mentioned about negotiation by the government.
REILLYBecause this is a myth that we hear a lot. That there's no negotiation in the Medicare program. And that couldn't be further from the truth. There is significant negotiation that happens in Medicare Part D. That's a program that once that was passed by Congress, the cost today is 400 billion dollars, almost, less than what it was projected to cost. And that's as a result of significant competition. And that negotiation happens between pharmaceutical benefit manufacturers and pharmaceutical manufacturers. It's not the government negotiating, but it is PBMs who control more lives than many European countries. They've driven a hard bargain in Medicare.
REILLYThere's significant competition. It's a program that's working. Lowering cost to American seniors. And it is a great example of how competition in the United States can work.
REHMStephen Schondelmeyer, do you want to respond?
SCHONDELMEYERSure. So, I have to ask if the PBMs control more lives than most European countries and they're so good at negotiations, why is it we have prices that are 20 to 80 percent higher than the European countries?
REILLYWell, Dr. Schondelmeyer, that is, you know, I think oftentimes exaggerated claims. What we often see happen when we look at those types of price comparisons is that they take an unnegotiated list price and they compare it to a price controlled price in a foreign country. What they don't do is compare prices that Medicaid, Medicare Part D and others get compared to foreign countries. We looked a few years ago…
SCHONDELMEYERWell, that's not true. The Medicaid prices are in the multiple sclerosis article or a good estimate of them. And they're still 40 to 50 percent higher than what we pay in European countries. Frankly, I'd be glad to take into account on every study I do, the discounts and rebates that every one of your companies provides, if they would simply release the information. But they hide the information, they prohibit it from being disclosed. And sometimes, I get this from work that I do in various projects. But the information is hidden and non-disclosed and the drug companies do everything they can to prohibit that information from being made available.
REHMAll right. I have an email here from Brian. He says one thing that's not discussed is that taxpayers pay billions of dollars for R and D, research and development, for drug companies by funding research through NIH. Drug companies, essentially, use research funded by the US government to develop their drugs. Why shouldn't drug companies give back to the government for this free R and D? Lori?
REILLYThat's a great question. Thanks for asking. The National Institutes of Health spends about 30 billion dollars a year. That is their entire budget, a portion of which is spent for research and development costs. It's very important research and development and it's very complimentary to the research and development that are done by pharmaceutical manufacturers. But it's basic research, which is again, very important research, but when you look at it in terms of where the costs and the risks come in to the R and D process, it tends to fall very significantly on the pharmaceutical manufacturer side.
REILLYToday, only about 10 percent of medicines actually, that are going through the approval process, actually make it out the other end and are approved. And that's after, oftentimes, lengthy and costly and risky clinical trial processes, which is born by the manufacturers, not...
REHMSo, are you saying that the manufacturers spend more...
REHM...after the basic R and D is done at NIH or by NIH, correct?
REILLYCorrect. You know, last year, again, the NIH budget was about 30 billion dollars. PhRMA members alone, which don't represent all pharmaceutical manufacturers, spend over 50 billion dollars on research and development.
REHMAll right. And here's a question for you, Stephen Schondelmeyer. From Steve. He says, why can't I acquire the same prescriptions from Canada at half the cost or less? These drugs are manufactured in the US, shipped to Canada and then shipped back at a profit to individuals in our country. How does that work, Stephen?
SCHONDELMEYERWell, that happens because the Canadian system does have a system for evaluating prices and setting what they call the patent medicine price review board. And they have a group that reviews when a new drug comes on the market what price is being set. And then, if they feel like that price is excessive, given the value that that product provides in the marketplace, they negotiate with the drug company to lower that price. And that's held the prices down in Canada substantially from what they are in the US.
SCHONDELMEYERBut what happens is even though you occasionally can get drugs from Canada in the US, there really is no such thing as what we would call free trade for pharmaceuticals between Canada and the US or Europe and the US. Even though those other markets have FDA systems, essentially the same as ours and have products of the same quality in Europe and in Canada, one cannot, a pharmacy or a wholesaler can't buy product in Canada and ship it to the US. Occasionally, consumers do that on the internet in ways that are actually quasi-illegal.
SCHONDELMEYERBut the market, we don't have free trade in pharmaceuticals, and that would help to hold down the cost and help to balance the cost throughout the world more appropriately.
REHMAll right. Let's go back to the phones to Toledo, Ohio. Rowe, you're on the air.
ROWEHi Diane. This is Rowe. I had, just, I guess, a question that really relates to the thread that's going throughout the whole discussion. And that is why is there such a huge disparity between the costs in the US and the cost elsewhere. You know, I've seen documentaries where the cost of an asthma inhaler say in Cuba was five dollars. And the asthma inhaler of the same brand, same pharmaceutical company was 125 dollars in the US. Just this past weekend, I spoke to a young man who was a medical student in his last stretch of residency, who actually told me that he was very disheartened as a doctor.
ROWEBecause he felt he was going into a system that was broken. And he gave the example of a drug, and again, I don't have verification, but that was something that was a mainstay for me as a child and that's epinephrine. Which was given for asthma attacks. And he said that this particular drug was being, I guess reworked to not have a better description. And was going to come back at like 10,000 percent cost increase. And so, I just, you know, I have not heard one single thing, I've heard it's what the market will bear.
ROWEIt's a burden on the, you know, person who has to pay for that as an individual. But as a sibling to a man in his 40s who is trying to support his family, he has rheumatoid arthritis, he has peripheral vascular disease, he has a number of health problems. But he does not have a good drug program through his employer and he just doesn't take the meds.
REHMI understand. And Kimberly Haugstad, can you talk about her first point, namely that drugs are so much less expensive in other countries than they are here in this country?
HAUGSTADYou know, I don't know that that's my area of expertise. I mean, it's the reality of what we live with today. And honestly, I don't know if, you know, the price, if it's the insurance company or the drug company. I do know that the insurance companies and the drug companies, in general, are profitable and patients, on the back end, who are using these drugs, are struggling with how to pay their portion. So...
REHMStephen Schondelmeyer. Talk about other countries.
SCHONDELMEYERWell, you know, each country is different in that it has different rules and regulations. And it's true that most European countries regulate either the price or profits of pharmaceutical companies. But some also negotiate their prices with drug companies, based on what we call evidence based medicine. What is the effectiveness of a drug? What is the safety of a drug? And then, how does this new drug compare to other therapies available in the marketplace?
SCHONDELMEYERAnd then they place a value on them. What I think is troubling to me is that many of the new drugs coming out on the market in the United States don't have any -- they may be better than placebo, and FDA does a good job of reviewing and approving them based on comparison of effectiveness verses placebo, but they may not be better than existing drugs on the market, but the drugs still can come on the market at a much higher price. That tells me that a market's not working when you can charge a higher price than safer, more effective drugs that are on the marketplace.
SCHONDELMEYERAnd you can get away with it and hold to that price. And we've also approved drugs and we have price tags of 10,000, 20,000, 50,000 for drugs that extend life by four or five weeks. Or maybe ten weeks. Now, I'm all for extending life and people deciding to use their resources to extend their life even five or ten weeks if they want, but is that worth 400,000 dollars or 500,000 dollars?
SCHONDELMEYERAt some point, there's a limit to that.
SCHONDELMEYERAnd we as a society have to figure out how do we place a true value -- what we really need in this market is innovation and value, in addition to innovation and new drugs. We need drug companies, we need their innovation, but we need them to pay attention to the cost and the value that healthcare -- the burden it places upon society and individuals, in particular.
REHMAnd you're listening to "The Diane Rehm Show." One of our callers wants to know how total drug industry profits compare to research and discovery expenditures.
REILLYWell, you know, one of the issues, and of course, you know, we talk about profitability and obviously, there are some pharmaceutical companies that are profitable. That's a good thing, actually.
REHMAren't they all profitable?
REILLYAbsolutely not. There are many companies that never -- that you'll never have heard the name of that go out of business before they ever get to market, because they're not successful in getting a new medicine to market.
REHMBut those that are successful are quite successful.
REILLYWell, I think again, it goes back to how profitability is measured. One of the problems with how profitability is measured in the pharmaceutical industry has to do with research and development costs and how those are treated. Their treated as an ordinary business expense, which means oftentimes when profitability gets reported, it's inflated compared to other profitability. The Congressional Budget Office has looked at this. Joe Newhouse from Harvard has looked at this. All have said pharmaceutical profits tend to be overstated.
REILLYBut again, the importance of having profitability in the pharmaceutical market is the reality that unless you have profits, you can't fund new research and development for cures.
REHMAll right, and one last question for you, Richard. In the Wall Street Journal yesterday, there was a piece about tying the price of drugs to the efficacy of that drug. What do you make of that?
HARRISI think it's a fascinating idea that basically a price should be based on the true value of something.
REHMWhether it works.
HARRISAnd not just simply what somebody can charge, but yeah, you know, if this is very valuable for this use, you should pay more, and if it has very little value for this use, I may have it backward, but basically, the price should depend upon how valuable the drug is and not just simply what they can get away with charging.
REHMAnd Stephen, finally, in an ideal world, what changes would you like to see in the prescription drug industry?
SCHONDELMEYERWell, I think one of the most important things is transparency in the pricing and distribution of drugs so that we know who's getting paid to do what in the system. The drug company, the PBM, the insurance company, the pharmacy, all along the way, who's getting paid what and how much? And make that transparent and require that to be disclosed. Markets don't work without good information and particularly without good information on price. And we simply don't have that in pharmaceuticals.
REHMAll right. I want to thank you all. Stephen Schondelmeyer of the University of Minnesota, Kimberly Haugstad of the Hemophilia Federation of America, Lori Reilly of PhRMA and Richard Harris of NPR. And thanks all for listening. I'm Diane Rehm.
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