What’s So Special about Specialty Medications?: Emerging Policy Proposals for Price Regulation of Pharmaceuticals

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KellypictureBy Andrea Kelly, MPH@GW

There is no agreed upon definition of specialty drugs. Medications can be classified as “specialty” based on the complexity of their chemical makeup, how, and where the drug is administered, or how readily insurance companies will cover the drug. The common denominator throughout all of these definitions? Specialty drugs are expensive.

Specialty drugs are commonly used to treat complex chronic diseases such as kidney failure, cancer, multiple sclerosis, and diabetes. Biologic drugs used to treat cancer can range from $100,000 to $400,000 for a course of treatment, and new treatments for Hepatitis C can cost as much as $189,000. These costs are unsustainable given the sheer volume of patients poised to purchase these medications- 2.7 million people in the United States are currently living with chronic Hepatitis C, and anywhere from 1/3 to 1/2 of Americans will be diagnosed with cancer during their lifetimes. What’s more, specialty medications are expected to comprise 60% of all drugs approved by the FDA by 2016. Not only do high out-of pocket-costs threaten to bankrupt patients, but Medicare, Medicaid, and private payers are wary of the cost burden these medications create.

Pharmaceutical companies justify these prices citing high R&D costs, improved patient outcomes, and subsequent decreases in spending associated with chronic disease management. Regardless, these high drug prices have been criticized by members of both parties, with the Senate Finance Committee demanding increased transparency regarding the costs associated with the production the innovative, yet prohibitively expensive Hepatitis C drugs released last year.

This issue has also made its way onto the campaign trail, with Democratic hopefuls Hillary Clinton and Bernie Sanders detailing plans to combat the rising cost of prescription drugs. Both proposals would:

  • Allow Medicare to negotiate lower prices with drug manufacturers, a change that would further align the program with Medicaid, which currently receives a 23.1% discount on brand name drugs;
  • Enable patients to import drugs from other countries where drugs are less expensive; and
  • Prohibit pay-for-delay agreements between brand name and generic drug manufacturers, which delay generic entry and reduce price competition.

Additionally, Clinton’s proposal would:

  • Cap out-of-pocket spending for consumers;
  • Eliminate tax breaks for direct-to-consumer advertising to reduce the percentage of pharmaceutical companies’ revenue spent on marketing;
  • Require pharmaceutical companies to invest more of their revenue on R&D;
  • Increase investment in comparative effectiveness research to ensure that higher priced drugs result in improved patient outcomes (a correlation that is not evident in many recent studies); and
  • Reduce patent exclusivity periods for biologic medications from 12 to 7 years, consistent with FTC analysis that a 12-year exclusivity period is not needed to foster innovation and unnecessarily inflates the price of these already expensive drugs.

Conversely, Sanders’ plan advocates for:

  • The transition to a single-payer system
  • Increased price transparency surrounding manufacturers’ R&D costs, pricing strategies, and profits;
  • Increased penalties for drug companies engaged in fraudulent pricing practices;
  • An expedited closure of the Part D donut hole; and
  • Increased discounts for low-income seniors.

In evaluating these policies, one should consider both the economic and political challenges they create. First, while transitioning to a single payer system would increase the government’s ability to negotiate lower prices, such a policy would face significant political opposition, and health insurance companies that have invested significant time and resources into the implementation of Health Insurance Exchanges, alternative payment models, and utilization management strategies would object strongly to this change. Similarly, insurance companies would oppose out-of-pocket maximums as such a policy would unfairly penalize them for pricing decisions made by pharmaceutical companies. Finally, pharmaceutical companies would argue that these policies decrease incentives to innovate, especially in the creation of orphan drugs to treat rare diseases, where profits are less certain. An effective policy needs to engage in a delicate balancing act to prevent predatory pricing practices but also ensure that the policies target the appropriate sectors and do not create disincentives to develop medications that actually improve patient outcomes and decrease long-term costs.

AndreaKelly

Andrea Kelly is a second year student in the MPH@GW program. She works as a paralegal for AARP.

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