Biotech and Pharma

Pharma's latest defense against pricing criticism: Drugs lower health-care costs

Key Points
  • Pharmaceutical companies have come under fire for the rising cost of drug prices.
  • Pharma CEOs are now touting that the use of medicines lowers other health-care spending.
  • Studies have shown some truth to the claim, but critics say the support doesn't go that far.
Ian Read, chairman and chief executive officer of Pfizer Inc.
Andrew Harrer | Bloomberg | Getty Images

When the topic of drug prices comes up, as it so often does in this post-Martin Shkreli world, pharma is always prepared with a rebuttal.

First, it was that drugs account for only 10 (or more recently, closer to 15) percent of overall health-care spending.

Then, that it's the middlemen, like pharmacy benefit managers, who drive up drug prices.

Now, the pharmaceutical industry's counter to criticisms of its prices: that use of medicines lowers other health-care spending.

"Any attempts to lower health-care costs are going to have to involve, my belief is, using medicines to ensure adherence, to ensure the appropriate management of diseases," Pfizer Chief Executive Ian Read told analysts on the company's earnings call Tuesday.

"This is the paradox of trying to squeeze drug costs," Eli Lilly CEO David Ricks added in an interview with "Squawk Box" Wednesday morning. "Perhaps we might inflate other medical costs."

Ricks said Lilly's medical inflation is lower than that of the U.S. on the whole, "and part of the reason for that is how we've designed our programs."

Specifically, "we use drugs more often" — double the spending on medications as a percent of all health-care costs, Ricks said, compared with the U.S. figure.

Prescription drugs accounted for about 17 percent of all Medicare spending in 2015, according to the Kaiser Family Foundation.

Both Ricks and Read were responding to questions about the potential threat from a new health-care consortium of Amazon, J.P. Morgan and Berkshire Hathaway, designed to bring down health costs for their employees, their families, and — according to J.P. Morgan CEO Jamie Dimon, potentially all Americans.

And the comments came the week President Donald Trump named tackling the "injustice of high drug prices" a top priority for his administration in 2018, as part of his State of the Union address.

The drug industry is under siege. So does its latest defense hold water?

Yes — with caveats.

The Congressional Budget Office published a study in 2012 on the issue: It estimates that for every 1 percent increase in the number of prescriptions filled by Medicare beneficiaries, the government insurer's spending on medical services would decline by about 0.2 percent, and vice versa.

In many ways, this makes sense. As the CBO report points out, "most often, pharmaceuticals have the effect of improving or maintaining an individual's health" — for example, taking antibiotics to prevent a more severe infection or adhering to medication to manage a chronic condition like diabetes or high blood pressure.

"In either of those circumstances, taking the medication may also avert hospital admissions and thus reduce the use of medical services," the report said.

The CBO came to its estimate by reviewing recent studies on the relationship between use of prescription medicines and spending on medical services. Universally, the studies cited found that reductions in use of prescription drugs resulted in increased spending on medical services, and likewise, that more generous coverage of prescription drugs led to fewer hospitalizations and fewer medical services used.

So, yes, attempting to control health costs by reducing the use of prescription drugs would result in higher spending on medical services (and, importantly, could be harmful to people who need those drugs to manage their disease).

But as a defense for the ever-increasing prices of brand-name drugs? Critics say the support doesn't go that far.

"In general, there is research when you're talking about adherence to necessary meds," said Walid Gellad, director of the University of Pittsburgh Center for Pharmaceutical Policy & Prescribing. "However, increased use of expensive drugs when generics are available, or the meds are not needed in the first place, does not lower overall health costs."

"As usual, there is truth to what is said," Gellad concluded. "But not the whole truth."

Eli Lilly CEO: It's a great time for science in pharma sector
Eli Lilly CEO: It's a great time for science in pharma sector