Why drug prices are so difficult to bring down

Key Points
  • The AARP recently rolled out is "Stop Rx Greed" campaign to lower drug prices. The message is that Americans are spending an excessive amount on prescription drugs.
  • But companies and investors have little incentive, and large research institutions, foundations and even politicians have conflicts of their own.
  • One complexity is that Medicare has no authority to negotiate prices thanks to a policy proposed by the Bush administration that has been in effect since 2006. Changing the law requires action.
A pharmacist collects medications for prescriptions at a pharmacy.
Simon Dawson | Bloomberg | Getty Images

Talk about a dichotomy. These both happened last week. The AARP launched its "Stop Rx Greed" campaign to lower drug prices. The message is that Americans are spending an excessive amount on prescription drugs, the cost of which likely topped $330 billion in 2018. By comparison, the highly lucrative NFL generated less than $15 billion during the 2017 season.

On the same day this message blasted out, I was attending a health care conference where biopharma management enthralled the crowded room with descriptions of potential curative therapies for rare diseases that would generate sales of $1 billion annually. The patient population for some of these products is only 1,000, implying a cost per person of $1 million.

All my conference room-mates furiously scribbled or typed the dollar number, perhaps some did the math, but no one raised a single question about the astronomical price of the drugs.

When I encounter these two wildly opposing views of drug prices, I feel exactly as i do when I see record prices being paid for beachfront property in Miami Beach. Don't the buyers know the seas are rising with climate change and their gorgeous haciendas could be under water in 20 years? One side will be wrong about the future, just as in the example above where either high drug prices will continue unabated or they will be regulated by the U.S. government as they are overseas. How can we explain this widening chasm?

On one side are, of course, the drug and biotechnology corporations and their employees; venture capitalists and their investors; and shareholders of public drug producers. They insist that high-priced new drugs are justified by the hundreds of millions of dollars spent on their development, although R&D costs should be one input, not necessarily the most influential input, in the ultimate price.

Lower prices are almost never a positive for markets where the demand is mostly fixed. So, beyond the public relations angle, the industry and its supporters lack incentive.

On the other side, the vocal opposition to high drug prices comes from a breadth of sources. Payers, who are sometimes patients, but often insurance companies, balk at very costly new therapies for everything from cancer to hepatitis. Politicians, from Donald Trump to Hillary Clinton, Bernie Sanders and most of the Democrats running for the 2020 nomination, invoke lowering prescription drug prices as one of their goals.

The two opposing factions, however, are more intertwined than we might expect. Elected officials in states, such as New Jersey, California and Massachusetts, with their large biotech and pharma presence, recognize that state income tax, job growth, housing values, and appeal to well-educated young professionals are all connected to the profitability of the underlying industry.

Even if politicians truly wanted to lower drug prices, one complexity is that Medicare, which many candidates want to expand broadly, has no authority to negotiate thanks to a possibly ill-advised policy proposed by the Bush administration that has been in effect since 2006. Changing the law requires action.

Academic institutions and medical centers receive funding from drug companies and often share in the success of drugs developed in their labs. Foundations that focus on rare diseases and support research efforts within for-profit firms now participate in a windfall from products that eventually reach the market. The Cystic Fibrosis Foundation sold its royalty rights in several drugs to Royalty Pharma for $3.3 billion a few years ago, a milestone transaction for a charitable foundation. The buyer obviously assumed that future profits from these drugs would exceed their acquisition price.

Lawmakers, executives and physicians may be used to facing continuous conflicts (fairness across limited resources for all constituents, as an example). This battle to control drug prices coincides with a decade of limited approvals of potential blockbusters, putting more pressure on the industry to dig into its position.

Despite an environment where so many industries have been hit by deflationary competitive forces — retail, traditional media, banking and brokerage commissions — the biopharmaceutical industry has maintained its moat around pricing. It will, no doubt, continue the fight, which will be longer and more difficult to win, in part due to the mixed interests across the participants in this battle.