On February 9, the President’s Council of Economic Advisors (CEA) issued a report outlining policy reform options to improve biopharmaceutical pricing. The report, which gives insight into the Administration’s priorities, aims to achieve two goals simultaneously: reducing American drug prices today and raising incentives to promote innovations that improve health.
The report relies heavily on research conducted by Schaeffer Center experts over the past decade, including three recent white papers:
- Innovative Contracting for Pharmaceuticals and Medicaid’s Best-Price Rule (May 2017) by Rachel Sachs, Nicholas Bagley, and Darius Lakdawalla
- The Flow of Money through the Pharmaceutical Distribution System (June 2017) by Neeraj Sood, Tiffany Shih, Karen Van Nuys, and Dana Goldman
- The Global Burden of Medical Innovation (January 2018) by Darius Lakdawalla and Dana Goldman
“The Schaeffer Center has conducted rigorous research over the past decade that has significantly contributed to our thinking on effective drug pricing policy that benefits current and future generations,” said Dana Goldman, who holds the Leonard D. Schaeffer Director’s Chair at the Schaeffer Center and is a Distinguished Professor of Policy, Pharmacy, and Economics at the University of Southern California.
As policymakers grapple with how to effectively lower drug prices domestically, especially given the recent public outcry, Medicare and Medicaid pricing arrangements provide avenues for reform opportunities. The CEA discusses revising rules and encouraging CMS to provide guidance on how value-based contracts and price reporting could affect regulations aimed at lowering prices domestically.
The report cites research by Darius Lakdawalla that outlines opportunities for innovative pricing strategies while still working within the Medicaid “best price” framework, although the rule does produce challenges to the implementation of some models. “The law here is complex, and moving to a pay-for-value model for drugs will require close coordination between manufacturers, payers, and regulators,” writes Lakdawalla and his coauthors.
Lakdawalla, who is Director of Research at the USC Schaeffer Center and Quintiles Chair in Pharmaceutical Development and Regulatory Innovation at the USC School of Pharmacy, led the research analyzing how different pricing schemes including indication-based pricing, outcome-based pricing, drug licenses, and drug mortgages could be implemented given the current policy and CMS rule writing authority. These types of models are increasingly being considered in today’s era of costlier specialty drugs which do not follow the same treatment conventions as typical drugs from the past.
In addition to regulatory hurdles, the CEA report identifies a need to enhance market competition, especially among pharmaceutical benefit managers (PBMs) and other segments of the pharmaceutical supply chain, to effectively lower domestic pricing. Neeraj Sood led research cited in the report which analyzed the pharmaceutical distribution system and the cost and profit margins of each system player, finding over 20 percent of spending on prescription drugs is captured as profit in the pharmaceutical distribution system.
“While we cannot say definitely whether any sectors are making excessive profits, our results are consistent with profit-making behavior on the part of all sectors. Greater scrutiny of their pricing policies and more competition throughout the distribution system is warranted,” writes Sood and his colleagues in an accompanying Health Affairs Blog post. A health economist at the Schaeffer Center, Sood is a professor and vice dean for research at the USC Price School of Public Policy.
Future innovation requires appropriate incentives today. It is often argued that policies aimed at bluntly lowering drug prices across the board will negatively impact the investment needed to bring future cures and treatments to market. A recent white paper by Goldman and Lakdawalla draws on years of research on the value of innovation and examines the unfair burden shouldered by Americans at today’s pharmacy counters. They find U.S. markets account for as much as 78 percent of all global drug profits which helps pay for pharmaceutical research and development. Citing the Schaeffer report, the CEA argues their two goals of lowering domestic prices and increasing future innovation can be attained through policies that target global drug pricing.
Using the Schaeffer Center’s Future Elderly Model, Goldman and Lakdawalla find that increasing prices in Europe by 20 percent, the resulting increased innovation would generate $10 trillion in welfare gains for Americans, and about $7.5 trillion for Europeans over the next 50 years. These findings suggest policy reforms that include higher prices for pharmaceuticals for Europeans today—would ultimately benefit patients globally tomorrow.
The complete White House report is available here.