Medicare negotiating with pharma is not the answer

The concept of Medicare negotiating drug prices directly with manufacturers has been raised throughout 2015 by the Senate and the president, but never more vocally than over the last month by presidential candidates Hillary ClintonHillary Rodham ClintonWeld wins Libertarian nomination for VP Sanders supporter challenges Wyo. delegate allocation Dems to Clinton: Ignore Trump on past scandals MORE and Sen. Bernie SandersBernie SandersTrump thought biker rally crowd would resemble ‘I Have a Dream’ speech Sanders supporter challenges Wyo. delegate allocation Snowden mocks Trump for refusing to debate Sanders MORE (I-Vt.) following Turing Pharmaceuticals' attempted 55-fold increase in the price of Daraprim and Valeant Pharmaceuticals' receipt of subpoenas from federal prosecutors followed by Eli Lilly and Merck & Co. Late last month, President Obama's nominee for Food and Drug Administration (FDA) commissioner, Dr. Robert Califf, was questioned by members of the Senate Committee on Health, Education, Labor and Pensions (HELP) on a variety of issues, including tackling rising prescription drug prices and the right of Medicare to negotiate same and in late November, the White House convened a drug prices forum in response to public outcry over the skyrocketing prescription drug prices. Health Affairs reported that in 2014, Medicare prescription drug spending increased 16.9 percent, primarily because of the use of new specialty medicines. While Califf stressed pricing to be largely outside of the FDA's purview, there's no doubt that the FDA is falling short in several actionable areas within its purview and patients are suffering.

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What we are seeing here is an out-of-control regulatory paradigm and the real solution lies in evaluating the FDA's current system of drug development regulation and approval and removing barriers to creating highly competitive markets that would promote lower prices.

By way of background, the 2003 Medicare law exempts Part D drugs from "best price" rebates that drugmakers have been required to give to the state Medicaid programs since 1991. Medicare is prohibited from receiving "best price" to provide incentives to drugmakers to develop drugs for conditions that affect patients over 65 years of age. And this incentive is working — in the first few years after Medicare D was enacted, there was an estimated 40 percent increase in all clinical trials versus expected trends and a 59 percent increase in the number of drugs entering the final phase before FDA approval.

If Medicare received the same best price rebates that Medicaid and the VA received, the Congressional Budget Office estimates that savings over 10 years would total $155 billion. However, considering that biopharma companies spend roughly 23.4 percent of revenues on research and development (R&D), this would mean a loss of $36 billion in development activity on new drugs over a decade.

Even more devastating, some are calling for Medicare to adopt European-style price controls. Consider the prices paid by foreign developed countries as outlined by Dean Baker of the Center for Economic and Policy Research. Using Denmark (34 percent of the level of the U.S.) as an example, Medicare would reduce its spending on drugs by $541.3 billion over 10 years, which translates into reduced R&D investment of $14.3 billion yearly — a 28 percent reduction in R&D spending off the current $51.2 billion invested by Pharmaceutical Research and Manufacturers of America's (PhRMA) member companies.

Developing a new drug is a costly, time-intensive affair. According to Dirk Calcoen in Nature Reviews Drug Discovery, only about one in 10 drug products that enter phase I testing are ever approved in the U.S. Wayne Winegarden of the Pacific Research Institute writes that only two in 10 approved drugs recoup their development costs. For some hard-to-treat indications, success rates can be even lower.

Yet new drugs, barring high-profile exceptions, are delivering unprecedented medical value to patients by keeping patients out of the hospital and avoiding huge costs elsewhere in the healthcare system. The Congressional Budget Office (CBO) estimates that for every 1 percent increase in the number of prescriptions filled, one-fifth of 1 percent of healthcare spending is reduced. With drugs costs accounting for just 9 percent of overall healthcare expenditures, the cost reduction is enormous. Noteworthy, too, is the fact that the value of drugs to Medicare in terms of overall reduced healthcare spending is even higher than the value to private insurers, who, after spending a large sum of money on a drug or drug regimen, might not see the benefits in the long-term because patients often switch insurers. In other words, by reaping the full benefits of its investment in patients (fewer hospitalizations, fewer surgeries, etc.), Medicare gains more value for its spend than private insurers.

Is there a way to address rising prices without Medicare negotiating drug prices, thereby erasing all the gains in R&D activity for Medicare share diseases? Yes — lots of competition. In our latest "Medical Innovation Impact Index (MI3) Alert," we provide several solutions, including a call for significantly increased competition. As Joseph Walker has written in The Wall Street Journal, it's common for manufacturers who seek better positioning on insurers' drug formularies to give rebates in highly competitive drug markets. Last year, Eli Lilly & Company gave rebates on Humalog insulin averaging 56 percent of its list price, Credit Suisse estimates. For example, Eli Lilly doubled Humalog's price over five years, but rebates meant that its net price rose only 3 percent.

The same is true for generics. Currently, there's a backlog of about 4,000 applications with a wait time of 27 months, according to FDA data. In fact, the Turing Pharmaceuticals debacle would not have occurred had the FDA moved quickly to approve generic versions of Daraprim. Already, Imprimis Pharmaceuticals has announced that it will make a compounded alternative to Daraprim available for just $1 per tablet, compared to Turing's $750 per pill.

The current system of drug development and regulatory approval by the FDA needs to be significantly changed to achieve the required level of competition. The FDA's current approach of requiring definitive proof of clinical outcomes in very large, time-consuming and expensive trials prior to market entry is flawed because no trials can be large enough to amass the information that is required to see the real-world value of new compounds before approval, and the costs and time are prohibitive. A better approach would be for the FDA to approve drugs that have shown activity and can be labeled for safe use in defined populations.

The answer is not for Medicare to negotiate directly with drug companies; rather, doctors who take care of Medicare patients must have more drug choices to treat their illnesses. In this way, innovation in drug treatments for the diseases of the elder population will continue to be incentivized and drug prices will be addressed appropriately in the medical marketplace.

Gulfo is the executive director of the Rothman Institute of Innovation and Entrepreneurship at Fairleigh Dickinson University and author of "Innovation Breakdown: How the FDA and Wall Street Cripple Medical Advances" (Post Hill Press). He has more than 25 years of experience in the biopharmaceutical and medical-device industries and is the former CEO of Mela Sciences. Follow him on Twitter @josephgulfo.

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