Better ways than Trump's plan to address prescription drug prices

The Trump administration has proposed several steps to address the cost of prescription drugs. Reaction mostly ranged from unimpressed to strong opposition. Rather than relying on bureaucratic micromanaging and price controls, we need to explore market solutions that expand access and encourage pharmaceutical innovation — and some are already here.

The good news is that the large majority of prescription drugs are very affordable. Generics, which are much less expensive copies of original brand-name drugs, represent nearly 90 percent of prescriptions sold in the U.S.


But some newer prescription drugs are expensive, and the primary reason is the cost of developing and moving them through the Food and Drug Administration’s approval process.

Pharmaceutical companies report annually how much they spend on drug research and development — $71.4 billion in 2017 alone. We also know how many drugs the FDA approves every year — 46 in 2017.

But there’s more to the story. The pharmaceutical industry used to focus on simple, “small molecule” drugs that could be put in a pill and benefit millions of patients. And there was a very large market over which to spread those R&D costs.

However, for the past 15 years or so the innovator companies have increasingly focused on complex, “large molecule” drugs, mostly biologics, often intended to treat “rare diseases,” affecting 200,000 or fewer people — and often only several thousand. 

Now, companies are increasingly moving to cell and gene therapy, a paradigm shift that holds the promise of cures rather than just treatments. Gene therapy addresses the underlying cause of a disease by precisely targeting defective genes. The FDA approved three gene therapies last year, and FDA Commissioner Scott Gottlieb recently said he expects 40 to be approved by 2022 —and that we could see a cure for sickle cell anemia within 10 years.

Thus companies are spending ever more to cure diseases that affect small populations, which means higher costs per patient, though it’s worth it because we want treatments for those devastating diseases.

But how does the average family pay for these so-called “miracle cures”? Even those with health insurance can struggle to meet their co-pays and co-insurance.

One option is life insurance with a critical care component. Numerous life insurers sell a traditional term life policy that allows policyholders facing high medical costs to draw on part or all of the value of the policy to pay for medical expenses. It’s not a loan; the face value of the policy is reduced accordingly. But it is a way to have both life insurance and a financial safety net in case the policyholder has an expensive medical incident.

Another option is referred to as “outcomes-based pricing.” While the details will vary among companies and contracts, the idea is the patient or insurer only pays for the drug if it meets certain predetermined outcomes. It’s sort of like when a vendor promises 100 percent satisfaction or your money back.

For example, Novartis’s Kymriah is an “immunotherapy” that harnesses a body’s immune system to fight the disease, in this case cancer. The process involves removing immune cells from the body and genetically engineering them to hunt and kill cancer cells. The one-time procedure costs $475,000 and is usually covered under Medicare Part B. But if it does not prove effective for a patient within 30 days, the government doesn’t have to pay.

In another case, Luxturna treats an inherited retinal disease. In one insurer contract, if the drug does not work the payer will receive two separate rebates.

Accounting firm KMPG reports that some 25 branded drugs are currently in some form of value-based contract in the U.S. Drug innovator Novartis was one of the early adopters, but Amgen, Sanofi and AstraZeneca are also engaged.


Health insurers also appear willing to try this model. Consulting firm Avelere Health claims Aetna, Anthem, Cigna, Harvard Pilgrim and UnitedHealth Group have outcomes-based pricing contracts.

Avelere also says the three most targeted areas for outcomes-based contracts so far are cardiovascular disease, infectious diseases and oncology.

Outcomes-based pricing is in its infancy. There will likely be several adjustments as this pricing model proceeds. But it’s promising. And it, along with life insurance options, are a market-based solution that’s trying to ensure patients have access to the most innovative pharmaceuticals rather than relying on government-imposed price controls, which always limit patients’ options.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter at @MerrillMatthews.