Pharma, Heal Thyself On Drug Pricing

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[This post originally appeared on Forbes.com on December 26, 2015.]

As the drumbeat for drug pricing reform has grown, two things are becoming clear: This issue is not going away, and Pharma’s time-worn rebuttals are increasingly unlikely to save the industry from political retribution. Now, the main question is whether drug companies have the foresight and will to voluntarily rein in prices before they’re subjected to a government-imposed solution.

A few months ago, when the drug pricing story centered on egregious one-time hikes on older medicines, many thought mainstream Pharma companies would be insulated from the backlash–which wasn’t such an unreasonable prediction. In early October, as biopharma took a beating in the media and the stock market, Biogen Chairman Stelios Papadopoulos predicted “the drug pricing debate [is] likely to go away in the next several weeks” because “politicians cannot sustain attention to a particular point forever.”

So, in response to this supposedly transient non-threat, the lobbying group PhRMA and individual drug company CEOs continued their usual finger-pointing talk track on drug prices: the real enemies are faux drug developers (not the “innovative biopharmaceutical companies [that] have R&D at the core”), non-prescription costs that comprise the majority of healthcare spending, and rapacious payers that control patients’ out-of-pocket expenses. A Wall Street Journal op-ed earlier this month summed up these arguments by calling the targeting of Big Pharma for high healthcare spending a “folly.”

But it turns out that the real folly has been to believe that the drug pricing story would blow over. Instead, the target on Pharma’s back when it comes to drug pricing has grown steadily, with no signs of abating. Media coverage and election-year rhetoric have intensified, and the drug industry’s positions and practices are coming under heightened scrutiny. Even Pharma’s most logically sound arguments seem increasingly unlikely to turn the tide of public and political opinion in the industry’s favor.

So unless Pharma wants to double down on its bet that the whole drug pricing brouhaha will blow over, the industry needs to demonstrate it’s serious about the issue–and the best place to start is by exerting some self-control, starting with annual price hikes on marketed drugs.

Just to clarify–we’re not talking here about one-time hikes like those made notorious by Turing and Valeant. We’re talking about the annual price increases on already-marketed drugs that Pharma companies take year after year–often by double-digit percentages. A recent Wall Street Journal analysis (here and here) showed that from 2010 to 2014, the 30 top-selling drugs in the U.S. increased their list prices by an average of 76%–amounting to a compound annual growth rate of over 15%. For six of the drugs, the list price more than doubled over that four-year period. Annual price hikes like these undercut the industry’s argument that drug prices reflect the clinical impact of new medicines.

Thus far, one of the industry’s main responses to criticisms of high annual price hikes has been to niggle about the details–which is a wrong-headed approach. PhRMA claims that the net increase is “only” 5-9% annually when one takes rebates to wholesalers and distributers into account. But this argument is unverifiable without more transparent data about rebates (which the industry so far has not provided), and rhetorically weak in an era of near-zero inflation.

The other counter-claim, particularly favored by investors and slavish free-market devotees, is that limiting annual price hikes would destroy the Pharma industry–which simply doesn’t stand up to scrutiny. Yes, it’s true that Pharma owes much of its top-line revenue growth to these price increases, and a slowdown would force companies to make tough choices about which and how many R&D programs to fund. But are we really supposed to believe that the “innovative biopharmaceutical companies” that PhRMA claims to represent can’t figure out how to reduce bureaucratic waste, R&D decision-making inefficiencies and investment in high-cost, low-impact commercial activities (my prior takes here, here, and here)? If some drug companies whimper that they need huge annual price hikes to fund risky research–well, maybe they’re in the wrong business.

There are some practical questions about how, exactly, Pharma would institute a voluntary cap on price hikes–but they don’t appear to be deal-breakers. Should increases be pegged directly to inflation, or some other measure (like wage growth for skilled labor)? Do drug prices warrant an additional annual increase above inflation to account for growing costs, like meeting increasing expensive regulatory requirements? How would we judge companies’ compliance? There are no clear answers to these questions, and any proposals will have critics–but these are scarcely reasons for inaction.

The recent scrutiny of massive one-time drug price increases temporarily diverted the attention of politicians, the media, and the public from more widespread industry pricing practices, but this reprieve won’t last for long. Instead of wiping their brows with relief at having dodged a bullet, drug makers should focus on establishing the industry as a credible partner in the impending political debate over how to link drug prices to clinical value. If Pharma wants a seat at the table when this important question reaches center stage, it needs to demonstrate it is on the side of patients–and proactively and decisively reining in annual price hikes would be a good place to start.