Drug Pricing in America, Part 1

Finance, Drug Pricing in America: A Prescription for Change, January 29, 2019

Ways and Means, The Cost of Rising Prescription Drug Prices, February 12, 2019 

As you may recall from previous, we have advocated for  a combination of catastrophic insurance, health savings accounts (Archer) and medical lines of credit, which is a bit more liquid version of a flexible spending account, with all accessed by one card with costs allocated based on account balances and income levels. Poor people would have minimum or even no copays, but would always have credit access. As income rises, so would copays and available balances, as well as catastrophic deductibles. Such a plan, however, has no chance of passage and if adequate to maintain access, would not save money either. We no longer endorse this approach.

Our proposed Net Business Receipts Tax/Subtraction Value Added Tax would replace corporate income taxes and proprietary and pass through taxes and treat all business income the same. It would provide for the health insurance exclusion or fund single payer insurance.

Single payer health care, aka, Medicare for All (with Medicaid level copays and premiums) could allow consumer advertising to be waste if the government plays hardball with drug makers, although for now it cannot even play hardball on Medicare Part D purchases. In single payer, there would likely be VAT funding, and advertising costs would come with a VAT paid to the advertiser and passed along to the consumer.

Companies who hire their own doctors and pharmacists and buy their own drugs would get a tax exclusion from single payer (third party insurance would be discouraged), and would negotiate with drug makers for lower prices, although this would leave small firms at a distinct disadvantage and would discourage such practices as franchising and 1099 employment. Still, on the whole, it would decrease cost while not discouraging innovation. Expanding the Uniformed Public Health Service into the Medicare and Medicaid markets (edging out HMOs) would also lead to cost cutting on drugs.

Limiting advertising has been proposed by Senator Shaheen and her cosponsors. This dances on limiting the freedom of speech, although this is not absolute for commercial speech. The FDA could limit these ads, as could the Federal Trade Commission.

While some favor restricting patent rights, I would argue in favor of having every drug approval disclose all government supported research used to develop the product, giving the sponsoring agency the right to both share in the profits and have a say in the pricing. This both keeps the research dollars flowing and limits cost.

A main problem with high cost drugs, especially orphan drugs, is the high development costs and the cost of small batch manufacturing. This could drive the need to raise drug prices for mature drugs in order to subsidize the orphans, although some hikes are undertaken because no one can stop them. The solution for this is for NIH and the FDA to own the rights to orphan drugs and to contract out research and development costs as it does basic research, as well as testing and production.

PhARMA would still make reasonable profit, but the government would eat the risk and sometimes reap the rewards. HIH/FDA might even break even in the long term, especially if large volume drugs which were developed with government grants must pay back a share of basic research costs and the attached profits, as well as regulatory cost.