The news that President Donald Trump takes the anti-baldness drug Propecia has temporarily bumped his war against the pharma sector from the front pages. Before his doctor offered this juicy tidbit, the focus was on Trump’s comment that drug companies were “getting away with murder” and his threat to authorize Medicare to negotiate lower prices.
Wall Street took Trump’s remarks seriously, causing pharma stocks to tank. Pharma CEOs did too. Several pledged to limit future price hikes to 10 percent per year.
Not all pharma execs were cowed, though.
Jeffrey Aronin, the CEO of Marathon Pharmaceuticals, stuck with big pharma’s historic game plan. After Marathon gained approval from the Food and Drug Administration for deflazacort, a treatment for muscular dystrophy that has long been available in other countries for about $1,000 a year, he announced that the drug would cost $89,000 a year in the U.S. When accused of price gouging, he cited research and development costs and pointed out that most of the money comes from insurers.
Both excuses are phony.
Marathon can demand an absurd price because it has a monopoly on deflazacort, an “orphan drug” that treats a rare disease. Under the Orphan Drug Act, the FDA’s approval gave the company the exclusive right to sell the drug in the U.S. for seven years. Marathon is gouging consumers, insurers and public payers simply because it can.
Monopolies are the biggest reason that drug prices in the U.S. are so high. Manufacturers acquire them in a host of ways. Some are legal. Others straddle the line.
The legal means include obtaining patents on new drugs, proving that orphan drugs and unapproved drugs work, and using tweaks such as pill coatings, timed-release formulas and redesigned delivery systems to make patents last longer. The shady means include collusive litigation settlements that stave off generic entry for years, parallel pricing by manufacturers of similar drugs that should be competing and informal agreements among manufacturers not to invade each other’s turf.
Monopolies explain why pharma companies can raise prices on existing medications, something they routinely do. Car-makers can’t charge more for last year’s models. Neither can companies that make computers, cellphones or flat screen TVs. But pharma companies raise prices on existing drugs year after year. Being the sole suppliers, they can set prices as high as they like knowing that they have Medicare, Medicaid, private insurers and consumers over a barrel.
Trump’s idea of letting Medicare bargain over prices won’t help much because Medicare can’t really refuse to pay for drugs that are overpriced. The first time it offers cost as a reason for refusing to cover a medication, cries of “rationing” and “death panels” will fill the air. That’s the third rail of health care politics, so Medicare won’t go there.
A better approach would be to do away with monopolies, starting with the legal ones.
Several economists have proposed that patents be replaced with prizes. For example, a company that spent $100 million researching a new drug might receive a check for $500 million from the treasury after the drug was approved. The multiplier would preserve the incentive to innovate while public funding would spread the burden across all taxpayers — who bear much of the cost of medical research already — instead of concentrating it on the much smaller population of sick people who need a particular drug but may be the least able to afford it.
Drugs would then sell cheaply at pharmacies because all manufacturers would be free to make and sell all approved medications. It’s time to explore this option, which would work for old drugs and orphan drugs, too.
Trump will have to tackle shady monopolies. To do this, he’ll have to put pharma companies in the crosshair of the antitrust division of the Justice Department. That’s not a popular idea in Republican circles, but as long as drug companies know they can collude, prices will remain high.
Right now, Trump is scoring points by using his pulpit to bully pharma companies. But we’ll know that he’s serious about getting prices under control when he tackles drug monopolies.
Silver is a professor of law at the University of Texas and a co-author of the forthcoming book “After Obamacare: Making American Health Care Better and Cheaper.”