When it comes to healthcare, drug prices, both new and old, continue to
dominate the news. Often, the benefits of a new, breakthrough medicine
are lost due to the cost of the new therapy, even if the new drug
provides overall savings to healthcare systems. This has happened most
notably with drugs like Harvoni (Gilead) and Zepatier (Merck), which can
cure hepatitis C but whose prices have stirred a national debate on the value of new medicines
.Now, some states are attempting to pass laws to gain control over drug price increases. Vermont Governor Peter Shumlin has just signed into law a bill to do just that. The law authorizes state healthcare regulators to develop an annual list of up to 15 drugs that have seen the biggest price increases. Their manufacturers would then have to justify the increases to the attorney general’s office. But Vermont is not alone. As reported by STAT’s Ed Silverman, the California senate recently approved legislation that requires companies to disclose any increase in the list price of a drug by more than 10% over a 12-month period. In addition, ANY price hike for a drug with a list price greater than $10,000 would have to be justified within 30 days of making such an increase.
Personally, I am skeptical that passing such legislation will have much of an impact. For example, take the pending California law. To skirt this a company can simply raise list prices less than 10% to avoid any formal explanations. For the higher-priced drugs, my sense is that companies will appear before various congressional subcommittees armed with reams of data showing the value that the drug is providing to patients and physicians. Legislators will be hard-pressed to overcome such arguments. If its law passes, the California legislature would periodically hold hearings and attempt to embarrass companies about drug prices. Perhaps that could have a moderating effect–but I doubt it.
Actually, laws that are meant to limit drug price hikes could have the unintended consequence of increasing drug prices. At the Forbes Healthcare Summit held last December in New York City, Matt Herper led a discussion with the “Pharma All Stars”–CEOs of Pfizer PFE +0.98%, Merck, Celgene CELG +0.57%, GSK and Regeneron. Inevitably, the discussion turned to drug pricing, during which Pfizer CEO Ian Read made an interesting observation. He said that often drug prices are initially set too low. It is not unusual that, once on the market, the true worth of a drug is realized and that prices are then increased to reflect that value. The other CEOs on the panel didn’t disagree.
When setting the price of a new drug, a company will carry out extensive pharmacoeconomic analyses to understand the value that its new drug will bring to patients, physicians and payers. But, should more states emulate California and Vermont, one can envision companies starting to factor in the possibility of having limited ability to raise a drug’s price significantly after launch. That could cause companies to set a list price much higher than originally envisioned, in order to cover such a situation. Essentially, a company would set a drug’s list price higher than originally intended in order to cope with limited price increases later on. By setting a higher price at launch, a company might even offer a guarantee of no price increases for the drug over its first five years on the market. Theoretically, there would be no need for an increase as it would already be built into the price. But overall drug prices would be higher.
.Now, some states are attempting to pass laws to gain control over drug price increases. Vermont Governor Peter Shumlin has just signed into law a bill to do just that. The law authorizes state healthcare regulators to develop an annual list of up to 15 drugs that have seen the biggest price increases. Their manufacturers would then have to justify the increases to the attorney general’s office. But Vermont is not alone. As reported by STAT’s Ed Silverman, the California senate recently approved legislation that requires companies to disclose any increase in the list price of a drug by more than 10% over a 12-month period. In addition, ANY price hike for a drug with a list price greater than $10,000 would have to be justified within 30 days of making such an increase.
Personally, I am skeptical that passing such legislation will have much of an impact. For example, take the pending California law. To skirt this a company can simply raise list prices less than 10% to avoid any formal explanations. For the higher-priced drugs, my sense is that companies will appear before various congressional subcommittees armed with reams of data showing the value that the drug is providing to patients and physicians. Legislators will be hard-pressed to overcome such arguments. If its law passes, the California legislature would periodically hold hearings and attempt to embarrass companies about drug prices. Perhaps that could have a moderating effect–but I doubt it.
Actually, laws that are meant to limit drug price hikes could have the unintended consequence of increasing drug prices. At the Forbes Healthcare Summit held last December in New York City, Matt Herper led a discussion with the “Pharma All Stars”–CEOs of Pfizer PFE +0.98%, Merck, Celgene CELG +0.57%, GSK and Regeneron. Inevitably, the discussion turned to drug pricing, during which Pfizer CEO Ian Read made an interesting observation. He said that often drug prices are initially set too low. It is not unusual that, once on the market, the true worth of a drug is realized and that prices are then increased to reflect that value. The other CEOs on the panel didn’t disagree.
When setting the price of a new drug, a company will carry out extensive pharmacoeconomic analyses to understand the value that its new drug will bring to patients, physicians and payers. But, should more states emulate California and Vermont, one can envision companies starting to factor in the possibility of having limited ability to raise a drug’s price significantly after launch. That could cause companies to set a list price much higher than originally envisioned, in order to cover such a situation. Essentially, a company would set a drug’s list price higher than originally intended in order to cope with limited price increases later on. By setting a higher price at launch, a company might even offer a guarantee of no price increases for the drug over its first five years on the market. Theoretically, there would be no need for an increase as it would already be built into the price. But overall drug prices would be higher.
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