10 Reasons Drug Prices Always Go Up -- and What We Can Do About It

Last Updated May 17, 2011 11:35 AM EDT

The Government Accountability Office found -- again! -- that prescription drug prices rose faster through 2010 than average medical costs. But the report, published yesterday, doesn't say why drug prices always seem to go up.

Knowing why is crucial because, as the report makes clear, unchecked drug prices are a burden to both the taxpaying and insurance premium-paying public: "Prescription drug spending in 2009 totaled approximately $250 billion, of which $78 billion -- or about 31 percent -- was spent by the federal government," the report says.

The current poster child for drug price increases is KV Pharma (KV.A), which jacked up the price of the pregnancy drug Makena from $10 a dose to $1,500 a dose. KV took advantage of the FDA's orphan drug program, which allows companies to gain pricing monopolies if they can prove old drugs have important new uses. (The fact that KV's old CEO was just sentenced to prison didn't help the company explain that, however.)

That's a dramatic example but it's far from unusual. Drug companies have a range of options for increasing drug prices, and many utilize a combination of methods. The effect, per the GAO report, was to create a total 29.1 percent rise in drug prices between 2006 and 2010 (click to enlarge):


Here are 10 ways that drug companies extract price increases from patients, insurers and government healthcare providers. Where applicable, I've suggested a legislative solution that would cost zero tax dollars to implement. What's surprising is how simple and unpolitical it would be to make the drug pricing market fairer to consumers:
  1. Drug pricing fraud: Simple fraud is a lot more common in the pharmaceutical industry than most people think. Companies publish false prices and the government ends up paying them. Here's a list of a dozen companies that did just that. The government has recovered $5 billion in overcharges from drug companies since 2009.
    Suggested reform: Harsher penalties for companies and executives caught gaming the system; allow prosecutors' offices to keep a portion of recoveries to fund future prosecutions in much the same way local sherriffs' offices keep the cars and houses of drug dealers.
  2. Federal judges are asleep at the wheel: In a string of recent decisions, federal judges have interpreted the False Claims Act and the Anti-Kickback Statute so strictly that it is increasingly difficult for whistleblowers or federal prosecutors to bring cases against companies that bribe pharmacies and doctors to make drug sales.
    Suggested reform: Amend the acts to require evidence of false claims or kickbacks be judged according to the standard of a "reasonable person," rather than the current set of technical hoops and hurdles. Such an amendment would require judges to refer cases to juries for fact judgments rather than dismissing them before trial on non-constitutional technicalities.
  3. Illegal "off-label" sales: A recent case against Pfizer (PFE) showed that the illegal, unapproved promotion of the seizure drug Neurontin was fantastically effective. A few visits to doctors sent prescription rates through the roof. When Allergan (AGN) was caught pushing Botox illegally, it became clear that off-label promotion was built into its business model. The company shrugged off the $600 million settlement when the FDA approved Botox for the very same thing it was caught illegally promoting.
    Suggested reform: Prison sentences for executives caught promoting off-label. There is some evidence that prosecutors are becoming more interested in jailing errant CEOs for this type of offense. In addition, the law should be amended to allow a "reasonable person" to judge when off-label promotion occurs. Currently, whistleblowers and prosecutors must find evidence of specific sales tied directly to specific off-label promotions. As sales and promotion are almost always linked only indirectly, such links are rare, allowing companies to promote off-label with relative impunity.
  4. Loopholes for injectable drugs: There is absolutely no reason why injectable drugs should be treated differently than pills, but for some reason Medicare is required by law to cover the full price of an injectable no matter how expensive it is. Pills require a copay. Suggested reform: End the legal difference between injectables and pills.
  5. Monopoly power: When companies launch a new drug, they enjoy a monopoly until the patent on the drug runs out, which is usually around 10 years. During that time Medicare is not allowed by law to negotiate drug prices with a free hand. It is bound by a set of formulas based on published prices, which are often fictitious (see "fraud," above). Private healthcare insurers are using the same numbers, so the entire system moves in lockstep with itself.
    Suggested reform: Allow the government to use its purchasing power to negotiate with monopolists for the prices it pays. If the Greeks can do it, why can't we?
  6. Naked price increases: Drug companies make a lot of noise about their need to generate profits in order to fund future drug research. They're right: Drug discovery is expensive. Companies need to be make money to pay for their work. But that's not only why drug companies raise prices. Much of the time, they're just trying to find the ceiling on a reimbursers' willingness to pay. Insurers and the federal government tend to acquiesce, especially if the drug company has a monopoly on a treatment.
    Suggested reform: The U.S. should adopt the U.K.'s N.I.C.E. system, which judges whether new drugs are actually worth the money the government is being asked to pay for them. Not every new drug can extract higher prices if the government balks at trivial new therapies. Private insurers would think twice about reimbursing for drugs that a blue-ribbon panel of independent experts has found to be not effective.
  7. Lobbyists: Lobbyists persuaded President Obama not to include a provision allowing Medicare to negotiate drug prices into the healthcare reform act. They are also currently trying to persuade the federal courts that kickbacks from drug companies to pharmacies and doctors are actually discounts that make drugs cheaper for everyone. Suggested reform: Judges should listen to the Department of Justice, which is arguing that a drug company makes an illegal "false claim" if it takes reimbursements for prescription while concealing the fact that it paid to get the scrips written in the first place.
  8. New monopolies on old drugs: The FDA is currently running a legal program specifically designed to deliver lucrative monopolies to companies who take old generic drugs that were on the market before the FDA existed and do the necessary testing to prove they work. With a new drug approval in hand, a company can force the generic dealers out of the business.
    Suggested reform: There isn't one. Dodgy old drugs shouldn't be on the market if no one has proven them safe, so why shouldn't a company enjoy the rewards of figuring out whether they actually work or not?
  9. Pay-for-delay deals: The U.S. Supreme Court recently allowed drug companies to pay competitors to drop challenges to their patents. The Congressional Budget Office says the federal government would save $2.8 billion if pay-for-delay deals were banned.
    Suggested reform: Require companies that make pay-for-delay deals to take a discounted level of reimbursement from insurers and the government. Hey, if the company is getting extra sales by delaying competition, shouldn't consumers -- who are footing the bill for those sales -- get a slice of the action too?
  10. Fake FDA approval dates and codes: Some companies have figured out that Medicare doesn't check the dates and code numbers that are used when companies submit claims for reimbursement. They allegedly sold vitamins and popsicles to the government with fake FDA approvals dates and drug code numbers.
    Suggested reform: Submitting fake codes to the government for drug reimbursement should be a strict liability offense requiring a company to disgorge all revenues earned through those codes.
Of course, this is all academic. The chances of Congress revisiting healthcare reform are roughly zero. Still, it's nice to dream.

Related: Image by Flickr user Brooks Elliott, CC.

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