Is There Really a "Market Price" for Drugs?

Everyone seems to be ganging up on high drug prices these days. In two separate hearings last week, Congressional committees took after drugmakers for big markups on specialty treatments and a pharma "windfall" created by the Medicare prescription-drug benefit, while the WSJ took a hard look at the opacity of drug pricing via pharmacy-benefit managers. All these stories have a common thread, in that they underscore how there really is no "market price" for drugs in the common sense of the term -- just a free-for-all of special side deals and arbitrary price increases.

Some examples:

• The Joint Economic Committee threw a spotlight on Ovation Pharmaceuticals and Questcor Pharmaceuticals, among others, for pushing up prices on newly acquired hospital drugs by a factor of ten or more. This seems to be an increasingly common practice, but it's still something of a shock to see it in action. Ovation, for instance, recently acquired exclusive rights to Indocin, a drug used to treat breathing conditions in newborn and premature infants, from Merck and promptly jacked the price to $1,500 a dose -- 13 times higher than its previous price of $108. Ovation did much the same thing with three other former Merck drugs. (It's worth noting that big pharmas aren't immune from this temptation, either. In a classic case, Abbott Labs quintupled the price of its already profitable AIDS drug Norvir in 2004 for no reason other than that it could in order, apparently, to boost demand for its new combination therapy Kaletra. Abbott weathered protests and calls for the federal government to void the company's drug patent.)
• Meanwhile, the House Oversight Committee took aim at Medicare drug prices, which the committee argued are 30 percent higher than those paid by state Medicaid programs. Bristol-Myers Squibb, for instance, took in an extra $400 million over two years for its blood thinner Plavix thanks to Medicare's higher prices, which Johnson & Johnson raked in an extra $500 million for its antipsychotic Risperdal, committee investigators said. Unlike Medicaid, which like any large buyer insists on discounted prices for volume purchases, Medicare allows health insurers and "pharmacy benefit managers," or PBMs, to arrange its drugs prices. A minority report by House Republicans argued that Medicaid pays "below-market prices" and that limiting Medicare pricing would simply force drug companies to boost prices for the rest of the market.
• Speaking of those PBMs, the WSJ reported that many such outfits -- which are supposed to be negotiating volume drug discounts on behalf of pharmacies and, ultimately, patients -- are instead marking up discounted prices for generic drugs and pocketing the difference, with the costs passed along to insurers and, well, Medicare.

What's more, the government isn't the only problem drugmakers face on this front. Growth in prescription-drug use is stalling out, and overall prescriptions may have actually fallen during the second quarter. Although there are plenty of reasons for this, high prices and the fact that many patients are paying more for drugs via deductibles and coinsurance undoubtedly play a big role. So, much like the health insurance industry itself, pharma now faces the possibility of having to push high-priced products to a shrinking -- or at least slow-growing -- base of customers. Which is not a pleasant place to be.

One of the best things the drug industry could do to ward off -- or at least partially deflect -- this looming political attack would be to create a true "market price" for drugs by making pricing more transparent. Along the way, it wouldn't hurt for drug companies to stop treating effective monopolies in various drug markets as an opportunity to squeeze hospitals and patients for all they're worth. The ill-will created by such tactics goes a long way toward explaining why Congress seems eager to whack the industry for all it's worth.

And it's not just Congress that recognizes the problem. As Billy Tauzin, the former House Republican who now heads pharma's main trade group PhRMA, recently told drugmakers during a conference call: "Your house is on fire, and you're still smoking in bed." (Too bad PhRMA is still mostly trying to fight the blaze with squirt guns, but that's a subject for another day.)

Update: Abbott didn't get away totally unscathed, as it's about to face the first of seven civil suits filed over its Norvir price hike.