Price controls on pharmaceuticals Pros and cons

							Milliman Pharmaco-Actuarial Advisor




Price controls on pharmaceuticals:
Pros and cons


The disparity in drug prices between the United States and other nations has led to
political outcry that consumers in the U.S. are bearing the cost burden for the rest of the
world.
With a new presidential administration and health care               the U.S. are bearing the cost burden for the rest of the
reform at the top of many political agendas, the debate              world. This seems a fair sentiment. To remedy the matter,
over pharmaceutical price controls may begin anew.                   legislators have suggested either allowing the re-
Health Affairs reports that real spending on                         importation of drugs purchased at controlled prices abroad
pharmaceuticals grew at an average annual rate of 9.9                or implementing price regulations similar to those of other
percent from 1997 to 2007. According to an analysis by               OECD nations.
the Centers for Medicare and Medicaid Services,
prescription drugs accounted for approximately 10 percent            Adverse Effects of Price Controls
of total health care expenditures in 2007. Many legislators
hope that by reining in drug costs through price regulation,         The U.S. Department of Commerce has reported that for
pharmaceuticals will become more affordable and                      OECD countries with price controls, regulated prices have
accessible for all Americans. However, an unintended                 resulted in lost revenue estimated at $18 billion to $27
consequence of pharmaceutical price controls may be that             billion annually for pharmaceutical companies, a loss that
firms have less incentive to invest in research and                  has led to a reduction in global research and development
development.                                                         spending of $5 billion to $8 billion per year. These
                                                                     sacrifices in global R&D spending have resulted in
Pricing of Prescription Drugs                                        approximately 3 to 4 fewer new molecular entities (NMEs)
                                                                     being developed per annum. These NMEs would have
At present, the United States is the only country in the             had an estimated benefit of $4.9 billion to $7.5 billion to
Organization for Economic Cooperation and Development                U.S. consumers, according to an analysis by the HHS.
(OECD) that does not impose any price regulation on the
drug industry. Not only does this allow prescription drug            An example of the powerful impact that price control
prices to respond to market forces, but this policy has              legislation has upon R&D spending occurred between
allowed pharmaceutical companies to utilize differential             1992 and 1993 when the Clinton administration proposed
pricing, or price discrimination, in the U.S. market. The            a healthcare plan that would have placed caps on the
U.S. Department of Health and Human Services (HHS)                   prices of breakthrough drugs. During that time period, the
estimated that prescription charges for Americans with               market value of pharmaceutical firms plunged, and a 2005
insurance are 14.6 percent less than for cash-payers,                study estimated that the industry reduced overall R&D
reflecting health plans’ ability to negotiate better prices in       spending by $1.6 billion. It was not until the defeat of the
exchange for more volume in sales.                                   plan that research spending returned to prior levels.

 By way of contrast, a 2004 study by the U.S. Department             Because of the favorable market, U.S. consumers have
of Commerce of drug pricing policies in OECD countries               access to the newest and most effective treatments on
found some type of pharmaceutical price controls in place            average within 4 months of the when a drug first becomes
in all 11 countries studied. These include direct price              available anywhere in the world, while their counterparts in
ceilings, reference pricing, approval delays and procedural          other OECD countries have faced longer delays. For
barriers for new drugs, restrictions on prescribing, and             instance, Germany and France both face delays of 9
reimbursement limitations. As a result, aggregate                    months and 15 months, respectively, for new treatments to
pharmaceutical prices for OECD countries are 18 percent              reach their markets. In the United States (unlike in these
to 67 percent less than U.S. prices.                                 other countries), there are not time-consuming
                                                                     negotiations with the government over how to price a new
The disparity in drug prices between the United States and           drug.
other nations has led to political outcry that consumers in

This monthly newsletter is written by Jill Van Den Bos to provide information on timely       Jill Van Den Bos
topics pertaining to the pharmaceutical market. Van Den Bos, who is part of Milliman’s        Consulting Actuary
Denver Health practice, specializes in bringing an actuarial perspective to the field of      Direct: 303 299.9400
pharmacoeconomics. Her interests and expertise include budget impact modeling,                Jill.VanDenBos@milliman.com
benefit design, and collaborative research with other disciplines.


January 2009                                                                                                        milliman.com
Milliman Pharmaco-Actuarial Advisor




Price controls on pharmaceuticals:
Pros and cons


The disparity in drug prices between the United States and other nations has led to
political outcry that consumers in the U.S. are bearing the cost burden for the rest of the
world.
The Price Control Conundrum

It is a difficult choice – price control policies provide short-
term aid for individual purchasers, but at the expense of
longer-term healthcare technology innovation. In difficult
economic times and with a new balance of power in
Washington, pharmaceutical companies need to be
especially concerned about the possibility of major
changes in the structure of the prescription drug market.
Changes could include greater involvement by the
government in providing or paying for health insurance, or
Medicare beginning to use its purchasing power to
negotiate lower drug prices. It will be increasingly
important for pharmaceutical companies to be able to
demonstrate the value of their products in the face of
increasingly budget-conscious payers.




This monthly newsletter is written by Jill Van Den Bos to provide information on timely    Jill Van Den Bos
topics pertaining to the pharmaceutical market. Van Den Bos, who is part of Milliman’s     Consulting Actuary
Denver Health practice, specializes in bringing an actuarial perspective to the field of   Direct: 303 299.9400
pharmacoeconomics. Her interests and expertise include budget impact modeling,             Jill.VanDenBos@milliman.com
benefit design, and collaborative research with other disciplines.


January 2009                                                                                                    milliman.com