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White House advisers cite USC research as basis for potential drug price reforms

Some of the recommendations result from work by the USC Leonard Schaeffer Center for Health Policy and Economics

Illustration of cost of healthcare done with pills in the shape of dollar sign
Studies by USC researchers on drug prices and health care costs have led to policy recommendations by an advisory council. (Photo/iStock)

A White House advisory council has issued several recommendations for reining in U.S. prescription drug prices and costs, some of which stem directly from the work of the USC Leonard Schaeffer Center for Health Policy and Economics.

Voters are increasingly concerned about rising drug prices and health care costs — to the point that two presidential candidates in the 2016 election, Donald Trump and Bernie Sanders, campaigned on promises of reform.

Posted on the White House website Feb. 9, the Council of Economic Advisers’ report, “Reforming Biopharmaceutical Pricing at Home and Abroad,” recommends solutions for significant problems within the pharmaceutical market and health care system, both internationally and in the United States, that contribute to the rise in drug prices.

The council, comprised of 14 of the nation’s top economists advising the president, cites more than 40 peer-reviewed articles and white papers by leading U.S. health policy researchers and analysts. Three papers authored by Dana Goldman, Darius Lakdawalla and Neeraj Sood of the USC Schaeffer Center are prominently cited in this White House report.

For Schaeffer Center researchers, the report is the latest evidence that their work is informing discussions about health care policy at the highest levels of government.

The Schaeffer Center has done a good job of taking faculty research and translating it for policymakers.

Dana Goldman

“The Schaeffer Center has done a good job of taking faculty research and translating it for policymakers, and then making sure the right people see it,” said Goldman, director of the Schaeffer Center and a distinguished professor at the USC Price School of Public Policy and USC School of Pharmacy.

The council report cites Schaeffer Center research that has examined significant disparities in pharmaceutical prices and drug innovation between other nations vs. the United States, Medicare and Medicaid reimbursement policies and practices that contribute to high prices, and a lack of transparency in the flow of money through the pharmaceutical system.

The uneven, global playing field

For one, the United States pays more for the same drugs than other nations where the government sets prices. The U.S. market is responsible for more than 70 percent of the pharmaceutical profits in the world, according to the work of Goldman and his colleagues.

“Americans rightly look at the high cost of some of their medications and ask: Why don’t other countries pay the same price?” Goldman said. “What that essentially means is that we are bearing the burdens for innovations that benefit everyone around the world. Americans understand, regardless of party affiliation, asking other countries to pay their fair share.”

Ill effects of Medicaid’s ‘best-price rule’

Under current rules for the Medicaid Drug Rebate Program, Medicaid is entitled to receive the best price of a drug sold anywhere in the country. In theory, that sounds like a great money saver — at least for Medicaid and its patients — but it can have an unintended effect of stifling critical innovation in drug pricing, said Lakdawalla, director of research at the Schaeffer Center, whose study cited by the council was published last September in the Journal for Health Politics, Policy and Law.

We all want prices to reflect value. Insurers should pay less when drugs don’t work.

Darius Lakdawalla

“We all want prices to reflect value. Insurers should pay less when drugs don’t work,” said Lakdawalla, who is also a professor for USC Price and the School of Pharmacy. “But all it takes is one health plan that has a bunch of patients that do poorly on the drug. That health plan gets a huge discount under ‘value-based’ pricing. And, all of a sudden, Medicaid patients get the same discount, even if the drugs work great for them.”

The best-price rule also overlooks the fact that a drug can be less effective for some patients than for others. For example, the drug may improve the health of a patient with breast cancer but have little or no beneficial effect on a patient with colorectal cancer.

“Instead of paying a single price for a drug, Medicaid could pay different prices depending on what the drug is used for, but the current best-price rule makes that impossible,” Lakdawalla said.

Lakdawalla said that Schaeffer Center researchers have recommended solutions, such as pricing drugs based on their effectiveness, that may only require some clarification in current regulations or in the contracts that determine drug prices. “It doesn’t have to be done through legislation,” he said.

Following the money

Schaeffer Center researcher and USC Price Professor Sood has mapped one other key factor cited in the council report that compounds the drug pricing problem: a lack of transparency in where the money goes after a patient buys a drug. The findings appeared in a Schaeffer Center white paper released last year.

In the pharmaceutical supply chain, the money does not simply flow from the patient to the manufacturer of the drug. Much of it is kept by middle men such as wholesalers, pharmacies, pharmacy benefit managers and insurers.

We should not only be scrutinizing drug prices but also how much money is being made by middle men in the pharma supply chain.

Neeraj Sood

“For every $100 spent by patients, about $60 goes to the manufacturer and $40 accrues to intermediaries in the distribution system,” said Sood, who is also a professor at USC Price. “We should not only be scrutinizing drug prices but also how much money is being made by middle men in the pharma supply chain.”

The report found that the pharmaceutical supply chain is not very competitive. Three pharmaceutical benefits managers in the United States account for 85 percent of the market. Similarly, the top three wholesalers and retailers also account for a majority of the market. The potential lack of competition in these markets raises concerns about excess profits in the supply chain, according to Sood’s recent Schaeffer Center white paper.

“These markets are ripe with practices that are unfair to consumers,” Sood said.

For example, pharmacy benefit managers do not have to disclose the size of the manufacturer rebates and the amounts passed on to insurers and patients. Sood has said that requiring transparency could go a long way toward increasing accountability while potentially resulting in price reductions.

Value vs. price

The Council of Economic Advisers, which has existed since 1946, is charged with providing objective economic advice to the president that affects national and international policy. Its latest report may or may not result in significant reforms that lower drug prices in the coming months, but it marks a starting point for a national discussion about improving patients’ access to effective drugs and reducing costs.

Policymakers will consider the impact of reforms over the long term that can accomplish two goals: save the health system money and improve patient outcomes, according to the council report.

Goldman said there are some great examples of drugs that initially were expensive but that delivered great results and eventually decreased in price. In the 1990s, for instance, antiretroviral drug treatment for HIV cost about $15,000 for one patient.

Over time, the treatment became more widely used and has staved off the virus, saving lives. Goldman said that the cost of antiretroviral treatment is now about $350 a year, or about $1 per day, making it more affordable and accessible for other countries.

“Value — saving lives — is just as important as affordability,” Goldman said.

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White House advisers cite USC research as basis for potential drug price reforms

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