This op-ed written by William Smith was originally published on RealClearHealth.com.
A recent Institute for Clinical and Economic Review (ICER) “Report on Unsupported Price Increases,” concluded that: “Among the top drugs with price increases in 2019…ICER determined that seven of 10 lacked adequate new evidence to demonstrate a substantial clinical benefit that was not yet previously known.” The impression left by the report is that drug companies arbitrarily raise prices without good reason. As with so many ICER products, the study is misleading and demonstrates a profound lack of business acumen.
First, the study selected only those drugs that would fit their preconceived narrative. ICER could have selected drugs that had gone off patent during 2019, drugs whose prices had collapsed downward due to the arrival of generic competition. But ICER only selected drugs that saw price increases.
The report points to seven drugs that, ICER claims, “cost the U.S. health system an additional $1.2 billion beyond what would have been spent if their prices had remained flat.” This statement may be technically true, but irrelevant, as IQVIA estimates that the U.S. health system saved $107 billion between 2014 and 2019 because of generic competition. So, weren’t the $1.2 billion in additional costs of the seven drugs offset by price drops for other drugs that had gone off patent?
ICER’s report is akin to saying that, due to price increases for chicken, American families would be paying $300 more per year for their chicken. This may be true, but irrelevant, because if, during the same period, prices of pork, beef, milk, cheese and bread were all falling, is it really a huge problem that chicken prices had risen? The more important statistic would be the overall grocery bill of the typical American family.
If ICER were being honest about drug costs, they would not select only products that had price increases, but would instead look at the overall U.S. bill for prescription drugs. What the report glosses over is the fact that net price increases for prescription drugs dropped to 1.7 percent in 2019, below the general inflation rate; a statistic so moderate that it calls into question the entire mission of ICER.
While ICER, whose goal is to reduce drug costs for health insurance plans, has perfect right to put out misleading reports, the disconcerting aspect is the authors’ obvious lack of knowledge about how businesses operate, how they make payroll, how they attract investors, how they manage ups and downs in their sales – in short, how businesses work. This is particularly troubling when you consider that ICER is based in Boston, the most important cluster of life sciences companies in the world.
There are many reasons why a biopharmaceutical company would raise prices on a product that are unrelated to whether there was new evidence of improved efficacy, just as a restaurant may increase the price of a hamburger because the landlord raised the rent, not because they added more ground beef. Let’s just look at a few examples.
First, what if payers were demanding deeper rebates on products, i.e. deeper discounts? By raising the wholesale price, the company could provide a deeper rebate to customers while maintaining their revenue for the product, i.e. NOT making more money, just keeping the status quo on revenue.
It is not uncommon for companies to experience an unexpected patent setback due to a loss in court. So, a company might have thought it would enjoy annual revenue of $1 billion on a product and suddenly that product becomes generic halfway through the year, shaving $300 million off the company’s revenue. What to do? One option is to lay off hundreds of employees, many with deep expertise; or, the company could raise prices on other products to make up the shortfall. A third option, of course, would be simply to tell investors that the company would miss its revenue targets, which would instigate a stock sell off, loss of confidence in the company, a talent flight out of the company, and many other adverse consequences.
In the real world, companies suffer sales slumps, unforeseen litigation costs, unanticipated competition, failures to obtain FDA approvals, hurricanes that destroy manufacturing plants, new laws that disadvantage their business, and on and on. It is easy for the armchair quarterbacks at nonprofits funded by billionaires to tell companies how to price their products, it is difficult to bring new, innovative medicines to market.
William Smith, PhD, is Visiting Fellow in Life Sciences at the Pioneer Institute in Boston.