“Pharma Bro” – Lessons Learned

Does government have a role in ensuring access to prescription drugs?

(By access to any health care good or service, I mean affordable access on a population-wide basis to safe, effective — AND cost-effective — goods or services.)

The federales are not afraid to intervene (in a big way) in other parts of the health care market. Consider, for example:

• The Hill-Burton Act (federal funding for hospital construction going back to the 1940s conditioned on access to free or reduced-cost health care services for eligible individuals)
• Medicare and Medicaid beginning with the Great Society programs of the 1960s
• Stark (self-referral ban) and anti-kickback rules (that started with government payors and have spread in many states to be all-payor rules)
• The HITECH Act’s incentive payments to health care providers to adopt electronic health records (part of the 2009 Recovery Act)
• “Obamacare”
• In the FDA’s wheelhouse, there is an orphan drug program providing incentives to develop and market drugs for rare conditions

Likewise, our friends in government are prepared to step in when the going gets rough in other industries – or when the national interest otherwise dictates – and nationalize private sector businesses or entire industries or invest heavily in bailing them out. F’rinstance:

• Wartime nationalization of railroads and other key resources during WW I and WW II
• Peacetime railroad nationalizations include Amtrak and Conrail – the latter later privatized
• The savings & loan industry in the late1980s/early 1990s
• The airport security industry post 9/11
• Great Recession bailouts of AIG and GM, among others

Against this backdrop, let’s consider the current public debate about pricing of prescription drugs – sell prices jacked up by pharma companies (most notably Turing, but there are others) and buy prices paid cut back by pharmacy benefit managers (PBMs).

On the buy side, PBMs are in the business of holding down prescription medication expenses for ultimate payors (self-insured employers), and they negotiate prices with pharma companies. The pharma companies or their middlemen should not be charging pharmacies full freight for drugs bought and paid for through PBM plans with deep discounts, and the PBMs should not be enforcing previously-announced pricing after a pharma company raises its prices – but they apparently do, and this practice hits smaller retail pharmacy operations (and, consequently, the patients who rely on them) particularly hard.

On the sell side, a specialty compounding pharmacy recently announced that it would sell a compounded alternative to Daraprim for $1 a pill. (Daraprim is the drug bought by Turing Pharmaceuticals, that CEO Martin “Pharma Bro” Shkreli repriced from $13.50 a pill to $750 a pill in August, bringing the nation’s ire at pharma down on his head.) Per Reuters: “Unlike Daraprim, Imprimis’s formulation [it’s Daraprim plus another drug often prescribed in tandem] in itself is not FDA-approved, and can only be used when prescribed by a doctor for a particular patient.” Thus, this approach, while noble, is unlikely to scale to meet the needs of all patients absent a major education campaign and behavior change by all prescribing clinicians. (Some agree this is going nowhere; others are more optimistic.)

So, what is to be done? The question applies to Turing (which has publicly committed to reducing its prices, but as of this writing has not done so), but also to the broader prescription medication market. The buying and selling of pharma companies (or FDA-approved drugs), followed by price increases, is not unique to Turing and Daraprim – this case is merely the most extreme example to hit the public consciousness.

It would be nice if Congress would reverse itself and permit Medicare to negotiate directly with the drug companies on price. The fact that this possibility is foreclosed costs Medicare (and all of us) over $10 billion a year. Medicare prices become the starting point for negotiations in other health care domains, so the potential savings overall could be far greater. I won’t hold my breath.

My good friend Jason Glasgow suggests that with respect to the sell side, the federales should “nationalize the most egregious players in the ‘market.’”

How would this suggestion play out? The argument goes: If there is a private company that controls a good or service that is needed, and for whatever reason there is reason to believe that continued access is imperiled, or some other national interest is at stake, the federales should step in and take action to protect that interest. In the case of railroads in WWI and WWII, the government nationalized those resources for the duration of the war. In the case of airport security post-9/11, the government nationalized airport security and employs all security personnel directly through the TSA. In the cases of AIG and GM during the Great Recession, the government spent billions on supporting these tottering giants because they were deemed “too big to fail” – their failure would cause irreparable harm to the U.S. economy. In the case of health insurance companies, one approach to ensuring affordability in the Affordable Care Act was to limit their profit margins from the health insurance business (medical loss ratios). Aetna (one of the largest health insurance companies in the U.S.) has since rebranded itself as a health information company.

How about a “too expensive to continue” as an analog or corollary to “too big to fail”?

The federales could nationalize Turing (or some other similarly-situated enterprise) — as it effectively nationalized GM — by acquiring all or a significant percentage of its stock. The consent of the target would not be required – this like a “taking” of real estate by eminent domain, when the land is needed for a broader public purpose: building a school, obtaining an easement for public utility lines, etc. The government could maintain control as long as necessary, restore sane pricing levels, and then sell it off subject to continuing conditions that would prevent future price gouging.

There are certainly details that would need to be fleshed out in order to implement such a plan, but the broad outline is there.

Making an example of a couple of bad actors that create an emergency should be sufficient to get others to play nicely, minimizing the need to take such action on an ongoing basis.

I acknowledge that I retain a central planning gene from my days as a regulator and that this proposal may not find many fans in the private sector. However, others in the private sector understand that to do business in the health care realm means having to deal with the frameworks and expectations of the federal government, and such a reaction from the government should not come as a surprise.

The FDA does not have the tools at its disposal to act in the realm of price controls (and the Congressional do-nothings that are unable to act on much these days due to partisan, and even intraparty, squabbling are unlikely to be able to give the agency such tools). Thus, it remains the executive prerogative to take action.

Could the action be challenged? Of course. Would it survive a challenge? It could if the remedy imposed by the federales were narrowly tailored to address a specific harm, or potential harm, such as the harms and potential harms that have triggered the use of such extraordinary powers throughout our history.

What do you think?

David Harlow
The Harlow Group LLC
Health Care Law and Consulting

CC image courtesy of Stockmonkeys.com