We All Need to Pay Our Fair Share
President Trump has issued a blizzard of Executive Orders (EO), everything from tariffs that affect our countries dealings with many other countries to orders that our aimed solely at certain universities. I won’t bother you again with all the reasons I dislike Executive Orders except to say that they circumnavigate many of the checks and balances of our Constitution and thus almost all of them have garnered legal challenges that assert President Trump has exceeded the powers of his office.
My blog today deals with an EO that is not new, he first proposed this approach to prescription drug pricing in his first term. It’s called the Most Favored Nation (MFN) approach to drug pricing.
At the root of the reason for this approach is the fact that many countries pay less for certain drugs than we do in the United States. The drugs targeted under the MFN are those that have no generic or biosimilar competition. The President’s premise is that the U.S. is footing the bill for the cost of the research and development and the other countries are not paying their fair share. He says that the U.S. should pay what the nations who fit the profile approaching that of the U.S. are paying. This list of nations is given the label of “Most Favored Nation” and become the basis for setting the price of a drug.
Will this lower the price in the U.S. or raise the price in other countries? I’m not sure, but I do know that the fair share of the cost to get a drug approved and manufactured is not small. Estimates to get a drug approved range as high as 2.7 billion for some cancer drugs. A significant portion of this cost is associated with the research and development on drugs that don’t get approved. Did you know that 9 out of 10 drugs never get approved. You can see that it’s a risky business for manufacturers and their investors and requires a robust ecosystem to support this type of research. This MFN approach would have a big impact on this ecosystem.
Earlier this year I wrote about this EO and even released a statement about its detrimental effect but, as more details are released, I think the administration is taking a slightly different approach. This time it is declaring that other countries should pay their fair share has become a much more accepted rallying cry than it was when the MFN approach was proposed during the President’s first term. Those that opposed MFN have begun to add this “pay their fair share” phrase to the list of reasons for the disparity in prices. Having both sides agree on even one part of a solution is definitely not a common occurrence. However, trying to get other countries to pay their fair share will not be an easy task.
Another difference is that the administration is asking the pharmaceutical manufacturers and the providers to voluntary reduce prices on these drugs. I’m sure the administration sees this as the easier solution than forcing other countries to pay more. It is unclear what the punishment would be if the manufacturer does not comply, and it’s another action that would very likely elicit legal action. But the language does leave room for a discussion which I find refreshing.
A fair question to ask is, “why are other countries allowed to pay less?” Here’s my take on this complicated question: I think it’s a combination of the government-controlled healthcare of foreign nations and economics. Government dictated healthcare is focused on saving money, often accomplished through rationing, and delaying access to medicines. It’s a fact that many other countries limit access to new medicines. As I mentioned in an earlier blog, of the 74 cancer drugs launched between 2011-2018, 95% are available in the United States, compared with 74% in the UK, 49% in Japan, and 8% in Greece. This control gives the foreign country the ability to threaten the manufacturer with limiting access to the patients in their country to the drug under consideration if the drug manufacturer doesn’t agree to the proposed drug price.
Now, I’m not an economist but I did learn about something in school called contribution margin. It means that once a drug is sold at a price that pays the fixed costs of research, development, and a profit, then the contribution margin of drugs that are manufactured and sold after this point is increased since the fixed costs are paid for. This is the fair share that foreign countries are NOT paying. The drug manufacturer can sell the drug at a lower price and still make a profit. This is aided by the fact that the approval to sell a drug in a foreign country is often delayed so the U.S. purchasers end up paying the fixed costs for a period of time before it is approved in another country.
This is just my opinion on why this difference in prices between our country and other countries exist, but the fact remains that there is a price disparity and forcing the manufacturer to lower the price will only add to the disruption of our research ecosystem. More importantly, it would affect those of us in Medicare. According to Sue Peschin, president and chief executive officer of the Alliance for Aging Research, MFN pricing is “founded on incorrect assumptions about where high out-of-pocket costs really come from and what it would mean for the US to adopt cost-effectiveness standards used by foreign governments,”. She added “in an assessment of a 2020 proposal for most favored nation pricing, CMS said that anywhere from 9% to 19% of Medicare beneficiaries would lose access to care. She noted that many of the medications included in that proposal “did not have comparable alternatives, so the rule would have left patients without any treatment.” This is how this MFN approach would affect you and me. It just doesn’t seem that now is the time to disrupt Medicare.
There’s a lot more to happen with this MFN way of pricing our medicines and I’ll work to keep you informed. Don’t hesitate to tell your lawmakers that there has got to be a better way to get other countries to pay their fair share.
Best, Thair