Capitalism, like the software on your computer or iPhone, should periodically be updated. (Trevor Noah—paraphrased)

  • Our goals include: Fairness to those who strive, create, and manufacture.
  • Avoiding actions that are likely to inhibit innovation.
  • Changing a culture that encourages big Pharma to charge a lot and keep raising prices because no one is looking and people with small drug co-pays don’t seem to care,
  • Not rewarding manufacturers who spend billions acquiring other companies so they can control a promising new drug.
  • Not having our attention diverted by the outrageous antics of the gougers.

Where the market place works I would tread lightly.  Negotiations, talking, bargaining, and reaching a deal is sensible.  It’s how the VA and private insurers establish the price they pay.

The dollar amounts they agree on also determine what Medicaid pays.  A special law asks manufacturers who want to sell to Medicaid to give each state program “the best price offered to any purchaser… (The negotiated prices companies give to private insurers).  In return, manufacturers who sign on can sell all the drugs in their arsenal to every state’s Medicaid program.”The legislation put a cap on price increases.  The cost of drugs sold to Medicaid can’t rise faster than inflation.

And it contains a complex formula of rebates–money given to states.  I suspect the funds are an attempt to plug a loophole that allows companies to give “discounts and concessions” to some insurers.   The rebates to states were increased by the affordable care act (ACA).  The minimal kickback rose “from 15.1 percent to 23.1 percent.”

Medicare:  People over 65 paid a payroll tax all their working years.  That money (incompletely) underwrites Medicare A, hospital insurance.

Once insured by Medicare A, people over 65 must still pay for– or buy a policy that covers– out of hospital health care (Medicare B) and/or drugs (Medicare D).

To receive medications under “D” people need to enroll, pay a monthly fee, and sign up for a plan.

The plans “help cover the costs for prescription drugs, may lower a person’s prescription drug costs, and may protect against future higher costs.” Then again they may not.

The Medicare D drug co-pay + the money the government kicks in, probably exceeds the co-pay + the insurance company cost for meds used by young people who have drug insurance.

Private insurers bargain.  D plans are not allowed to negotiate drug prices.

Easily fixed, you say.  Only if people care.

Most generics:  there’s a vigorous marketplace.  The demand is worldwide.  We face intermittent shortages of some drugs.  The production of sterile intravenous fluids and injectables can be costly.

As long as there’s more than one manufacturer and there’s competition, price is a secondary consideration.  We need to worry more about the availability of some medications and sterile fluids.  I’d ramp up the FDA’s ability to inspect and certify production facilities abroad.  And (as with purchases of weapon systems) I’d find a way for government to guarantee minimal purchases of needed fluids and drugs at a negotiated price.  In return I would want manufacturers to agree to build needed, state of the art factories—hopefully in the U.S. and Puerto Rico.

Gouging:  The examples in my blog are merely the top of the iceberg.  We need hearings where congressional legislators do more than express their outrage.  They need to create a law.

A recent article that demonstrates an ongoing need (and perceived permission) to exploit:  “Painkiller that once cost $138 is now $2,979. — An Irish drug maker has jacked up the price of a painkiller to nearly $3,000 a bottle. The drug is 22 times more expensive than when the company acquired it in late 2013.” )

For brand name high priced medications I can’t think of anything short of regulation that will work.    I realize the word “regulate” to some, is as onerous as gun control.  It’s easy when you’re young and healthy to claim to have no appetite for government “interference.

My “regulation” proposal:  When a new, drug gets approved by the FDA and each year thereafter, the manufacturer will fill out an IRS LIKE form.  As with the income tax—most filings won’t be scrutinized.  If and when a company is audited they will have to provide evidence that their figures were honest.

On the form:

REVENUES:  manufacturers will estimate first year revenue based on projected price and sales.  Each subsequent year they will use actual prior year revenues.

COSTS AND PROFITS:  manufacturers will list the following on the form:

Cost of actual research+ development for this drug– paid by the company.

Cost of invested money:   The Tufts—industry quoted– study assumed invested funds, placed elsewhere, would earn 10% a year.  Sounds high, but for now let’s use the company number.

Profit:  say 10 percent per year—max.  (Remember companies use the results of research paid for by taxpayers; new drugs get 5 years of exclusivity.  Public monies are (at times) used to develop and run the initial tests on new meds; many a drug’s niche has been established by University based researchers.  The tax payer’s helping hand may fall short of “corporate welfare”…but should our craving for innovation be rewarded with extravagant profits?)

Promotion costs:  10 percent years one and two.

Contribution to company’s overall research:  If the company spends 8 % of its revenue on research, add 8 %.

Moneys spent when one company buys another company:  no deduction

Money spent on research using NIH or charitable money:  no deduction

CALCULATE:  Revenue (projected the first year- actual thereafter) MINUS costs and profits.

AND DIVIDE REVENUE MINUS COSTS AND PROFITS BY 5 years.  After the first five years divide by the number of years the drug is on the market.    (The really expensive–billion + dollar a year drugs earn back their costs very quickly.)

The formula would establish the maximum companies can charge for each drug.  If a medication doesn’t sell because it’s too pricey, manufacturers can, of course, charge less.

PRICE INCREASES:  As a result of inflation and subtle hikes in production and distribution costs, manufacturers should be allowed to raise drug prices a certain percent each year.  The amount of an automatic increase needs to be worked out by our legislators. Manufacturers should also be permitted to increase a drug’s price (amortized over a few years) when they update their factory or if the cost of raw materials goes up.

(There is currently no limit on drug price increases and most drugs have relatively little marketplace competition.  That has created problems.  We need a drug pricing formula that is reasonable and fair to both sides. —Prices don’t always go up. Cheap imports from Asia have pushed the price of many consumer goods down, and American wages have, on average, been flat for decades.  The U.S. went through a period of deflation in the early 1930 and we lived through inflation rates of or above 10 percent when Jimmie Carter was president.  During the last five years the U.S. inflation rate was 2.1 percent or less and that’s bound to change.  )

Forms will be signed by the CEO and submitted annually.  A few will be audited.  Fraud will be punished with jail time.

All formulas have flaws.  Please point mine out.  Let’s refine an approach so when and if our leaders decide to deal with the problem they will have a road map.