Pharmaceutical Reverse Payments and Lower Drug Costs: An Interesting Dilemma
4:47 AM MDT | July 26, 2010 | By GIRISH MALHOTRA
The U.S. Federal Trade Commission and the lawmakers have scorned the concept of the ‘reverse payment’ - also called “pay-for delay” - in the pharmaceutical business. The U.S. House of Representative recently voted 239-182 to restrict such payments in the hopes that stopping such payments will reduce the cost of drugs to the consumer. Legislators would like to see the drug costs lowered for their constituents. Everyone had expected that the entry of generics would significantly reduce the drug prices. Generics have put some pressure on brand companies but their presence has not lowered the costs of drugs by significant percentage.
U.S. Federal Trade Commission estimates that the “reverse payments” could save U.S. customers about $3.5 billion dollars/year. These savings might be there, but they are not worth the effort and squabble compared to the yearly U.S. drug revenue of about $480 billion. These payments are less than one day’s revenue. Since every company wants to maximize its profits for patented drugs, the use of reverse payment is part of doing business. These costs are passed on to the consumer. In the U.S., customers, who are covered by a health plan do not know the real price of the prescription drugs; they just pay the co-pay.
Legislation is not going to lower the drug costs. The fundamental reason that companies are in the business is profits. If any government limits the profit margins or sets the prices, they that will be in direct conflict with the charter of every company i.e. to have the highest profits. Government’s price control would discourage innovation.
We need to understand the factors driving prices/costs, and how they can be lowered and passed on to consumers. The underlying fact is that all of us want to extend our lives and we will pay anything for that. Drug prices are based on this sentiment. Prices are set at the highest level companies believe customers can afford. Every company in the supply chain has used this sentiment for pricing. This also covers inefficiencies of the companies.
Limiting profits goes against economic principles. Laws of economics teach us that in a fair game, only competition can lower prices. Brand companies have lowered prices when they want to promote and/or grab the market share as evidenced by recent price drops in the selected developing countries. In recent years, there has been a limited supply of prescription drugs available from well-known merchandisers ($4.00 for 30 day and $10.00 for 90 day supply). This is a clear indication that the drug prices can be lowered and everyone in the supply chain can make their desired profit.
Regulatory and appropriate government bodies have to facilitate competition. Companies in the supply chain also have to participate in this endeavor. Lowering of drug costs to the consumer by 8-10% or higher will have value for consumers provided they are passed on. Less than 1% cost reduction is of no value. Addressing minor issues like “reverse payment” just placates the constituents without accomplishing anything and upsets the brand pharmaceutical companies.
Real issues that will lower the drug costs need to be addressed and no one is addressing them.
Girish MALHOTRA, PE
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