In my last Forbes blog, I described the ways that the American healthcare system represents both the best of times and the worst of times. We lead the world in scientific breakthroughs like gene splicing, but trail most industrialized nations of the world in life expectancy and infant mortality. Three articles from the Washington Post clearly contrasted our pride as a nation in our medical research with our inability—or refusal—to address our shortcomings.

This week, I describe two articles from the May 6 Wall Street Journal that highlight a different dichotomy. On one hand, we celebrate the success of the drug industry when it introduces effective specialty drugs. But on the other, many are unwilling to confront the exorbitant pricing that exists today, particularly for medications with minimal advantage over current treatments. As a result, drug companies can justify charging over $100,000 a year for certain medications that are much better than the alternatives, but ignore the issue of efficacy when their products are only minimally better. This problem is getting worse.

The Tug-Of-War Over “Biosimilars”

A well-researched piece on the front page of the Wall Street Journal, “Knockoffs of Biotech Drugs Bring Paltry Savings,” explained why the much-anticipated biosimilars are unlikely to reduce the huge price tags associated with “biologics.” In contrast to traditional small-molecule drugs with straightforward chemical structures, these biologics are large, complex proteins.

Even for the small-molecule drugs with chemical structures that are relatively easy to duplicate, the introduction of generics has slowed recently. Increasingly, drug companies are using complex legal maneuvering, including filing patent infringement claims, to block the manufacturing and distribution of lower-priced generics. But for the biologics, the article points out, the challenges will be even greater. Despite fears fueled by brand-name drug manufacturers, small-molecule generics are identical in chemical structure to the brand drug, and therefore have the same safety, efficacy and side effects. And because they’re easy to manufacture, multiple competing companies are anxious to enter the market soon after the brand drug patent expires.

By contrast, many of the newer large-molecule medications used to treat diseases such as cancer, rheumatologic disorders, and hepatitis C are produced not in typical laboratories, but by living organisms, often via recombinant DNA technology. Monthly prescription costs for these agents can run as high as tens of thousands of dollars.

Unlike the traditional generic medications, these newer biosimilars are not exact replicas, and companies must prove to the FDA that they have the same physiologic effects and deliver comparable clinical benefits. This is a more complex process. As a result, while biosimilars have been available in Europe for many years, the FDA has to date approved only two in the United States: Zarxio, a biosimilar for the drug Neupogen, and Inflectra, a biosimilar for Remicade. Inflectra, only recently approved, has yet to reach the market. Standing in the way for the generic manufacturer are allegations of six patent infringements brought forward by the manufacturer, legal challenges most analysts believe to be stalling tactics.
Pharmaceutical Sticker Shock

The Wall Street Journal reporter cites multiple examples of drug companies raising their prices dramatically as the patent expiration date approaches, in an attempt to milk as much profit as possible and to establish a new pricing floor by which to calculate a biosimilar discount. The article points out that Humira, manufactured by Abbvie, was approved by the FDA in December of 2002, with a patent due to expire in December of 2016. The company has raised the price eight separate times in three years, producing a cumulative 73% increase. And while manufacturers of smaller-molecule drugs have used this tactic of raising prices near the end of a patent, the impact of a 73% increase in the cost of a tablet of brand Lipitor, from $1.50 to $2.60, is pretty modest compared with the same increase in the annual list price of Humira from approximately $29,000 to almost $50,000.

And as Humira approaches the end of the 14-year time frame from FDA approval to patent expiration, Abbvie’s attorneys have been busy accumulating more than 70 patents on the drug, in an effort to force new companies to defend a slew of patent infringement lawsuits and discourage potential biosimilars from entering the market to compete for the company’s eight billion dollars a year in sales. Patent protection is designed to protect the R&D investments of companies, not extend monopoly pricing power long after U.S. consumers and patients have a right to expect relief.

Should the Less Effective Cost Less?

As a physician, I recognize that many of these biologic agents represent significant advances over previously available therapies. But others, particularly some newer oncology drugs, offer minimal benefit, with survival increased merely by weeks, not years. We might expect that these less effective agents would be priced lower than the others, but they are not. In fact, drug manufacturers seem uninterested in linking the efficacy and development costs of these drugs with their launch price and year-over-year price increases.

When a highly effective new drug hits the market with a huge price tag, the manufacturers highlight the added clinical value as a rationale to justify the price. Yet when the next drug is released with a similar price tag but minimal impact, this criterion is ignored. As a nation, we want a robust engine of innovation to deliver breakthrough therapies, but we need to recognize that the current “the-sky’s-the-limit” pricing means that fewer and fewer patients will be able to access healthcare or even benefit from the medications themselves.

The second Wall Street Journal article, “Lawmakers Criticize Medicare Plan for Costly Drugs,” examines how Medicare pays doctors to administer costly medications, particularly cancer drugs, through their offices. Under the current “buy and bill” approach, oncologists buy the medications, administer them to seniors, and then are reimbursed for the drug’s average sale price plus a 6% premium. This means that if doctors administer an expensive medication, rather than an equally effective lower-priced one, they receive greater revenue, even when the patient achieves no increased value.

The Centers for Medicare and Medicaid Services, concerned that this creates a perverse incentive to choose a more expensive regimen, has proposed an experiment that changes the reimbursement formula in some parts of the country. The new approach would lower how physicians are paid to administer the drugs and would add a flat payment of $16.80 to maintain the same average income. Then they would compare oncologists paid in this way with doctors in communities where the formula stays the same.
Lobbyists Enter the Fray

Doing a research study of this nature hardly seems revolutionary, and yet as a result of aggressive lobbying by the drug industry, more than 240 representatives and numerous senators have written in opposition to the plan. In addition, the drug companies have enlisted significant support among consumer groups, patient advocacy organizations and community oncologists.

A model for drug pricing based on independent determination of clinical value could make sense for American healthcare, although assembling the right set of experts would be crucial. And rewarding companies that do extensive R&D with a reasonable profit margin that’s in line with the other parts of the healthcare system might work to stimulate new drug development, but it would require drug companies to open their books to independent auditors. But what happens today makes no sense. Providing more than a decade of patent protection for drugs that companies can price at over a hundred thousand dollars a year per patient, and that generate a profit margin of 60–70%, is simply bad policy for healthcare and patients, and failed economics for our nation’s financial health.

We need a rational system to price new drugs as they become available. And we need to lower the barriers, to enable competing companies to manufacture and sell generics and biosimilars after the initial patent-protected timeline expires. The out-of-control pricing approach that is becoming the norm will drive healthcare costs through the roof, without concomitant quality improvement. Contrary to what drug ads imply, the people who will suffer the most from inaction on this issue are patients and their families.

We can reward drug companies based on the clinical efficacy of their drugs if they prefer, or on the cost of development. But they should be required to choose one or the other. They can’t have it both ways.

This article appeared on June 23, 2016 on