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Price Controls on Specialty Pharmaceuticals: Global Perspectives on the Free Market Debate

June 10, 2015 (8 min read)

Karen C. Yotis, Esq., a Feature Resident Columnist for the LexisNexis Workers’ Compensation eNewsletter, provides insights into workplace issues and the nuts and bolts of the workers’ comp world.

We love our pharmaceuticals here in the U S of A and we pay through the nose for them too. According to 2014 health statistics from the Organization for Economic Growth Cooperation and Development, this great nation spends more on legal drugs than any other country in the world. And it doesn’t look like our penchant for the good stuff is going away. Current research predicts that spending on the so-called “specialty” drugs like breakthrough Hepatitis C medication and various cancer treatments will balloon to $400 billion by 2020.

The effort to contain these costs—primarily through government price controls—has reinvigorated the age-old debate between the concepts of economy and innovation and between regulation and the free market system. The Kaiser Foundation’s Kaiser Permanente Institute for Health Policy recently touched upon these conundrums in Pharmaceutical Pricing: Lessons from Abroad, a recent white paper that examines the health care systems and drug cost containment initiatives in three countries. Kaiser also gauges the impact that price regulation is having on research and development in the global pharmaceutical industry and pinpoints key factors that should guide policymakers who are grappling with these problems on this side of the pond.

Beware the Dark Side

The various bites that the Democratic Party has taken over the decades at the pricing policy apple can be expressed in two words: Epic Fail. As Kaiser recounts, the Health Security Act (the Clinton era’s early 90’s precursor to Obamacare), which proposed a federal advisory council to address whether new drug policies were reasonable, lost big to fierce opposition from Congress and industry lobbyists. Similarly, proposed provisions to the 2003 Medicare Prescription Drug and Modernization Act that would have empowered the federal government to negotiate drug prices purchased under Medicare Part D did not make it into the final law that Congress eventually passed. Kaiser mentions in passing several unspecified (but clearly failed) bills that tried to authorize the feds to negotiate or impose drug price discounts for low-income patients and the yet-to-be-seen outcome of President Obama’s budget proposals for fiscal year 2016 which attempt to resurrect attempts to authorize federal negotiation of Medicare Part D drug prices.

While not discussed by Kaiser, it is interesting to note that California lawmakers tried to make an attempt to contain pharmaceutical costs with AB 463, which would require drug manufacturers to file an annual report outlining each qualifying drug’s total costs for production, R&D, clinical trials, manufacturing, acquisition and patents and advertising/marketing/promotion. AB 463 also required the report to include a cumulative annual history of average wholesale price and price increases for each drug as well as the total amount of financial assistance that the manufacturer gave to available patient prescription assistance programs. Adding frosting to the bill’s 100-layer regulatory cake, AB 463 also called for manufacturers to itemize and document all report information AND have it verified by an independent third party. It’s hardly surprising that the expensive approach to inexpensive medications advocated within the Pharmaceutical Cost and Transparency Act of 2015 never made it out of Committee.

For some insight into whether manufacturer data reporting could provide insight into cost centers associated with drug development and availability, we went to Suzanne Honor-Vangerov, CPC, CPC-I, CMSP, Managing Attorney of the Lien Unit at the California firm of Floyd, Skeren & Kelly LLP and former Manager of the DWC’s Medical Unit. According to Honor-Vangerov, AB 463 was a step in the right direction.  In her view:

“It is important for purchasers of specialty drugs to know for purposes of pricing negotiations as well as policy determinations by governmental agencies that having transparency is what it takes to bring these drugs to market. Since the Division of Workers’ Compensation is looking into the development of a formulary for drugs, this information would be of great assistance in making decisions whether or not particular specialty drugs should be included.”

Honor-Vangerov also posited that most opponents of AB 463 appear to be related to Big Pharma. Indeed, stakeholders on both sides of the argument remain committed to their own preferred principles of engagement. As Kaiser explains:

“[T]here is a renewed focus on how the government can—and whether it should—intervene in a market that seems to have spun out of control with the pricing of the latest specialty drugs. Moreover, many believe the government—which is itself a purchaser of pharmaceuticals—has an ethical imperative to act if it is to be a good steward of taxpayer dollars.”

50 Shades of Regulatory Grey

Kaiser next turns to Australia, Germany, and the United Kingdom to examine each country’s healthcare systems and specific price regulation schemes in an effort to provide some illumination for US policymakers. Kaiser does not specify its methodology or provide any descriptive details about the underlying elements of its research.


Australia accomplishes its mission of focusing on providing an arguably reduced set of therapeutically important drugs and timely access to needed medications at an affordable cost via what Kaiser calls “a strong regulatory function” over medical services, private health insurance and pharmaceuticals. The government’s Therapeutic Goods Administration plays an important role in overseeing healthcare needs by performing technological assessments and classifying the risk, quality, safety and efficacy of drugs. The TGA conducts “post-marketing surveillance activities” after drugs are approved and made available for distribution.

Australia also contains costs via a national purchasing system known as the Pharmaceutical Benefits Scheme. The PBS makes drugs available, approves them for sale, and fixes prices at which listed drugs can be supplied and prescribed. The Australian government and the PBS operate a “monopsony” that brings significant market pressure into pricing negotiations because of the monopsony’s refusal to cover certain high-priced drugs.


Germany’s statutory health insurance system provides universal coverage for all legal residents through a system of competing, non-governmental insurers known as “sickness funds” that operate like private companies and bear risk for their ‘insureds.’ Eighty-six percent of Germans exercise their option to receive private health insurance in addition to or instead of statutory coverage.

Things get a little more confrontational when the Institute for Quality and Efficiency—which is empowered to negotiate integrated care contracts and price rebates with pharmaceutical companies—gets involved, particularly when the IQWiG evaluates whether drugs “with added benefits” are cost-effective. All drugs—and that means generics too—are put into groups with a reference price that caps reimbursement unless the drug is shown to have “added medical benefit.” Manufacturers set a price that is valid for one year after a drug goes to market. The IQWiG sets a price equal to the cost of the current accepted therapy if it decides the drug has no added benefit. Where added benefit is found, the manufacturer and statutory sickness funds negotiate a price that applies to all patients.

Germany’s additional benefit determination process is fraught with complexities and challenges from all sides. Its hard-hitting approach has also resulted in some companies refusing to bring new drugs to market in Germany in order to avoid the IQWiG’s additional benefit assessment.

The United Kingdom

The UK uses a series of regulatory initiatives to keep a lid on pharmaceutical costs, including:

> the Pharmaceutical Price Regulation Scheme (a voluntary agreement covering all nationally dispensed meds that sets allowances for R&D, sales, marketing, manufacturing and general costs as well as maximum profit percentages);

> a separate statutory scheme (alternative regulations that impose a 15 percent discount on any drug with a list price above $3.06 USD per fill)

> formularies (which reportedly include a “Black List” of medications which are not paid for under any circumstances);

> incentives for generic prescriptions (such as prescribing targets, issuing guidelines, and financial rewards)

When Pigs Fly

Whether the alternative approaches that other countries use to contain drug costs could be sustained in the United States, where a new (and incredibly controversial) healthcare system has divided the entire nation, is a problem that Kaiser tackles but does not of course resolve. While demonstrating how regulation has helped other countries get a handle on skyrocketing healthcare spending, Kaiser is clear about the estimated 11 to 16 percent annual reduction on R&D spending that is directly attributable to these policies. Kaiser also prompts policymakers to consider ways to guarantee that the pharmaceutical industry continues to invest in and develop beneficial drugs in the face of price regulations and the resultant decline in R&D spend.

Addressing this concern head-on, Honor-Vangerov explained:

“Although price regulation can be a deterrent to innovation, if the regulations are carefully crafted, provision can be made to encourage innovation in drug development. Newly developed drugs that meet criteria spelled out in the regulations can be exempt from the pricing controls initially. Although these drugs are generally targeted at chronic conditions, some injured workers do have these underlying conditions and their industrial injuries can be affected by them. This makes their treatment and the costs related to such treatment of importance to the workers’ compensation community.”

Kaiser concludes by proposing various additional policy concerns for future consideration. The impact of reduced pharma revenue on the US job market, the US economy and the global market, the nature and extent to which the nation’s healthcare system lends itself to robust pharmaceutical price controls, and alternative solutions such as increasing market competition and other market-based approaches are all issues that Kaiser calls out for additional research and discussion.

As Kaiser warns in closing:

“No silver bullets exist to solve the pharmaceutical pricing dilemma. Any policy will have both positive and negative effects. Policymakers must be open about the consequences and make an honest effort to determine what tradeoffs society is willing to make.”

To regulate or not to regulate? That is the multi-billion dollar question.

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