Who’s Afraid of Big Bad Pharma?

HUMANITIES PROGRAMME
2019 CAPSTONE PAPER
Ethics in Progress

Abstract

In 2007, the cost of two Epipens was about USD$94. Today, those two same pens cost USD$700. It is a very common theme of headline news: Dramatic rises of pharmaceutical drug prices in the thousands of percents. This trend has raised the concern about the pharmaceutical industry’s profit-oriented pricing strategies that is unfair for their clients and particularly disadvantages lower and middle income families. This thus calls into question the ethics of pharmaceutical pricing. Because the pharmaceutical products in question have such a critical impact on the lives of many, this creates an even more pressing need for regulation in the pharmaceutical industry. Many suggestions have been put forth to address this pertinent issue, each providing a different perspective. In this paper, we aim to present analysis of solutions put forth by relevant voices in the field, and thus conclude with new insights on the regulation of pharmaceutical prices, to ensure a more ethical practice.

Introduction

Hypothesis

Before we begin the report, prior to full research on the issue, we hypothesise that the sharp increase in prices of pharmaceuticals and medical care from major pharmaceutical companies and corporations is not only unethical but also excessive in the funding of the research and development regarding these products. We believe that the benefits of privatisation of medical care do not justify the increasing of selling prices which is a breach of medical ethics, and that practical and feasible solutions must be identified to regulate the pricing issues. 

Scope

We will be researching on international pharmaceutical companies, and the impact of its pricing on their consumers. These impacts may range from medical and financial to social impacts. We will also consider the range and percentage of people who are affected, as well as the depth of impact. From this, we will research on methods and solutions proposed to solve the problems of pricing. 

Methodology

We will consider research on the cost and selling prices of pharmaceutical products, and consider the differences in these prices in relation to the popularity and necessity of the product. This will allow us to estimate the impact sharp price hikes have on those affected, especially in relation to affordability and impact on health, and hence allow us to determine the ethical impact such price hikes have on consumers. Importantly, we will also research on various proposed solutions and self-regulatory measures to regulate the pricing of various products with the intention of mitigating unethical behaviour of firms, and compare the measures by the following FIRST criteria:

  1. Feasibility, Flexibility
  2. Impediments
  3. Root Cause
  4. Side effects
  5. Time period 

1.   Impact of Pharmaceutical Price Hikes on consumers and ethical implications

To assess the ethical impacts of Pharmaceutical pricing, we must assume that the companies which produce these products hold to the 4 values of medical ethics – respect for autonomy, beneficence, nonmaleficence, and justice (Gillons, 1994). These are the beliefs in the patient’s right to choose their treatment, and the medical professional’s responsibilities to act in the patients’ best interests, to not cause harm to them, and to fairly distribute scarce medical resources, and respect for consumers’ rights. In the context of our paper, this entails the responsibility of pharmaceutical companies to maximise the affordability and access of essential pharmaceutical products to all who require them. Sharp price hikes of products with profit-maximising objectives, especially when independent of changes to cost of production or development of the product, is hence seen as unethical, especially when it costs the affordability of these drugs to those with lower purchasing power.

With extremely high prices for new drugs and dramatic price hikes for current drugs, prescription drugs are the fastest growing category in the healthcare industry (Altarum Institute, 2017). The Department of Health and Human Services in the United States of America estimates that citizens spent more than $460 billion on drugs in 2016, which was 16.7 percent of total health-care spending. Thirty percent of these prices can be attributed to either changes in the composition of drugs prescribed toward higher price products or price increases for drugs that together drove average price increases in excess of general inflation (Department of Health and Human Services, 2016). 

The argument against regulating these high drug prices is that doing so will have slow research and development, but there is little evidence to link high drug prices and innovations (Emanuel, E. J., 2019). A team analysing fifteen drug companies that manufactured the 20 top-selling drugs globally found that the premiums received by these companies were substantially more than what they spent on research and development. After spending $80 billion a year on research and development, the companies made a profit of $40 billion from the top 20 drugs alone (Nancy L. Yu, Zachary Helms, Peter B. Bach, 2017). 

Fields, G (2013) examined big pharmaceutical companies for institutional corruption by comparing it to the corruption analysis of the American Congress. It was discovered that the pharmaceutical industry’s prioritisation of certain interests over others leads to consumers being disadvantaged, and concluded that it needs to concern itself with public interest due to its reliance on the trust of the public and its status as an institution that is looked to by the public for health issues. The views of certain insiders in large pharmaceutical companies seem to agree that the responsibility of ensuring access to medicine falls on the companies. FLAUM, S. (2016) presents that the pharmaceutical industry needs to begin self-policing in terms of the pricing of medicines and take on the responsibility of ensuring the affordability of essential medicines, despite the way these actions will put a limit on the revenue earned by them. He postulates that the public images of pharmaceutical companies have been suffering and taking social responsibility to ensure access to medicine will be the only sustainable method of doing business. 

Hogerzeil, H. V. (2013) similarly speaks of the social responsibility of the pharmaceutical industry to ensure access to essential medicines, such as in cases where medicines for severe illnesses do not yet exist due to lack of research & design on the part of the companies. There was a special focus on emerging economies with wide income gaps where the quality of medicines wildly differs or medicines are wholly unavailable in the region. An independent initiative, the Access to Medicine index, aims to encourage pharmaceutical companies to work towards ensuring access to medicines in less developed nations by exposing different companies’ methods and policies for improving access to medicine, and has been effective as many companies now devote almost 20% of research resources into addressing the needs of the poor. However, the end goal of the Access to Medicine index must be for the companies to treat improving access to medicine in developing countries as a sustainable way of doing business, rather than a donation for publicity’s sake. 

The current literature on the topic of the pharmaceutical industry and its pricing policies primarily discusses the impacts of this on different groups of people, and relegates the responsibility to the pharmaceutical industry to solve these issues of accessibility. Yet there is a significant gap in discussions on how the pharmaceutical industry can self-regulate or otherwise be regulated in order to put an end to unethical pricing strategies and improve accessibility to important pharmaceutical products. 

Thus we will in the next section delve into four proposed solutions and analyse them using the FIRST criteria.

Proposed Solutions to mitigate high pricing of pharmaceutical drugs

As it stands, solutions to the problem of high drug prices fall into two broad categories – solutions implemented by the government, and self-policing measures implemented by the pharmaceutical companies themselves. Each category has its associated benefits and drawbacks. While governmental policies are better regulated and can be implemented on a wider scale, they are often harder to approve and implement than self-regulatory policies, tend to impede drug research and development (Vernon & Abbott, 2005), and can often significantly delay drug launches (Cockburn, Lanjouw, and Schankerman, 2014). Self-regulating policies, on the other hand, benefit from being more easily implemented by individual companies, can be tailored to each company depending on factors such as state of development and type of product, and as a result are favoured by numerous studies, such as those mentioned in the previous section. However, it is difficult to enforce these policies as ultimately it is left up to the companies to self-regulate. This is unreliable, as with the example of Mallinckrodt Pharmaceuticals, which, despite pledging to ‘Create the best possible healthcare at the lowest possible cost for the greatest number of people’, implemented a 2.5-fold price increase of the pain-relieving drug Ofirmev, after acquiring its original producer (Rockoff & Silverman, 2015). Thus, in consideration of the benefits and costs of each category, the four proposed solutions below will also span across both categories of solutions. 

Proposed solution 1: Government negotiation with companies

The first proposed solution we explored was the idea to let the federal government negotiate with drug companies for lower prices (Emanuel, E. J., 2015). Many believe that in order to combat the drastically rising annual prices of drugs, the government needs to intervene, as well as set a benchmark for drug spending. 92% of the American public believe in the idea of allowing their government to carry out these negotiations (Munnell, A. H., 2019). 

However, while the idea seems fairly straightforward, the implementation is not as feasible due to the complications involved when governments intervene in medical care markets. Interfering with negotiations might also affect the market-oriented approach of the pharmaceutical companies. This solution is currently still being debated in the United States, and has its drawbacks due to the limitations on how far their government can truly be involved in the negotiations, which is counter-productive to the solution. The United States congress has also deemed that Secretary of the Department of Health and Human Services (HHS) could not even directly be a part of these negotiations. The existence of middlemen (PBMs) during these price negotiations dampens the chances of getting the lowest prices as well (Wasik, J., 2018). This solution does not tackle the root cause of the problem, failing to address the emphasis on profit held by the pharmaceutical companies, as it focuses on treating the symptoms of the problem instead. It only addresses the high prices themselves, rather than the system that has allowed these prices to soar drastically, and thus does not address the root cause. 

Due to the drawbacks of this solution, it has been predicted that letting the government negotiate drug prices will save an inconsequential amount for the country(CRFB, 2016). The inflexibility of this solution creates a problem that the Secretary has very little negotiation leverage, and has no right to enforce any regulation instead of negotiation.

Proposed solution 2: Implement regulation legislature

Another proposal includes the full enforcement of rules and legislature that are meant to regulate the prices of the products sold by the pharmaceutical industry (Morton, F. S., Boller, L., Morton, F. S., & Boller, L, 2017). Governments would have to begin applying rules to allow for the quick and easy entry of generic products into the market, and providing incentives for consumers to choose treatments that offer more discounts. The enforcement of these rules and legislature would eventually result in lower prices for the consumer. 

The most recent development in legislation regarding drug prices is a bill in Maryland, USA which has been proposed in January of 2019. It would regulate the cost of prescription drugs and implement limits on how much state and local governments pay for the medicine (Collins, D, 2019). This proposed bill would create a five-member “drug affordability board” that would review the cost of brand-name drugs entering the market or brand-name drugs that increase in price by more than $3000 a year. The bill is touted to be a “model” for the rest of the country as well (Demarco, 2019). This shows that implementing rules and implementation is a viable solution and one that is being considered by policymakers. However, this proposed solution could have the unintended consequence of disincentivizing companies from providing drugs to countries or states that implement the policies, thus endangering patients’ access to important prescription drugs (Facher, L, 2019). This solution could have positive effects in the long run as the board will review drug prices every year and constantly be able to regulate prices to allow for affordability.

However, it is difficult to assess the feasibility of measures such as these as they are impeded from being implemented due to the actions of pharmaceutical manufacturers (Whistleblower Info, 2019). Moreover, pharmaceutical companies are able to bypass legislation by influencing policies that are meant to regulate them. In 2009 alone, pharmaceutical companies spent US$271 billion on lobbying (Fields, G. 2013). In a report by Citizens for Responsibility and Ethics in Washington (CREW), it was found that 153 pharmaceutical companies in 2017 lobbied on some variation of the term “drug pricing” (CREW, 2017.) These statistics reveal the amount of power and influence that pharmaceutical companies have over law-making processes and show the extreme difficulty of implementing any solutions to combat or regulate high drug prices. 

Figure 1: A graph displaying the number of companies lobbying on variations of the term “drug pricing” from 2013 – 2017

Proposed solution 3: Self-regulation

The third proposed solution is that of self regulation. Companies like Allergan Teva and Insys adhere to a self-imposed cap of a maximum of 10% price increase every year. Allergen describes this as a social contract, and emphasizes the company’s understanding that medicines have to be accessible in terms of price. The company has also pledged not to hike prices needlessly, especially for drugs that are approaching the end of patent protection (Allergan, 2017). However, some have pointed out that a 10% cap, while more restrained than excessive price hikes of the past, is not much of an improvement. Price increases are 10 times the Consumer Price Index (CPI), which can mean billions of dollars for expensive or best selling drugs (Lo, 2018). In addition, a drug can double in price in seven years with 10% annual price increases. While price increase caps might seem sustainable for the first few years, its impact is cumulative. This will be especially detrimental to patients who require medicine for chronic illnesses, who have no choice but to continue using these drugs despite price hikes. However, following this self-imposed cap of price increase percentages, other companies have also followed Allergan’s example, showing not only the success of such self-policing in one company, but also the possible impact that this can have on other companies in the industry. While these companies continue to increase their prices, many stick to Allergan’s pledge, with most keeping these increases below 10%. Price increases has decreased from about 20% a year in 2013 – 2015, to 8.7% in 2017 and 2018. Of course, not all companies have subscribed to this self-regulated price cap, which draws out the inability of self-policing to effectively regulate the entire industry. Hence, its effectiveness is only limited to the first few years of its implementation, and to a few companies in the industry.

Proposed Solution 4: Enforce greater price transparency 

The fourth proposed solution proposes the enforcement of greater price transparency of pharmaceutical drugs. Currently, drug prices are often negotiated by various different parties, such as employers and insurers, but rarely the true end-user, the consumers of these drugs themselves. However, there are drawbacks to this; for example, insurance companies are often unable to engage in heavy price negotiations as they often lead to supply shortages and fewer new products (Krugman, 2014). As a result, prices are often allowed to inflate due to a lack of negotiatory power on the part of these ‘middlemen’ for fear of unintended side effects, a lack of competition in the pharmaceutical market, and a low price elasticity of demand of drugs across all users, including general population, the elderly, and low-income individuals (Gemmill, 2008). 

However, one root cause of high drug prices, a lack of competition in the pharmaceutical industry due to insufficient information about drug prices, can be solved by implementing governmental policies which enforce greater price transparency of drugs to end-users. The intended outcome of such a policy is that with greater knowledge of drug prices, consumers would be better positioned and empowered to choose their treatment in consideration of prices and other factors, instead of having treatments chosen for them by these third parties, hence driving up competition in the drug market, lowering prices, and increasing consumer welfare. This has been proven to work – with medical procedures that rely on out-of-pocket payment from patients, such as head-to-toe CT and MRI scans, and LASIK surgery, prices have seen a dramatic decrease as in such cases patients’ are incentivised to consider the prices of such procedures when choosing between practitioners. 

Unfortunately, this solution only remains effective if consumers pay for their treatments out-of-pocket, and are hence are incentivised to save money; and in the realm of pharmaceutical drugs, especially when in the context of expensive and extended treatments involving life-saving drugs, it is highly infeasible to bypass insurance altogether and expect patients to self-fund their treatments, especially when it comes to low-income consumers, even with reduced drug prices. In this way, the feasibility of this solution is questionable. However, considering currently implemented policies such as cost sharing or user charges, which requires consumers to pay for a portion of the treatment at the point of use, and which reduces over-consumption of drugs, thereby improving the health of consumers and reducing expenditure (Gemmill, 2008), consumers are already arguably incentivised to find cheaper alternatives for treatment. Thus, even without completely doing away with insurers and other third parties paying for treatment on behalf of consumers, patients will remain incentivised to save money when selecting treatment, though arguably less so than if they paid wholly out-of-pocket; thus, this proposed solution can be seen as rather feasible, as there is a middleground which, though less effective, still prioritises patient welfare in keeping insurance in the equation.

Still, there are various factors which might impede the implementation of such a policy. For one, pharmaceutical middlemen seem invested in deliberately providing misleading drug prices and distorting them through tools such as copays and purposefully withholding information from pharmacists, thus preventing them from passing pricing information onto consumers (NCPA, 2016). As such, it might be challenging to implement this policy, considering the high likelihood of resistance from the pharmaceutical industry. Additionally, insufficient research has been done to show the possible side effects of such a policy, and it is uncertain whether these lowered prices would lead to supply shortages, less research and development, or delayed launches, of new drugs due to lowered profits.

Thus, greater price transparency of drugs is positioned to effectively tackle one root cause of raised drug prices, and seems highly feasible, but might face challenges in implementation, and there is a possibility of undesirable side effects. 

Conclusion

After the analysis of the four chosen solutions, we will now extract the most applicable parts of each of the four solutions. The first solution, calling for the government to negotiate drug prices with pharmaceutical companies, is a highly sought after and population-approved solution that will allow the government to have a direct hand in the regulation of drug prices. The second solution proposes stronger implementation of legislation meant to regulate drug pricing, and most importantly gives the example of the five-person “drug affordability” board to review the pricing of drugs. The third solution concerns self-regulation which hinges on the companies’ decision to make a commitment to the public. Finally, the last solution is about price transparency which does not require many infrastructural changes to be effective, but will face a lot of resistance from the pharmaceutical industry. 

Overall, we believe the most viable solutions of the four we have chosen are the second and fourth solutions. We can combine the two solutions to create a two-pronged solution. The government can put pressure on pharmaceutical companies to have greater price transparency, thus enabling more competition in the pharmaceutical market and allowing consumers and patients to make better monetary decisions and choose the most affordable packages of prescription medicine. At the same time, the government can convene a board to review the price of brand-name and generic drugs, when they are released and when they experience a price hike. These solutions will work in tandem to keep drug prices affordable and allow people to make the best financial decisions in terms of purchasing the drugs. 

However, the proposed solutions lack in some areas: A board of only five people to regulate the pharmaceutical industry would be too narrow to ensure a fair representation of all major stakeholders in this pricing issue, such as the government, the consumers, and the pharmaceutical companies themselves. To bridge this gap, we propose expanding the membership of this board to include representatives from various bodies, to ensure that the power of regulating the pharmaceutical industry does not remain concentrated in the hands of a small group of people. This would also ensure a more balanced representation of the needs from all relevant bodies, and can facilitate a consensus among these parties.

Another problem within our chosen solutions is the difficulty of implementation for the price transparency, as pharmaceutical companies would pose a lot of resistance to this measure. Moreover, the solution assumes that customers operate solely on their own individual terms, thus being able to use this provided transparency to their advantage and lower medical costs. We propose that the solution have more coverage on the many nuances of medical fees, not only providing information and transparency but tweaking methods of payment and insurance so customers have more agency over the schemes and drugs they wish to use. Also, the solution can come hand in hand with measures to determine that no falsehoods about prices and costs are being passed to the pharmacists themselves, in order to ensure that customers are well-informed enough to make better decisions. 

Recommendations

Our research has highlighted the impediments and problems brought about by the over-extensive power and influence that pharmaceutical companies exert on the government and legislation. We hope that future papers on this topic will also seek to explore the ties that these big pharmaceutical companies have with the government, particularly through policies, and the working relationship between these two bodies. 

References

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  2. Hogerzeil, H. V. (2013). Big Pharma and social responsibility–the Access to Medicine Index. New England Journal of Medicine, 369(10), 896–899. https://doi.org/10.1056/NEJMp1303723
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  17. Wasik, J. (2018, August 10). Why Medicare Can’t Get The Lowest Drug Prices. Retrieved from https://www.forbes.com/sites/johnwasik/2018/08/10/why-medicare-cant-get-the-lowest-drug-prices/#414f59a1302b
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Lew Kylin, Su Thet Hnin San, Faith Wong Ying Wen, Su Thet Htar San (18-U1)

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