A plan to make drugs affordable for all

Insurance should protect against misfortune, not place additional burdens on the sick. Here's a better way to pay for drugs, protect patients, and promote true innovation.

No health care issue causes more consternation for average Americans than the high cost of prescription drugs. The U.S. pays the highest prices in the world for medicines and forces its citizens to pay the most out-of-pocket. This places an inhumane and intolerable financial burden on the sick, nearly a third of whom fail to fill prescriptions to save money, according to a recent survey.

Sub-optimal utilization leads to sub-optimal outcomes. No patient benefits from a great new drug if they can’t afford to pay for it. The clinical trial results presented by the drug industry to the Food and Drug Administration for new drug approvals are meaningless if patients who don’t fill prescriptions or take half-doses to postpone refills.

The new weight-loss drugs drawing praise in the medical literature and media are a perfect example of drugs that will take decades to reach their full potential because of exorbitant prices. Wegovy, Zepbound and Saxenda — the three specifically approved for weight loss — have list prices above $10,000 a year. They must be taken permanently or the weight snaps back.

With 40% of the U.S. adult population considered obese, that translates into 100 million potential new customers for these drugs. It is not financially feasible for health care payers (employers, taxpayers and individuals) to collectively spend the $1 trillion it would take at current prices to make these drugs universally available to those who would benefit.

The enormity of that number signals that these new weight-loss drugs are ridiculously overpriced. A 2022 Institute for Clinical and Economic Review (ICER) analysis found the drugs’ prices would need to be cut nearly in half before their cost could be justified by their medical benefit.

That estimate is probably overly generous. The clinical trials looked at the drugs’ impact on reducing weight, blood sugar and blood pressure, which are predictors (surrogate markers to use the FDA’s jargon) of greater risk for cancer, diabetes and heart disease. What impact the weight-loss drugs will eventually have on reducing the incidence of these diseases (and thereby generating cost savings for the health care system) won’t be known for decades, and may never be known since the pharmaceutical industry has no incentive to accurately measure the long-term outcomes from the use of its products.

The cost-benefit analyses of numerous other drugs are similarly skewed. The latest anticancer drugs, for instance, cost over $250,000 a year. This includes treatments that extend life by only a few months. A decade ago, new anticancer drugs came to market at less than half that price.

Those prices are indefensible. A study that appeared last month in the Journal of Cancer Policy compared the prices and the health outcomes of 97 anticancer drugs approved by the FDA between 2012 and 2021. It found no relationship between the two. “Our study reveals a misalignment between drug pricing and the clinical benefits they offer,” the study authors concluded. In other words, drug companies raise prices on patented drugs because their patent monopolies allow them to pursue a “whatever the market will bear” pricing strategy. There is absolutely no correlation between price increases and effectiveness.

The Biden administration took an initial step toward curbing industry pricing power and to protect seniors on Medicare from exorbitant out-of-pocket expenses. The 2022 Inflation Control Act gave the Center for Medicare and Medicaid Services the right to negotiate some drug prices. It also set a $2,000 annual out-of-pocket cap on all Medicare Part D drug plans that have co-payments and deductibles. The cap, which does not cover monthly premiums, went into effect on January 1st. It will lower costs for an estimated 3.2 million seniors this year.

Despite the cap, seniors with cancer, diabetes and other high-cost diseases may still find themselves fighting their insurers, who continue to be responsible for most drug costs (patients pay less than 15% of the total bill in premiums and co-pays). Insurers are increasingly turning to “utilization management” tools like prior authorization and step therapy, where the insured must first try an older, usually generic therapy before changing to the latest medication. The goal is to steer patients away from pricier new drugs.

“While utilization management is used to lower plan spending and premiums for beneficiaries, it can also make it more difficult for patients to access the prescriptions they need, especially high-cost oncology drugs,” a Cancer Action Network of the American Cancer Society issue brief noted last year.

The political landscape

Donald Trump had little to say about drug prices while campaigning for a second term. He promised to lower drug prices during his initial run for the White House. But he then appointed a former drug industry executive to run the Health and Human Services Department. It did nothing for almost four years.

Only after he lost the 2020 election did his lame duck administration propose a rule that would have instituted mandatory government price-setting. Under that proposal, prices would have been based on the lowest prices paid overseas (known as reference pricing).

At the time, many observers, including me, noted its significance and called for the new Biden administration to pursue the reference pricing strategy. Western European governments routinely set a maximum price they will pay for a drug based on its estimated medical value, which is well below the prices paid in the U.S.

It never happened. The drug industry successfully used the courts to overturn the rule on procedural grounds. The Biden administration’s leaders at HHS and CMS opted instead for price negotiations on a limited number of high-cost drugs.

It remains to be seen what direction the second Trump administration will take. Voices on the extreme right (like Project 2025 and the Republicans controlling Congress) want to remove all drug price controls, including the government’s negotiating authority, the $2,000 annual cap on out-of-pocket expenses and the $35 monthly cap on insulin costs.

Even before its rightward turn, the GOP (and many Democrats) faithfully parroted the pharmaceutical industry’s argument that any form of price controls will choke off innovation. The Congressional Budget Office thought otherwise. Its analysis of the Biden initiative said it would reduce new drug approvals by a grand total of two (2) over the next decade. The FDA approves anywhere from 25 to 40 new drugs a year.

While Trump’s nominees to head HHS and CMS have occasionally criticize high drug prices, it’s hard to imagine either Robert F. Kennedy Jr. or Dr. Mehmet Oz crossing Republican leaders on the Hill, much less administratively resuscitating anything as far-reaching as reference pricing.

It’s time to think big

The field remains wide open for advancing common sense proposals that would provide substantial financial and health benefits for every person who takes prescription drugs. So far, I’m only seeing half measures.

The original Biden plan called for extending the $2,000 annual cap to all private insurance plans, not just Medicare. While useful, a universal cap would do little by itself to bring down prices since premiums are exempt from the cap. Absent other actions, a universal cap would trigger higher premiums in both public and private drug plans. Insurers will simply raise premiums to recover expenses previously borne by patients.

Vanderbilt University researcher Stacie B. Dusetzina recently highlighted this pitfall in the now operational Medicare cap. Writing in JAMA Internal Medicine, she warned many seniors in stand-alone Part D drug plans could see their monthly premiums rise by more than the 6% premium cap included in the Biden bill, which is an average for all beneficiaries. This would incentivize even more seniors to join Medicare Advantage plans, which use the extra payments they receive from the federal government (for more on their upcoding scam, see this GoozNews post) to offer low- and no-premium drug plans. The average monthly premium offered in MA plans is $10 compared to $40 in stand-alone Part D plans, Dusetzina wrote.

Her solution was creation of a government-run public option to compete with the insurers’ drug plans. “A public option could lower profits for private plans, pharmacy benefits managers, and drug manufacturers in favor of lower costs for beneficiaries and taxpayers,” she wrote. “A public option could also address broader concerns about the lack of transparency in drug pricing and potential overpayments to pharmacy benefits managers in the program.”

Why stop with a public plan that only competes with the insurance industry-run Part D drug plans in traditional Medicare? Why not create a public drug plan that covers everyone: people on Medicare, Medicaid, the Veterans Administration as well as people on private employer-based and exchange-based plans? In other words, the government could create a universal pharmacy benefit manager that pays generic prices for all drugs and provides medicine to everyone without co-pays or deductibles.

Call it Fairscript (FairRx). FairRx could be funded by a per capita surcharge on every major medical insurance plan (hospital and physician coverage), whether public or private. Both government and private plans would pay a per capita price, the same for every member of any plan without regard to utilization.

FairRx is not Medicare for All (M4A). It is only 10% to 15% of M4A (the range of estimates for retail drug share of total health care costs). M4A, which polls positively as a stand-alone question, has always foundered politically on concerns stoked by the insurance industry that people will “lose what they have.” Even in liberal states, no one has solved the problem of how to pay for the employer share of private health insurance. Despite growing anger about soaring out-of-pocket health care costs, most people not on Medicare or Medicaid still want their employers to pick up most of their medical expenses.

The public has no such loyalty to drug plans, which are routinely bounced between pharmacy benefit managers. People would jump at the chance to enroll in a drug plan that had either a firm annual cap on out-of-pocket spending on premiums and co-pays or no co-pays at all. One would think most employers would also embrace FairRx since the flat-fee surcharge on every health insurance plan would evenly spread costs disproportionately borne by companies with the sickest employees.

Even if the government-run plan did nothing to lower drug prices beyond the negotiating authority already included in the Inflation Control Act, it would become a tremendous boon to public health and the economy. No longer would the sickest patients with the most costly prescriptions face huge out-of-pocket costs, which leads to sub-optimal utilization. It would reduce an unfair competitive advantage that highly profitable businesses with younger, healthier workers (think Silicon Valley) have over businesses with older, sicker workers (think traditional manufacturing).

But wouldn’t drug manufacturers continue their price gouging tactics for medicines that are still patent-protected? Brand-name drugs account for just 10% of prescriptions, but generate an estimated 82% of pharmaceutical industry revenue while generic and biosimilar medicines account for fully 90% of all prescriptions, yet generate just 18% of total drug spending. Therein lies the key to making the universal FairRx drug plan affordable.

Trust bust the drug industry; generics for all

All drugs should be generic, even the ones that are new to market. Doctors should be able to prescribe what is best for their patients without regard to cost. Their decisions should be based on medical science, not television advertising, gift-giving by drug industry sales representatives to prescribing practitioners, or their patients’ ability to pay.

In 2020, I authored an article for Democracy: A Journal of Ideas that outlined a plan that would provide no-cost insulin to every diabetic. It called for creating a national purchasing pool for all insurance plans (a one-drug FairRx), which could use its monopsonist (single-buyer) purchasing power to obtain lower-priced insulin. It would make the drug available to prescription-filling pharmacies at no cost. As I noted at the time:

The pool authority would still have to buy the insulin, of course. Nothing is free. But by eliminating markups in the distribution chain and lowering the price it paid for insulin, the pool authority would be able to substantially lower the total payments patients and payers shell out.

In recent years, a number of companies have stepped forward to offer partial strategies to provide access to low-cost generics for more patients. CivicaRx, a non-profit consortium that includes insurers, hospital systems and a few charities, focuses on providing low-cost generic insulin and drugs in shortage to hospitals. It recently opened a manufacturing facility in Petersburg, VA.

In 2022, Dallas Maverick owner Mark Cuban launched Cost Plus Drug Company, which provides consumers with a mail-order source for generics. Cost Plus purchases generics directly from manufacturers to eliminate the PBM middleman. It charges patients or their insurers the cost of the drug plus a 15% markup, a $5 pharmacy service fee, and a $5 shipping fee.

Over the same period, a bipartisan group of legislators pursuing low-cost drug strategies has focused on ending the patent thickets that delay market entry of generic drugs. Drug companies create patent thickets by filing dozens of insignificant “follow-on” patents to extend the original patent life of a drug and burden potential generic makers with expensive and time-consuming litigation before they can bring a generic to market. A bill introduced last year by Senators Peter Welch (D-VT), Mike Braun (R-IN) and Amy Klobuchar (D-MN) would prevent patent holders from suing generic manufacturers based on such patent thickets.

None of these efforts go far enough, however. Making all drugs generic would require breaking up the pharmaceutical industry, which is currently vertically integrated up to the point of sale to distributors and pharmacies.

Given the industry’s use of patent monopolies and patent thickets to extract exorbitant profits, the Justice Department’s antitrust division could file suit to separate the firms’ drug manufacturing divisions, which average just 15% to 25% of total costs, from their research and development arms (about 18% of costs) and marketing-administrative arms (about 40% of costs). Pharmaceutical industry profits average about 20% of total revenue, which is among the highest in U.S. industry.

After the break-up, the newly independent manufacturing arms would become part of the industry sub-sector that produces generic and biosimilar drugs as well as small batches of experimental drugs needed for pre-approval clinical trials. The R&D-oriented drug industry would be required to license all new and existing on-patent drugs to any generic manufacturer that wants to produce them.

FairRx, in turn, would buy drugs from generic manufacturers on a cost-plus basis, similar to the way the Pentagon buys military equipment. (In the military’s case, the government also pays for the R&D, which generates the world’s most technologically sophisticated war weapons.) Voila. Generic drugs for all.

Wouldn’t this immediately dry up drug industry investment in R&D? Wouldn’t requiring drug companies to license their patented medicines to any and all generic firms bring private sector investment in drug development R&D to a crashing halt?

A better way to fund innovation

The solution to that problem lies in creating a separate fund to pay innovators and their innovations, financed by a second per-beneficiary flat fee on every health insurance plan. The fee would be adjusted each year based on how much health care value new and still-on-patent medications were bringing to patients.

The drug firms would still file for and retain rights to the original patent or patents on their latest drugs. The innovation fund would pay them a licensing fee for as long as those patents were valid. The size of the fee would be based on the assessed increased medical value of the new or improved drugs.

The science behind assessing medical and economic value of pharmaceutical innovation has made significant advances in recent decades. The National Institute for Health and Clinical Effectiveness in the United Kingdom (NICE) pioneered in using cost-effectiveness research to recommend ceilings on what the British National Health Service should pay for drugs. Studies by the Boston-based ICER, whose analysis of overpriced weight-loss drugs I cited earlier, are already being used by drug plans and PBMs when negotiating prices with drug firms.

Both NICE and ICER quantify the medical benefits shown during a newly-approved drug’s clinical trials. They then recommend a maximum reasonable price based on the added “quality-adjusted life years” (QALYs) from use of the drug. A 2020 study comparing prices set by both organizations on cancer drugs found ICER used per-QALY values of $100,000 to $150,000 for its ceiling on value. While this was well below the prices drug companies were charging in the U.S., it was still three times higher than NICE.

ICER uses an open process for making its determinations. All stakeholders, including drug developers, can comment on its draft reports and present their findings. If the innovation fund used ICER or adopted an ICER-like process for its determinations, it would still come up with significant savings over current drug prices.

Since the new drugs would get more widespread usage almost immediately, the innovation fund could adjust its licensing fees up or down based on utilization and actual outcomes. FairRx would know who was taking each drug. If given access to patients’ overall records, the government-run PBM could study the real world outcomes from drug use and not rely solely on estimates generated from the ideal settings of a pre-approval clinical trials.

The creation of a national PBM willing and able to learn from real world patient outcomes would reverse the industry’s current R&D incentive structure. Drug companies’ R&D labs would be incentivized to focus on innovations that generated the most health improvement. They would see less benefit from developing new patents whose main purpose was extending the monopoly status of already existing drugs.

An innovation fund could establish extra rewards in areas lacking sufficient private investment, such as antibiotics for drug-resistant infections and rare diseases. It could also invest directly in government- or non-profit development projects.

Project Warp Speed, initiated during the first Trump administration’s last year to rapidly develop COVID-19 vaccines, is the most recent medical breakthrough substantially funded by publicly-funded researchers, a pattern I discussed in my 2004 book, “The $800 Million Pill.” The government could even establish a public research enterprise like the one recently proposed by a group of legal scholars that could research and develop new drugs in targeted areas and then license them at no cost to generic manufacturers.

To sum up: The medical benefits of moving to a national PBM with centralized payments for innovation through a R&D reward fund would be enormous. There would no longer be financial roadblocks to utilization, thus maximizing medical gain from every new drug’s approval. Step therapy and prior authorization would disappear.

Drug company R&D departments would be incentivized to pursue new drugs that provided the most medical gain, not minor variations of old drugs with little clinical significance. Although new drugs competing for market share in a class of drugs that already exists (me-too drugs) wouldn’t disappear, their uptake and therefore rewards would depend on coming up with legitimate improvements like reduced side effects or improved efficacy, not on advertising and drug company marketing tactics.

None of what I’ve proposed here stands a chance of passing Congress in the current political environment. But the recent election demonstrated that the American electorate is open to new ideas that offer simple solutions to complex problems.

Make all drugs generic. Publicly fund innovation. It even fits on a billboard, button or bumper sticker.