Rights and Health Care topics: Overpriced Drugs

In the past several years, there have been a number of stories about severe price gouging for a variety of drugs. A link to one is here.

For example, the drug company Questcor bought the rights to Acthar Gel (used to treat one form of childhood epilepsy) and increased the price from $40 to $23,000.

Another company (Valeant) bought the rights to a heart drug (raising it from $440 to $2,700), a diabetes drug (raised from $800 to more than $10,000), and a diuretic (raised from $470 to $4,600).

Other companies have raised other drug prices by similar totally unethical levels.

These reports have gotten me thinking a lot about what goes in to the price we pay for our medication. As I’ve considered this, it seems to me that there are really two factors that go into the price of a drug: the cost to develop it, and the desire for profit.

Cost of developing a drug

It is no secret that the cost of developing a drug is incredibly expensive. I will come right out and say that I understand that they are costly to develop, and I have no desire to say that the companies involved in this research should not make a profit on their work. However, there does need to be some reasonable limit imposed on the profit structure for these drugs. Those limits should preferably be self-imposed; government imposed limits are far less desirable.

Because of the cost of developing drugs, it is vital, in order for the drug companies to continue to exist, that they make a profit on those drugs. Of course, this is the purpose of patents.

When a new drug is developed and ready to go to market, the company can apply for patent protection for 20 years (there are a few ways to extend that protection by relatively small amounts). Once the patent is expired, then other companies are allowed to produce generic versions of the drugs, typically at a much lower cost since the amount of development required is fairly minimal.

As a general rule, I consider the patent system a fairly reliable system for protecting the company’s need to make a profit on the drugs. However, I find it a little less good at protecting the rights of the people for whom the drug is a necessary part of their lives.

I would like to see a few changes made.

First, as part of the application for patent protection, I would like to see a requirement to disclose an accurate cost of development. There is a lot of discussion about what this would entail. It would of course include all direct costs to the company for the development of this drug, but it would also need to include other costs as well. As an example, drug companies often give research grants (to universities or other research institutions) to conduct research in areas that may, or may not, lead to future drugs. Also, drug companies spend money developing drugs that, for one reason or another, turn out to be ineffective and those development costs do not lead to a drug that can be sold. One thing that would specifically have to be excluded from the cost would be any government funding. For example, a great deal of the early research is funded through grants from government agencies such as the NIH (National Institute of Health) or NSF (National Science Foundation).

To be honest, I think that the primary benefit to this change would be in terms of transparency. However, transparency is a HUGE benefit, so the added complexity of the patent application would be more than made up for by the increased public information about the drug company practices.

Second, based on a reasonable (a term that will need to be defined) return on investment which takes into account the expected sales and the cost of the drug, I would like to have a cap placed on the cost of the drugs. In order to receive patent protection, the drug would have to be available at a cost that would not exceed the cap. This would require some flexibility. I would suggest that a company could exceed that cap for a period of time (6 months?) during which time the company could request that the cap be raised for whatever reason. The appropriate regulatory agency could also have some flexibility in the cap. For example, it would be acceptable for the cap to be higher for a ‘lifestyle’ type drug (such as Viagra) than for a life-saving drug (such as a cancer treatment).

Third, there needs to be more control on the ability to get extensions to the patent. Currently, if the company that produces the drug makes changes to the drug (and these changes might be fairly simple, such as a change in dosage or a slightly modified way to administer the drug), the company can then apply for additional patents which extend the duration of the patent protection.

These extensions block competition from producing generic equivalents, or doing research of their own on these drugs. This is a very complicated situation. We want drug companies to continue to invest in their drugs to improve them in order to increase their effectiveness and decrease harmful side-effects. On the other hand, competition is great for keeping the price down. And, the research to increase effectiveness might be done just as effectively by a competitor.

I would like to see these extension patents granted only in a situation where the effectiveness of the drug is significantly improved. Also, I would like to see the limitation removed that makes it illegal for a competitor to do research on the drug once the initial patent term has expired. If a company receives a patent for a drug, and around the 20 year mark, they receive a patent extension due to some modification that improves the effectiveness of the drug, I would still like to see competitor companies able to investigate other means of improving the drug (unrelated to the advances made by the original company).

Fourth, once the patent has expired, currently, other companies can then apply to the FDA for the right to develop a generic version of the drug. I would like to have that requirement removed (or at least, highly limited). If a company has the means to develop a generic version of a drug, they should be able to do so. Period. The government should not, as a rule, have the ability to stop that. Of course, EVERY drug (generic or otherwise) will need to receive FDA approval in order to be sold to ensure that it meets all the necessary health and safety requirements. Also, a generic drug should be required to be at the same level of effectiveness as the drug it is replacing. But, given these limitations, there should be no other barrier to companies producing safe and effective generic equivalents.

Desired profit

The second factor that determines the cost of a drug is the level of profit that the company expects to receive. Here, we will need to consider two types of drugs.

One class of drugs is those that are extremely widely used. I expect that, for this class of drugs, the changes I have suggested above pretty much keep the cost in check. During the patent protected portion of it’s life, a price caps will keep the cost at a reasonable level. Once the patent protection has expired, there should be a number of generic competitors available that will naturally regulate the cost.

The real problem comes with the class of drugs which are NOT widely used, but which are critical to some small population of people. The examples from the web site referenced above tend to fall into this category. These are drugs which are out of patent protection, but where, due to the limited demand for the drug, no generic alternative has been developed.

It is this situation that allows a company (such as Questcor, Valeant, or Turing Pharmaceuticals) to purchase the rights to distribute a drug and then raise the cost by a factor of 10 (or more). The users of those drugs still need the drug, and there is no generic equivalent to turn to.

Sure, another company might then decide to develop a generic, but due to the limited demand, and the costs of developing that drug, the generic would still be significantly more expensive than the original cost of a drug.

And so, as much as I dislike adding power to a government agency, there needs to be an ability to add checks to the power of the drug companies.

One possibility would be for the FDA to be able to apply a price cap as a prerequisite to receiving FDA approval. I’m not a huge fan of that, as it adds a significant power (and one totally unrelated to the true purpose of that agency – to ensure that the drugs meet all needed health and safety requirements) to the FDA.

Another possibility would be that there should be an ability to purchase drugs from other countries. A drug available in this country (at an unethical cost) might have an equivalent available in another country that has passed the requirements imposed by that country’s equivalent of the FDA that could be purchased at a reasonable cost.

This definitely makes it more complicated for a person to purchase drugs. A drug (even if it has supposedly passed stringed health and safety requirements) might be safer when purchased from some countries than others. Still, having the potential competition that opening up the supply to world-wide producers (instead of limiting it only to US producers) could have a huge impact on the cost that a drug company could charge. A US company might be able to increase the cost by 25% without driving away it’s customers, but increasing it by a factor of 10 (or even more as some of cases reported in the quoted article) would be guaranteed to drive the population elsewhere.

Another possible solution would be to have the FDA automatically fund one generic equivalent for every drug which does not have one within a year of leaving patent protection. That would guarantee at least one generic drug available.

I’m not sure what the best solution is, but I’ve listed a few. I’m sure of two things. 1) We can’t allow drug companies freedom to dictate any level of profit that they want and 2) we can fix this problem.

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