Editorial: Are pharmaceutical companies gouging taxpayers? Lawmakers need to find out

Having a child who suffers from Duchenne muscular dystrophy, a rare and fatal muscle-wasting disease that affects about 12,000 boys in the United States, is tragic enough. But watching drugmaker Marathon Pharmaceuticals seek a 70-fold increase in the price of a drug that can extend those patients’ lives — that’s beyond the pale. In fact, it’s outrageous enough that it should persuade California lawmakers finally to shine a light on how drug companies set their prices.

Illinois-based Marathon won the Food and Drug Administration’s approval this month to sell its version of deflazacort, an anti-inflammatory drug that can help (but not cure) patients suffering from Duchenne muscular dystrophy. The drug has been on the market in Canada and Europe for years, and some U.S. patients have been able to mail-order it for roughly the cost of a daily Starbucks drink — about $1,200 per year. Those imports will become unlawful now that Marathon has a seven-year monopoly on deflazacort sales in the U.S. The price tag for Marathon’s version, dubbed Emflaza: $89,000 per year.

Most patients won’t pay that much, thanks to coupons and other assistance Marathon will offer. The FDA approval may also result in more patients being able to get reimbursed for the drug by their insurer. But gouging patients has never been the pharmaceutical industry’s business model: Its goal has been to extract as much as possible from insurers and taxpayers. Hence the common practice of helping patients minimize their co-pays, while insurers continue to pay the bulk of the price. Medicaid, Medicare and other government healthcare programs also receive discounts, but still pay up to 83% of the average price for a drug.

A top Marathon executive told the Wall Street Journal that, after accounting for discounts and rebates, he expects to collect about $54,000 per year per patient. Meanwhile, the discounts for patients help boost demand for the drug, sustaining a price that market forces — as well as public outrage and political pressure — might otherwise beat down.

Patients may end up getting the drugs they need, but the costs get passed on to everyone who buys health insurance or pays income taxes. According to Sen. Ed Hernandez (D-West Covina), total U.S. spending on prescription drugs grew more than 22% from 2014 to 2015. The Kaiser Family Foundation estimates that such drugs accounted for more than 19% of the cost of employee health coverage. Officials in the administration of Gov. Jerry Brown estimate that about $11 billion in state tax dollars will be spent in the coming fiscal year just on pharmacy benefits for Medi-Cal enrollees.

Naturally, drugmakers insist that their products and prices are being unfairly singled out for criticism. Spending on prescription medicines makes up only about 10% of the country’s overall healthcare budget, as it has for years. Nevertheless, spending on drugs is growing faster than any other part of the healthcare industry. Manufacturers sought fewer double-digit increases in January than they have in recent years, yet half of the increases were 8.9% or greater — more than four times the rate of inflation.

Even some Republicans (most notably President Trump) agree that prescription drug prices have gotten out of hand. The question is what to do about it. The most direct approach would be to have the government cap drug prices, as governments do in many countries around the world. Manufacturers argue that artificial price caps can reduce the supply of vital medicines and discourage investment in new drugs, particularly for medical conditions that afflict a limited number of people. It’s hugely expensive to bring a new drug to the market, and manufacturers have to set prices high enough to recover the costs of the drugs that don’t get approved as well as the ones that do. But more than a third of the R&D dollars for new drugs comes from taxpayers and private donors, not from the industry itself. And much of the money spent by pharmaceutical companies these days is for marketing drugs, not developing them.

Still, it would be self-defeating if the government’s efforts to hold down drug costs resulted in fewer drugs being available. That’s why policymakers need a much clearer view into what it actually costs to keep the pipeline of new and innovative medicines open. To that end, a number of states have adopted or are considering transparency measures that would require pharmaceutical companies to reveal to state officials more about what they spend on materials, research, clinical trials and advertising. Hernandez pushed a transparency bill through the California Senate last year, only to have it die in the Assembly in the face of all-out opposition by pharmaceutical companies.

Undaunted, he introduced a preliminary version of a new transparency bill, SB 17, this month. Meanwhile, Marathon has put the introduction of Emflaza on hold as it deals with the backlash against its proposed pricing. The company argues that even though it didn’t discover or develop the drug, it still spent a considerable amount of money analyzing patient data and conducting new trials to win approval in the United States, which will make it more readily available here. But we shouldn’t have to simply accept Marathon’s word that it’s not price-gouging. And if lawmakers require more transparency, we won’t.

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