Think Obamacare Will Suffocate New Drug Development With Price Controls? Think Again

Xconomy National — 

There were a million arguments against healthcare reform a year ago. One was that if President Obama got his way and expanded health insurance to millions of uninsured people, and the government made a real effort to study the comparative effectiveness of drugs at high and low prices, it was really the first step toward government-imposed price controls on new prescription drugs.

Once you have government price controls, opponents argued, drugmakers will lose the windfall profits the marketplace offers today to companies that take the substantial risk to develop innovative new drugs. The U.S., in turn, would lose its competitive edge as the center of innovative pharmaceutical R&D.

Guess what happened? One year after Obama signed healthcare reform into law, drugmakers are still in the midst of a golden age. Drugmakers still command ever-higher prices for innovative new medicines. And they will almost surely continue to enjoy this kind of pricing power in the U.S. at least until the end of this decade.

The latest bit of evidence arrived last week in a report from the Government Accountability Office (GAO). The report said that brand-name drug prices climbed by an annual average of 8.3 percent from 2006 through the first quarter of 2010, compared with a 3.8 percent annual uptick in the consumer price index for overall medical goods and services. (When generics were factored in, the overall amount of spending on the 100 most commonly used drugs was a much more modest 2.6 percent annual increase, according to the GAO.)

Still, that’s a big rate of price increases for new brand-name drugs. Yet despite the evidence, plenty of people like to argue that we are starting to see a new era of “stealth” price controls that are part of healthcare reform.

When the FDA proposed the revocation of Genentech’s approval of bevacizumab (Avastin) for breast cancer in December, opponents of healthcare reform surmised the agency was actually cracking down on the drug because of its price—which isn’t the FDA’s job. The same point—about nameless, unaccountable bureaucrats exercising some hidden policy on behalf of price controls—was made in August when the FDA delayed Genentech’s application to market a supercharged version of Herceptin which is sure to have a supercharged price. And plenty of observers—me included—sensed that a hidden agenda against high-priced drugs was really driving Medicare’s decision to force Dendreon to publicly explain the safety and effectiveness of its new prostate cancer drug last November.

Whatever the true motivations are—and there are plenty of other reasons why government agencies might have made those decisions—I haven’t seen any compelling evidence that says … Next Page »

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9 responses to “Think Obamacare Will Suffocate New Drug Development With Price Controls? Think Again”

  1. Dr. R. K. says:

    Pundits are constantly getting this drug pricing thing wrong. When companies sell products for ~$100,000 dollars it’s not because they just want to rake in huge profits because even at these prices it’s still questionable whether companies like Seattle Genetics will even be profitable.

    These are really complex drugs. They are engineered antibodies chemically conjugated with really complex toxins. Each of these alone would be hard to do and now you combine them you wind up with a lot of complexity.

    If you don’t want the high prices. You won’t be getting the life saving meds.

  2. R.K.—I know these are complex drugs, and they cost quite a bit to manufacture. I wasn’t trying to make a point here about whether the high prices are excessive or not. My point here was that Obamacare didn’t take away the pricing power of drugmakers, and this situation will probably remain in place for many more years to come.

  3. Tom RankenTom Ranken says:


    I will bet you lunch that you have misanalyzed this. Increases in payments for brand name drugs is not equivalant to drug price inflation. The majority of the increases in payments for these products are introductions of new products that weren’t available in the past plus changes in utilization. Drug price inflation is a different, but related, issue.

  4. P.R. says:

    I believe that Obamacare is being implemented in phases over the next several years, with those phases most likely to have the strongest impact on drug coverage/reimbursements (and by extension, pricing) yet to be implemented. I will be very interested to see an update of this article 4 years from now, once we start seeing the full provisiions of the law having been implemented.

  5. Siraa says:

    As they say in the investment business: past performance is not an indicator of future returns.

    LT, just because these policy changes haven’t yet effected prices, doesn’t mean that they won’t. As P.R. noted, most of the changes are implemented after 2012.

    Sorry, but this is a fatal flaw in your argument LT, and therefore I don’t think that the article merits much consideration.

  6. John says:
    As usual, analysts got it wrong again w/ pricing! What’s new?

    Pre FDA approval, DNDN never announced a price for Provenge. They always responded that “it would be priced in accordance w/ similar drugs” and they always provided a range of $50-$100K.
    Dr. Gold has performed flawlessly, but I do fault him for not managing market & public expectations by providing a higher price range (ie: $80K – $120K) during all the healthcare cc in 2009 and 2010 and other presentations he has performed leading up to FDA approval day.

    It seems the street ( has consensus analysts forecasting $363M total for 2011. Dr. Gold has projected $350M-$400M.

    We don’t know who or what analysts make up this consensus average and we don’t know if this consensus will change during the year as more analysts provide their guidance on Provenge sales.
    Here is a list of analysts/boutiques/banks that follow DNDN:
    What we also don’t know is which of these analysts that follow DNDN make up The Streets average of $363M.
    Any analyst that projects higher than $400M tells me they’re against the success of DNDN and think Dr. Gold is underpromising on Provenge sales…

    Fortunately, so far, the street consensus average or total is $363M giving Dr. Gold and his team the opportunity to blow through and EXCEED market expectations rewarding shareholders and dying pc patients!
    I hope DNDN does $380M+ total for 2011 ;o)
    Thanks Luke!
    Long DNDN

  7. I think there are a few takeawyas from this analysis, correct or not depending on your point of view, that bear mentioning.

    1.) One of the problems with pricing in healthcare today, including pharmaceuticals is that all the pricing is based on false and specious numbers.
    2.) Invoice price has nothing to do with reimbursement rates and actual cost.
    3.) Due to the large amount of government action in this marketplace none of the pricing reflects true market influence.

    If we want to gain control over cost and pricing in healthcare including pharmaceuticales first we need to focus on having a market driven system. When the government attempts to try to gain some arbitrary control the inflective variables that industries can use to offset their controls come into play. If the government wants to limit margin then the industry will redirect the funds flows so they maintain their ideas of profit and there is not real control because the consumer doesn’t directly feel the effect of the price in a quantifiable way. The Rebate based and leveraged deepening discounted reimbursement rate system we use across healthcare has disconnected the providers of service and the consumers in such a fundamental way there is no recovery without a true market based redesign.

  8. J. Keeney says:

    Daa! It is because of fears of govt. control of health care and encouragement of generics that R&D-oriented companies, both big Pharma and biotech, are choosing to raise prices aggressively now on patent-protected, marketed drugs. The answer is to for govt. to lengthen patent exclusivity on forthcoming new drugs so that companies will be encouraged to invest more heavily in R&D, and have a longer period of time to realize a return on their R&D investments. The result would be a slowing in the rate of price increases on existing drugs, as well as companies choosing to introduce new medications at more reasonable prices.