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Shkreli Implodes And Provides Hillary A Perfect Medicare Moment

Xconomy National — 

It was already a good political time for Hillary Clinton to unveil her plan to control the cost of prescription drugs. Martin Shkreli made it perfect.

As you’ve probably heard by now, the front-running Democratic candidate Clinton on Tuesday outlined about a dozen ways she would aim to alter the American healthcare landscape if elected president.

She’s already altered the financial landscape, with major biotech stock indices down six to seven percent since she first hinted at the plan in a tweet Monday.

The unveiling of the plan came amidst—and contributed to—the public flaying of hedge-fund manager-turned-biotech exec Martin Shkreli, who has become public enemy #1 for price-gouging practices at his company, Turing Pharmaceuticals. When asked to explain, Shkreli turned on his questioners with insults, compounding his reputation for bizarre Internet behavior and turning himself into a global punching-bag.

Turing’s drastic markup of an old drug for parasitic infections, often used to treat patients with HIV, was first revealed in a story last week on Healio, followed by reports in USA Today and the New York Times.

Clinton then piled on via Twitter.

(Shkreli said in TV interviews Tuesday night he would back away from the price increase, then took his Twitter account private.)

Given the timing, it wouldn’t be a surprise if the Clinton camp had its plan queued up, waiting for a good pharma-blunder media moment to spring it. And they got one.

But Shkreli, a bit player in the biotech industry, is just a springboard into deeper waters. (Turing isn’t the only drug company of late to buy old drugs on the cheap then turn to resell them at huge markups, as the New York Times noted in its story Sunday.) The outline of Clinton’s plan has about a dozen components, depending how you break it down, including legal importation of cheaper drugs from Canada and other countries and a mandate for more drug R&D spending. They all will gin up debate, no doubt, and I’ve summarized them at the end of this post.

But I want to spotlight one: allowing Medicare to negotiate drug prices.

For those just digging into the pharmaceutical business, it’s one of those double-take moments: The biggest drug buyer in the world’s largest drug market isn’t allowed to negotiate prices? Come again?

Private health insurers and their agents negotiate furiously—and have threatened more and more to wield that power. Other U.S. drug-buying government agencies, namely Medicaid and the Veteran’s Administration, are allowed to negotiate, and they pay far less for drugs than Medicare, as we’ll see a bit later.

But Medicare’s hands are tied, thanks to the 2003 Medicare Modernization Act. Under the terms of that act, the program’s negotiating power is fragmented, parceled out amongst private entities that administer Medicare’s prescription drug plan, known as Part D, region by region. Efforts to give Medicare full bargaining power (which would be formidable, given that the program had roughly 40 million enrollees in 2014) died in Congress in 2007.

But the idea is never far from the surface of political discussion on the left, and bubbles up frequently. President Obama called for it recently, even as he promoted his support for a new era of precision medicine. Medicare negotiation is part of Democratic presidential candidate Bernie Sanders’ platform, too.

(Lest you think Clinton is simply trying to outflank her more liberal rival, remember that she voted against the MMA in 2003. And you young ‘uns out there might not remember that before there was Obamacare, there was Hillarycare, as her Republican opponents are happy to remind you.)

It’s a good time to take on the drug industry, not just because of its poor reputation. Americans like Medicare, and even more, like the idea of giving it negotiating power.

The climate makes Thomas Oliver, a University of Wisconsin professor who has written extensively about the history of Medicare and prescription drugs, believe the time will soon come.

“This is the one area of Medicare where we don’t have a reasonable relationship between costs and the payment for service,” says Oliver, who think Republicans will warm to the idea “within five to ten years” because of fiscal conservatism. “Open ended drug pricing, leaving it to small drug plans to negotiate prices, that’s just going to look weak, and tens of billions of dollars are at stake every year.” The MMA is often reviled as a give-away to the pharmaceutical industry. (It didn’t help that Billy Tauzin, the GOP congressman who helped push it through, soon after left Congress to run PhRMA, the industry’s top trade group.)

But the 2003 law has overall been good for Medicare patients, lowering their out-of-pocket expenses, according to a 2014 Kaiser Family Foundation report. And one of its flaws—the “donut hole” coverage gap—was addressed by the Affordable Care Act, which promises to close the hole by 2020 and “bring additional relief to millions of enrollees,” the Kaiser report said.

But that’s about patient welfare, not taxpayer costs. Does the MMA need fixing on that front? Opponents of Medicare negotiation, led by PhRMA, say leave well enough alone.

On its website, the trade group cites a Congressional Budget Office report from last year that says Part D is not as expensive as once feared. In 2003, the CBO estimated the cost would come to nearly $550 billion through 2013. Turns out it was $353 billion.

But PhRMA doesn’t cite CBO’s reasons for lower-than-expected Part D costs: a significant slowdown in the growth of drug prices in the last decade, and fewer people joining Part D than anticipated. The drug industry group explicitly says lower costs were “due to rigorous competition in the program.” CBO’s report says no, there isn’t enough evidence to make that claim: “Determining whether the actual effects of competition have been larger or smaller than those incorporated in the original [2003 CBO] estimate is not feasible because many other factors have also affected Part D costs.”

That’s important, because Kaiser says the external factor of drug prices—which helped keep Part D costs down—is set to start climbing at a higher rate again, from an annual average increase of 2.3 percent in recent years to 6.0 percent between now and 2023. The foundation estimates that Part D spending will jump from 11 percent of all Medicare spending to 17 percent in that time period.

And when that happens, the alarm bells will ring again, because the private contractors who administer Part D don’t seem able to demand the same breaks that other giant insurers demand. In a paper published two months ago, the consumer advocacy group Public Citizen and Carleton University in Ottawa, Canada, said Medicare pays on average 83 percent of the full U.S. drug price, while Medicaid pays 48 percent and the VA 46 percent. If Medicare could reach those levels of discount, it would save $15.2 billion to $16 billion a year, the study says.

(A related piece of Clinton’s plan, applying Medicaid’s low-income discounts equally to Medicare, would also save $116 billion over the next ten years, according to the CBO.)

What is Medicare paying nearly full price for? A check of the top ten drugs that Part D paid for in 2013 shows a lot of old warhorses, led by acid reflux treatment omeprazole (Nexium). Those top ten added up to $18 billion, or 17 percent of the program’s total spending that year.

Shocking enough that Medicare’s biggest drug bills are paying for old heartburn drugs, statins like rosuvastatin (Crestor), and largely ineffective Alzheimer’s treatments like memantine (Namenda). But the bills are about to get a lot bigger.

As Congress’s own Medicare advisory commission Medpac warned earlier this year, “The pharmaceutical pipeline is shifting toward greater numbers of biologic products and specialty drugs, many of which have few therapeutic substitutes and high prices.”

That doesn’t mean Medicare should simply adopt the Medicaid or VA system. Medicare historian Tom Oliver says there will “grounds for debate” about the right policy design. He expects a kind of “grand bargain” in the end. “The entire mechanism for pricing drugs will be rethought,” he says, perhaps involving a change in drug patents and generics rules. “It’s not going to look like government on one end of the table and industry on the other saying, ‘Let’s come to a price on your drug.'”

There will be unintended consequences, as with any changes to a massively complex system. The debate, then, comes down to whether the savings enjoyed by people on Medicare is enough; whether it’s worth the current spending; and whether that spending can be cut back—particularly in the face of ballooning drug prices—without screwing up the savings benefits.

The political fight is to convince enough Americans that something they like can be made even better, so that those Americans convince their representatives (likely Republicans) to roll up their sleeves. Sure, partisanship seems immutable these days, but politics runs in unpredictable cycles. In 1973, President Nixon’s health, education, and welfare secretary Caspar Weinberger advocated for price controls and generic-drug substitution. In 2003, the GOP under George W. Bush created a massive federal entitlement expansion.

Sometimes all it takes is a single incident—or a galvanizing figure to rally against—to change momentum yet again. In a few years, we might look back and say Martin Shkreli was it.

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For those who haven’t seen reports yet, or read Hillary Clinton’s plan, here’s a quick summary of each component.

—End tax breaks that drug companies receive for direct-to-consumer advertising.

—Mandate certain levels of R&D spending that are tied to the benefit some companies receive for developing “life-saving” and “health-improving treatments,” which seems to be a reference to the enticements for orphan and so-called “breakthrough” drugs.

—Place a $250 monthly cap on the amount individuals have to pay out-of-pocket for prescription drugs.

—Fully fund the FDA’s generic-drug office to “clear out the backlog” and speed more approvals.

—Lower the exclusive marketing period for new biologics from 12 to seven years.

—Allow faster FDA review for biosimilars that only have one or two competitors already on the market.

—Prohibit “pay for delay” arrangements between branded drug manufacturers and generic companies that keep generics from coming to market.

—Allow importation of drugs from abroad to encourage price competition.

—Require that drug makers pay higher rebates to low-income Medicare enrollees to match current rebates in state Medicaid programs.

—Allow Medicare to negotiate what it pays for drugs.