Intro. [Recording date: March 9, 2019.]
Russ Roberts: Our guest today is Robin Feldman.... Her latest book is Drugs, Money, and Secret Handshakes: The Unstoppable Growth of Prescription Drug Prices.... You call the rise in drug prices unstoppable; and I know that's to get my attention, which it does. Let's start with the question of how much they've been growing recently. We see some headline stories, some appalling--multiple increase of x-hundred percent in some crucial drug; and that gets people's attention. But, what's going on overall?
Robin Feldman: So we look overall, even from that perspective, the price of medicine has skyrocketed. Medicare spending for brand-name drugs, even after accounting for rebates, still rose 62% between 2011 and 2015. I don't know about you, but I'm not bringing home 62% more salary than I did 4 years. Ago. Now, the prices for new drugs and where conditions, some of the ones you were referencing, are causing their fair share of pain; but drug companies have raised prices most sharply for commonly-used medications to treat things like diabetes, high cholesterol, asthma. Those price rises are causing real pain for people.
Russ Roberts: And, talk about--you mentioned in passing--rebates. Most of the things that we often hear are list prices. But there are rebates. And, how are those working? How do they literally work, and how does the market, all the different players, how do the rebates work?
Robin Feldman: Ah. The rebate system is marvelously complex and difficult, but if you step back, it's one very simple thing: The drug companies are able to play the middle players, who are known as PBMs [Pharmacy Benefit Managers], as well as some hospitals and some doctors, to make sure cheaper drugs are left out. That's all it is. Drug companies pay everyone along the way so that lower-priced drugs lose. They are simply sharing their monopoly rents to keep competitors out. What's interesting and makes it complex is it's all wrapped up in secret deals that even the government and health plan auditors are not allowed to see. Now, I mentioned for you these PBM brokers. If you are looking for an easy score-card to tell you who's on first, the pharma industry will always disappoint you because it's got all these funny acronyms. But, at the center of this system lies these PBM brokers--
Russ Roberts: Which stands for?
Robin Feldman: Pharmacy benefit managers. Not any better in full than it is in short. So, PBMs negotiate discounts from drug companies, and then they help the Plan decide what it should charge patients. So, the PBM works for the Health Plans. They are supposed to be getting a good deal for you--for the patient. However, the drug companies have very cleverly turned that system on its head. Before they give a discount to the PBM brokers, they raise the price each year. And then the PBM claim to have negotiated a great deal. And everyone's happy. It's a little like a department store raising prices right before a sale so that the sale price looks appealing. You lift it up, and then you give a rebate, and everybody looks like, feels like they got a good deal. Now, that might not be quite as bad if nobody paid those high-list prices. But, people do. So, for those of us who have health insurance through our employers, 30% have the type of plan where you have to pay 100% out of pocket until you reach a deductible. And, that out-of-pocket cost is based on the high list price. Many people have plans that have what's called 'co-insurance'--you pay part when you pick up your drug. If it's co-insurance--rather than co-pay, which is done a little differently--that's based on the list price. Many people don't have drug coverage. Or, they have no coverage at all.
Russ Roberts: What about Medicare?
Robin Feldman: Well, Medicare is a Federal program that is administered by the states through individual, private plans. Even though it is a Federal program, the Federal government is restricted by law from negotiating directly with the drug companies. Now, those negotiations happen at a different level. They are distributed, and each individual plan, through its PBM, negotiates the drug prices. And again, within that system--so, you may have plans that have co-insurance. You may have plans people opt for where they don't have much drug coverage. And even within those who are eligible for Medicare, there are many people who haven't got a Medicare plan.
Russ Roberts: The strange thing about this market and this PBM/pharmacy-benefit-manager component, is that: There are only three--there are 3 very large firms in that market. I know one of them is Express Scripts because it used to be, probably still is, according to St. Louis--I used to know of them when I was teaching at Wash U. [Washington University in St. Louis]. They came into the market to try to make life easier for drug companies--for health care, for health insurance--to manage this very complicated, increasingly complex world of benefit structure, and list different kinds of drugs. And they seemed to me the kind of middleman that would normally make things better. So, why--first of all, am I right that there are three? How important are those three in the landscape? How much do they dominate it? And how did it get started?
Robin Feldman: You are absolutely right: 85% of the PBM market is dominated by the Big Three players. And they tend to move in lockstep. I have talked to large employer plans who have tried to negotiate for transparency or other types of different terms from the PBMs, and they are completely shut out. It's a very small, and a very tight and powerful market. They started out, historically, just processing claims--massive number of claims and paperwork to try to connect all of the pieces for a health plan. Very complicated. When we began to shift to digitization in this country, then the service the PBMs were offering became pretty commoditized. And so they had to try to figure out how to offer a service of value. They switched to, 'In addition to processing all your claims, we'll negotiate with the drug companies.' And that's how we came to where we are today. Now, in theory, if you have somebody like a broker negotiating a deal for you, that should be pretty good; especially if their pay is based on how good a deal they might get. But that's not how things have played out in practice. The incentives within the system push in the wrong direction. So, first of all, the PBMs get their payments from the drug companies in two forms. One is in the form of the rebate. So, the rebate will come later in the year, long after John Smith has bought his hard medication. And it will come to the PBM, who could pocket it or could pass it on to the insurance company. Now, all of the agreements about how much should get passed on and in what circumstances, those are all held deeply secret. Um, the health plan, who is a client, is not allowed to see it. Um, neither are the government auditors. All of the details of these plans are kept completely secret. In my view--I like to say, 'Markets, like gardens, grow best in the sun.' This type of hidden, back-room dealing, is not good for competition.
Russ Roberts: Normally, that just wouldn't happen, in certain markets. In real markets, I would say. That is the way I would describe it. Usually, you wouldn't go to a middleman to shave off some portion of the profit unless they provided something of real value. And I think part of what this illustrates--and we're going to get into it in a little more depth--is how abnormal, psychotic, toxic, non-normal health care market is. And I just say this because it has to be said: People all the time tell me, 'Well, we know free markets aren't good in health care,' because look how bad, say, pharmaceutical market is. Well, it's not a free market. It's distorted in all kinds of ways. And some of the ways we are going to be talking about today. But, the other point I want to make and get on the table is that, having read your book, Robin, you are not demonizing any of the players in any direct way, because you are explaining--which is why it's a great bit of economics--how all the players are just responding to the incentives; but the incentives are not particularly well-designed. And they didn't emerge from market forces. They come from, often, attempts to control the market, by legislation. These incentives are in place. And that's the biggest part of the problem. Not some evil conspiracy on the part of drug companies or PBMs. They are just trying to do what they are made to do, which is make money.
Robin Feldman: These are, you have to remember[?]--these are profit-making entities. They are going to respond to the incentives that we put in place in their own interests. Now, imagine if the CEO [Chief Executive Officer] went to a Board of Directors and said, 'I'm going to lower prices and reduce our profits. It's the right thing to do.' That CEO would be fired. That's not what a company does. You don't have perfect market in health care because you have third-party payers; you have a variety of other forces happening. But you can have a functioning market within that system. You just have to allow the right incentives to flow. Then we can get the kind of competition that gets the innovation we need. It's not where we are right now. But it is certainly possible. We are pretty good at markets in this country.
Russ Roberts: I just want to say that of course, many CEOs announce to their Board: We are going to lower our prices; and we're going to make higher profits, because if we don't lower our prices, our competitors have. And we're going to go out of business.' So, this is a market where, because of a lack of competition--some of it due to the nature of the product; some of it due to government protection--the competitive forces are just not in place.
Russ Roberts: I want to talk about, a little bit more about the Pharmacy Benefit Managers, the PBMs, for one more bit, and then get more into the incentives. But, tell us what the Formulary is. Because, it's a rather striking thing that--again, most of us are simply not aware of. We go into the doctor. The doctor writes us a prescription. We almost never say--I do, because I'm an economist and I read your books--we almost never say, 'Is there an alternative?' We just say, 'Oh. Well, that's what I need. That's what I'll send to the pharmacy.' I go to the pharmacy; I say, 'Could you fill this, please?' They do. That's the end of the story. Usually. And there's a thing working in the background, part of which we talked of is the pricing. But there's also this thing called the Formulary. So, describe that.
Robin Feldman: The Formulary is specific to a particular health plan. And the Formulary will decide whether you the patient, who is the customer of that health plan, can get reimbursed for that drug, and what level you'll get reimbursed. In other words, does your plan cover it? And there are often up to 5 tiers in health plans; sometimes even 7. And those tiers will determine, um, whether you can access and how much it costs. But those tiers have become a way that the players in the market--specifically the PBMs and the drug companies--have figured out how to drive people into the more expensive drugs. In a way, of course, that benefits the various players along the way. The name of the game in this is: volume. So, a drug company that has a lot of volume with a particular PBM, or a hospital--same kind of deal happens with hospitals--so, a drug company with a lot of volume can offer a better deal in exchange for excluding rival drugs from the formula. Or, just making sure that the rival drug has a disadvantaged position. So, let me give you an example with some simple numbers. Imagine a large company saying to the PBM, 'I'll give you a dollar back from each of these millions of bottles of mine that you sell, if you agree not to put my competitor on the menu.' So, that's worth--if you are a PBM, that's worth millions of dollars to you. Now, if the competitor--particularly as a new entrant or a new generic--starts out selling only a thousand bottles, how could it ever compete? That new entrant could never offer enough off its thousand dollars of bottles, or a thousand bottles, to compensate for the millions of dollars of the PBM would have to forego. And it gets a little worse here. Some patients will always need their prescription filled with the brand name drug. Maybe they have a reaction, or a special condition. Or maybe they are just wooed by advertising and they get their doctor to write, 'No generic, no substitutions.' Whatever the reason, the health plan will have to fill some prescriptions with that high price. So, if I'm a PBM, or a health plan, and I spurn the attractive deal offered by the drug company, I'm going to have to pay that ridiculously high list price. And all of us know that could break the bank. So, when the brand drug calls, company comes calling, the big company, and offers to deal with a PBM, that's a deal that even the PBMs and health plans can't afford to turn down. That's kind of a power that just speaks volumes. Literally.
Russ Roberts: A good one. I'm going to read an analogy you make; and I love this analogy for a couple of reasons. You say:
The more volume rebates a drug firm can offer the PBM, the better deal it can command to exclude its rivals. It is a little Budweiser approaching a bar owner, saying, "Okay, at the end of the year I'll pay you 50 cents a bottle if you've sold 40,000 of Bud. Better yet, I'll make it $1 a bottle if you don't put any of that microbrewery's beer on the menu." If the microbrewery sells a limited number of bottles, how could it ever compete? The microbrewery could never offer enough off the price off its few beers to compensate for the tens of thousands of dollars the bar owner would forgo by rejecting Budweiser's offer. The point is simply the following: The greater a drug's volume, the more the drug company can spread out a persuasion plan across each unit of drug sold.
And, some conversation on this program we took with Matt Stoller about how competitive the beer industry is; and I'm sure Budweiser tries to do things like that. A bar owner has to decide whether they are only going to be an attractive place to come on a Saturday night if they only have Budweiser. So, there's a cost to excluding the microbrewery. And, even if they succumb to that--even if they think, 'Oh, there's not that many bars around. I think I can get away with it,' the microbrewery will open its own microbrewery and will compete with the better beer, if you think the microbrewery--if there are people who wish to consume the microbrewery's product. We are living in the heavenly time of, I think, the greatest number of craft breweries in American history. There are 5000 small, independent microbreweries out there. The beer is fantastic. It's the golden age. So, that's working, despite the urge of Budweiser to do that. But that won't work in the drug case, will it?
Robin Feldman: It absolutely won't work. In part it's because government has put its thumb on the scale in a way that the drug companies have figured out to use to their own advantage. Before I shift to that, if it's all right, I'd love to just give you a couple of examples of where this is actually happening.
Russ Roberts: Sure.
Robin Feldman: Because it's great to talk in theory. And even though these deals are secret--
Russ Roberts: [?]
Robin Feldman: Yeah. These deals are secret, but it's starting to leak out. And law suits, sometimes in contract disputes between the parties themselves--amazing what you can find when people start fighting with each other. So, let me give you a couple of examples. In October 2017, Shire sued Allergan alleging that Allergan used bundled rebates--that is when you spread your volume across a bunch of drugs--to preserve its dominant market in the blockbuster dry-eye medication Restasis. This should be familiar to you from the Indian Reservation snack food that was tried. So, in this case, according to one Medicare plan administrator, given Allergan's bundling scheme, the new competitor could give its drug away for free--numbers still wouldn't work. As we were talking about with what Budweiser wishes it could do. So, I could give you another one. This is again a case filed in late 2017, and this one is Johnson and Johnson's rheumatoid arthritis drug Remicade. So, according to the complaint, after the patent protection expired, and just weeks after a bio-similar came on the market--that's a cheaper competing drug--the company began a bundling scheme that induced hospitals and health plans to essentially exclude the lower-priced copy, even though it was covered by government plans. So, I could give you--I can go on and on and list some of these. The point is that we are seeing it happen in the real world. There is a wonderful quote from one doctor who said, 'It's Alice-in-Wonderland time in the drug world.' I would say it's Alice-in-Wonderland time except it's our money going down the rabbit hole. You had asked me before, though, about--
Russ Roberts: Yeah, the thumb.
Robin Feldman: So, what's the thumb on the scale? So, why is it that drug companies have become very adept at using their monopoly positions, their government-granted monopolies, in order to try to put in place these types of deals? So, companies begin with a position of monopoly from a patent that they have, or from more than a dozen of what are called non-patent exclusivities that companies can get for doing things like testing drugs in children, or working on rare pediatric diseases. Whatever it is. Orphan drugs is one people may have heard of. So, they get additional periods of times for protections. And, companies use these to amass the volume positions and create contract terms that will hobble the generics when they finally get to market. And, as I mentioned: Companies are absolutely masters at repeatedly extending their protections. So, in fact, I show in my research for the book that drug companies are largely recycling and repurposing drugs rather than inventing new ones. More that 3/4 of the drugs associated with new patents are not new drugs coming on the market. They are existing ones. So, instead of innovation, we are seeing secondary patents piled onto new drugs over and over again. We want drug companies to go back to the bench and invent new things. This is channeling innovation in a less productive direction.
Russ Roberts: But the question I have, and I'm not sure it's answerable--I'm going to ask it two different ways; you can figure out which is maybe the best way to get at this. So, this is a horrible system. The way you describe it. If it's accurate. And it seems, based on these kind of, the small pieces of information we have from these documents that are revealed in lawsuits, that this is an extraordinarily byzantine and not-so-helpful structure for how drug prices get set. So, the first question that comes to mind is: Why are there only 3 big ones? Why aren't there PBMs able to compete by offering a more transparent deal? Why doesn't somebody start a transparent one, and do a better job, and get rid of all this, what looks on the surface to be exploitation?
Robin Feldman: Well, it wouldn't be in a PBM's interest to get rid of this and to operate transparently, because the PBMs' revenue and profit margins have been rising rapidly in recent years. Again, it's the incentives within the system that are driving the behavior that we have. The profit margins for companies on their drugs is about 76% in terms of the marginal cost, once you have the drug in place. It goes back to why companies are incentivized to try to make secondary changes to a drug rather than inventing a new one. Well, the R&D [research and development] is much less when you make a secondary change to a drug. So, when a company makes a secondary change to a drug, like adjusting a drug's dosage, the R&D investment is far less than required for the drug's initial development. So, you may get a change that means very little from a therapeutic standpoint, but you get a lavish reward in return. That's what the drug company is going to be driven to do. The same reason we see PBMs driven the direction they are there, because, well, that's where the profit is.
Russ Roberts: I understand why they do what they want to do. I don't understand why the drug companies and the health insurers put up with it. Because, it would seem to me, they should--if this is really going on, and they are taking a big slice, this complex rebate process and the use of formularies to keep out competitors: Why wouldn't the drug companies just work directly with the health insurance companies? Let the health insurance companies negotiate the deals; cut the PBMs out of it; and then everybody will be better off. Now, whether the patient is going to be is still a different question. But, it seems like both the health insurers and the drug manufacturers are being taken advantage of by the PBMs.
Robin Feldman: And that's a key question I spent a lot of timing researching and thinking about. Why can't the big insurers bargain against this? Why don't they? Now, certainly there are many small, regional plans who don't have much power; and one can't underestimate the complexity of the volume flow of claims in these ridiculously complex agreements, and what it would cost them to try to edit all of those, to audit all of those to bargain for the terms they want; then to make sure that the terms are going through. They are not going to be able to do that. But, how about the big plans? We've got big players out there. Why would they ever allow the PBMs to push them into a system like this? They are not naive waifs. And, the answer, I think as always: It's a pretty simple piece of economics. The health plans' short term goal is to keep this year's payments--to the PBM and through the PBM to the drug companies--but the goal is to keep this year's payments as low as possible. And remember that volume agreements can work so that those who are already in the market and have a high volume can offer deals that the cheaper entrants can't match. So, to the middle player, the price is cheaper this way, even if the long-term consequence is to block out the cheaper competitor. And, when a health plan with market clout asks for rebate pass-throughs or access-to-claim terms, the PBMs are starting to offer price-protection contracting. So, with a price-protection contract, the PBM promises the plan that prices won't rise, say, more than 2-4% a year. And then tells the plan, 'Why bother with all the grubby details, expensive to sort through? You care about the bottom line. That's what we'll guarantee.' So, in this way, the health plans' short-term interest in controlling price increases is satisfied without having to sacrifice things that the drug companies want; and that, of course, helped line the pockets of all the intermediary players. Again, it comes back to: What are the incentives driving the system? And they begin with the power that the drug companies have from the patent and exclusivity systems, and their ability to string those out, pile those on, one after another.
Russ Roberts: So, I want to raise a cultural issue which I--I'm uneasy, usually, raising cultural issues. As an economist, not quantifiable, and so in general people are uneasy about it. But, it seems to me this could be part of the problem, and I want to get your reaction. So, if I have a patent--let's talk about patented drugs that really should be patented--and earn their patent. That do something important for human wellbeing, and we're happy that we get developed. We're thrilled. And we want firms to be incentivized to find those kind of improvements and we let them make a lot of money. The question is always, 'What's a lot of money?' And, I think at some point in corporate history, drug firms felt bad raising prices enormous amounts, even though they had a monopoly. And so they didn't. And yet, today, I feel like those restraints are off. Now, there are a lot of reasons we might speculate why that's true. But, a firm that charges tens of thousands of dollars, and sometimes more--hundreds of thousands of dollars--for some chemotherapy, some kind of cancer treatment--we had Vincent Rajkumar on the program talking about treatment for multiple myeloma. It's incredibly expensive. And yet it's very good. It's a good thing for people who are helped or benefit from it. And yet, what firms charge for that seems to me is "excessive" in the following way. In the old days--excuse me, not in the old days--in a real market, your ability to charge high prices is limited by the ability of the consumers to pay for it. But since in this market, the consumers don't pay for it--rather, someone else does, whether it's government benefits for the elderly poor; whether it's a third-party payment for an employer's health insurance coverage--the sky's the limit. All those constraints are off. Now, it's true that only a few people end up paying that horrible high price. You could call them the suckers. And many people do get discounts and rebates. But, what that high price is, and the fact that anybody pays for it--it just wouldn't happen in a market. There wouldn't be that opportunity. And yet, because there's a third party involved, we're kind of stuck with the, I don't know, the cultural ability of the firm to please itself. Which is absurd. And a really bad idea. And once those cultural wraps[?] are off--it just, those increases are--now, they're going to feel bad increasing it, let's say, 1000% the first year, though occasionally we get those. But they just do it, 'Ahhh, we'll just do it 10% a year.' That's bizarre. And I just have a feeling--I hate to say that phrase, 'I have a feeling.' It sounds horrible. But, I have a feeling that those constraints existed in the past and they don't--they aren't there any more.
Robin Feldman: No, I think there are two really wonderful parts of what you were describing. Maybe 'wonderful' is the wrong word. But, there is a problem with third-party payers. But all budgets have limits. Even the third-party payer's budget has a limit to it--
Russ Roberts: Yup. Sure enough. [?]--
Robin Feldman: So you should find some limits there. But, in addition, you had a phenomenon that is difficult to discuss in economic terms, but there really is a psychological limit to how high drug companies felt comfortable introducing new drugs or raising the price of existing drugs. Once that barrier was crossed, the sky became the limit. And that, as a shift, a modality shift, is a both troubling and fascinating one. The second is, it's important to understand how those rebates work, in terms of the dollars people end up paying. So, if you are raising the price significantly every year, the bottom line price after the rebate still goes up. So, the rebates--the average rebates in a commercial plan--are reported to be--and obviously I can't measure this but they are reported to be 20-30%. So, if you are going down 20 to 30% of a number that's already gone up 60% in the last 4 years, you've still got prices rising. And then that becomes, that becomes a floor--you know, not really a ceiling; and new drugs can come out even higher than that and look cheap in comparison. Generics can just drop down a little and say, 'Hey, I'm a bargain.' You know, all of that shift in the curve is very difficult and troubling.
Russ Roberts: So, one view--let me take the industry side here for a minute. One view says, 'Okay; there's some ugly things in this business. There's some--people try to make more profit by extending their monopoly in stupid ways that the government allows, so it's not our fault. Of course, we're going to go for tweaks of composition and structure of these molecules. And we're going to change the delivery system. We're going to do everything we can to extend our [?]. But that's normal. It's not our fault that we have a stupid patent system, the way it's structured. It's true that there are these rebates and weird, labyrinthine, Kafkaesque things that happen in this non-opaque[?opaque?] delivery structure called the Pharmacy Benefit Managers. But, look: Let's look at the bottom line. The bottom line is: We have the greatest drugs in the history of human beings. We have incredible innovation in the system. Drugs--yes, they are expensive, but they are only a, you know, they are barely more than 10% of the Health Care Bill. It's not where the problem is. So, just leave it alone. It's not so important. It's not a big deal. You are over-reacting.'
Robin Feldman: Well, I would ask any one of your listeners, if they agree with that, when they are shelling out dollars at the pharmacy counter--and I would ask how people feel with the fact that the things that are covered in their health plans are fewer and fewer. And, co-pays are higher. Co-insurance is higher. The drugs that are covered are more limited. I suspect if you ask the average person, the average person would say, 'Wonderful. Marvelous economics. I'm hurting. And I don't like it.' I think that's why you are seeing pressure on Congress, and at the State House level to act--because these prices are affecting real people in very real ways. So, we can structure all kinds of numbers to say it's no problem, but the average person will tell you it's a problem.
Russ Roberts: Okay. I'm going to respond to that. But I'm keeping my industry hat on for the moment.
Robin Feldman: Yes.
Russ Roberts: Which I don't like wearing. But--because I do think it's a systemic problem. But I'm going to put my industry hat on for a moment. I'm going to say the following. 'Okay. Let's suppose the government changed the automobile market, and they started to not allow cars with certain--cars that didn't have certain features to be on the market at all.' In other words, they mandated a whole bunch of safety things--and effectiveness things--on how cars work. And so, you have to get a certain number of miles per gallon. All cars have to have certain safety features, maybe even ones that don't exist now. And as a result, it's going to push up the price of cars. It's going to improve the quality of cars, as well. So, now--I used to buy a Honda, and now, all of a sudden, I'm forced to buy a Lexus. Well, a Lexus is expensive. And, of course, I'm going to complain. And the pharmaceutical industry, and the car industry, will say, 'Yeah, but you are getting a Lexus.' It's true that you don't like all these out-of-pocket payments you have to make, and the co-pays. And, when you get to the pharmacy, you hear kind of, 'Yeah, but you are getting the greatest drugs in the world. You shouldn't complain. You should be thrilled. You've got the best car. You've got the best drugs.'
Robin Feldman: Now I'd say to that, 'I don't think we are getting a Lexus. I think we are getting a smart-car and we are paying Lexus prices, and we are doing that because of the way the government is meddling in the market.' What I would say is, 'I want to see competition reign. I would give you that we definitely need a period of protection for drug companies to recoup profits, so that they can have an innovation--a kind of incentive to go out and innovate.' But all good things have to come to an end. We need a time period for that to end. And we need real competition. And, if you can't compete, go back to the bench and invent something that can compete.
Russ Roberts: Now, we recently had Jacob Stegenga on the program talking about his book, Medical Nihilism. And, I'm going to channel my inner Jacob Stegenga for a minute. He mentions that there are only a handful of what he calls 'magic bullets'--drugs that cure the problem they are directed at and don't have a lot of side effects. And one of those is insulin. So, recently in the news there have been people complaining about the high price of insulin; that people can't afford their insulin. Insulin was discovered a long, long time ago. The reason it's expensive is part of what we're talking about; and I suspect that people who have diabetes and who take insulin are very happy at the innovations that have taken place in the insulin market and are happy that those are there. They include delivery changes in the mode of how the insulin is delivered in the body. I assume they maybe include other things about the drug itself: I don't know. But, there could be cheap insulin on the market; but there isn't. Meaning, it's feasible, it's imaginable, that someone could sell generic insulin. But I have a feeling it's not happening for some complicated reasons. Do you know anything about that?
Robin Feldman: Oh, yes--
Russ Roberts: That's my argument that says, 'Why don't you let me buy,'--you said, a smart car. I know you live in the Bay Area; but for people who don't live in the Bay Area: A smart car is a little, tiny thing. A little, small, like a mini-car. I'll just take a Kia, which is a pretty good car. A really good car compared to, say, a car of 25 years ago. It's not as good as a Lexus--today. In certain dimensions it's just as good. But, they don't let those on the market. Why isn't there cheap insulin on the market?
Robin Feldman: Well, insulin products are a classic example of drugs with extended protections. All of the top-selling insulin drugs have increased their protection by at least 20 years. Each of the top-selling insulin drugs has piled on dozens of protections. One of them, 55 protections. And again, those protections provide the kind of volume that can set up the sort of deals with the PBMs so that new, cheaper entrants can't get into the market. And can't get a foothold once they get approval. There are nonprofit organizations that are trying to come up with cheap, generic insulins. But, you can make the drug; if you can't get your way into the health care coverage--if you can't get the plans to accept them--no patient is going to get that drug.
Russ Roberts: I'm not going to quote the people who are railing against this, because I'd rather not. For a variety of reasons. But, you could understand that the fact that you could--it's not anybody's fault that they have diabetes--generally. Right? It's a disease. And to pay a high price for it, hundreds and hundreds per dose, is really unpleasant. And, it's easy to blame Big Pharma for that, because they are the ones selling it for hundreds of dollars, or whatever the price is. But, you'd think that this opportunity for nonprofits to deliver it would be a lay-up. Like, what's stopping it? I understand that Big Pharma doesn't want it to happen. I get that. Obviously they want to keep their profits high. But, it seems to me that whatever barriers there are to having nonprofits give away or sell at a very low price generic insulin, should be kind of an easy public policy problem to solve. Why isn't that happening?
Robin Feldman: Well, it goes back to what we were talking about at the beginning of the show with PBMs. So, the health plans, through their PBMs, have long term contracts. They have contracts with the drug companies about preferring their drug over cheaper competitors. If that cheaper competitor can't get coverage under the health plan, nothing's going to happen. They are not going to be able to get traction in the market. Insulin, by the way--the drugs you are talking about--that provides a wonderful anecdote for me. I was testifying a couple of weeks ago on the Ways and Means Health Subcommittee. And, one of the witnesses representing the pharmaceutical point of view was arguing that prices haven't really risen; that there is no problem; that everything is fine. One of the first witnesses interviewing him--and there were a number--I'm sorry--a number of members of Congress who were interviewing him and were taking the pro-industry position. But, even one of the first and most vocal proponents of that, looked slightly chagrined and said, 'Well, we have Type 2 Diabetes in my family, and I have to say, I can tell you that prices are rising.'
Russ Roberts: That's awkward--
Robin Feldman: It's a hard position to support.
Russ Roberts: But your example of the PBMs--I understand that for, say, a health insurance plan that's offered by an American corporation, or my university, or yours. But, can a nonprofit today sell generic--how hard is it for a nonprofit? Forget about getting in the formulary of a PBM. If I'm a group that's trying help poor people, say, who don't have health insurance, who don't have any drug coverage right now--maybe they're not poor: they're just low income. Is it hard for me to distribute or give away or sell a generic insulin product for people who are struggling with the amount of money you are talking about?
Robin Feldman: The major focus of drug distribution--prescription drug distribution--is through a health plan. If your product is not on the formulary, it's not going to get filled. It's not going to get substituted at the pharmacy. It's not going to get into the system. Those individual patients aren't going to find it. A brand company, which has lots and lots of money, can afford to advertise massively on television and reach patients everywhere. A company that's trying to make a cheap generic version isn't going to engage in that advertising. Isn't going to be able to reach those patients.
Russ Roberts: I guess what I'm thinking is: Why doesn't someone start a nonprofit pharmaceutical company that specializing in creating low-cost generic drugs that have very low regulatory hurdles for safety and efficacy because the molecules have been around for a long time. And, try to--and finance that out of a combination of donations; and maybe charge patients a small amount of money to cover their costs? And they could bypass the formulary. Bypass the PBM system.
Robin Feldman: So, I think that would be a fascinating idea. But, honestly, I'm much more interested in a market solution. Why aren't we seeing companies out there who are looking at this Rube Goldberg industry we have, where the payments are made at different times and half-thrown backwards over your shoulders and half forward, and then it goes up and down around one truck and the next to the--? Why don't we find someone who is waiving that all away and doing a direct distribution, in a way that is much more efficient and effective? There's plenty of money flowing around in this market for a much more efficient system. From that perspective, I'm fascinated by the venture between Amazon, Berkshire-Hathaway, and JP Morgan to try to figure out a way to deliver drugs to their employees more efficiently. That's an interesting triumvirate. Maybe we will see innovation within business organization. Maybe that's the way forward.
Russ Roberts: So, yet, you talk about different solutions in your book. Most of them that have been proposed by various people, most of them I would suggest are either ineffective or dead on arrival. I'm going to focus on one, and then you can tell me which ones you think are most promising. But the one that just, again stuns me--I've alluded to it earlier--is the way the patent system works. How the heck can you get a patent for changing the coating[?] on a drug and extend it, you know, for another 20 years? That just seems bizarro. Why is that the way our patent system is? It's like me saying, 'I'm going to patent peaches because my peach comes in a shiny wrapper and my competitors' don't.' So, I get a monopoly on the peach industry. That would be laughed at. Why is that working in the pharmaceutical industry?
Robin Feldman: Yeah; I don't think that's how the patent system was intended to operate. It is what we're living with. That, it seems to me--fixing that is the quickest, most direct approach you could. And that is, Congress could simply say, in the Patent Act: These kinds of minor tweaks and minor modifications are, using Patent language, 'obvious.' They are not patentable. That's not what we mean by innovation. That would be a very direct approach, and I think would go a long way towards ending some of these distortions in the market. A more complex approach is one that I describe in the book and have talked about. It's one I call 'One and Done.' And that is: Drug companies should get one period of innovation, one period of protection for its innovation. And only one. And if the time that the drug is approved, let the company pickwhich one it wants. One of its many patents. Maybe its orphaned drug exclusivity. Maybe its data protection. Let the company decide which of these at this moment is most valuable to the company. And then, that's the one. But after that, no more. So that, all the competitors know what the right is that's being asserted. When it's going to end. And then we get competition at that point. I don't even mind if it's a longer period of protection. But the notion is: Pick a period. Any period. And let it come to an end.
Russ Roberts: And when you say, 'One and Done,' you don't mean the company gets one patent--
Robin Feldman: No--
Russ Roberts: You are saying for one of its drugs, it gets one.
Robin Feldman: Yeah. The basic chemical composition of the drug.
Russ Roberts: So, is that going to end up being where they find their arbitrage opportunity? By redefining what the chemical composition is? Do you think that's--is that kind of definition enforceable?
Robin Feldman: I think that is exactly where the bargaining and negotiating would happen if Congress went in this direction. What is it that counts as a drug? What is it that doesn't? And that's where the difficulty is. But I do think it's definable. And I think you could do a very good job at it. And you would be combining what I spoke about before, which is specifying a category of things that are perfectly obvious and shouldn't be subject to greater protections.
Russ Roberts: Are you optimistic? You've been working on this area for a few years. It's great that you are ringing this bell, and telling people that this system is not a very effective system. That it's not well-designed, and it needs to be changed. There are a lot of people making enormous amounts of money off of it--as you detail. It's not the focus of your book, but, we all understand that's what's going on in the background. We all understand that people who make enormous amounts of money try to keep that system in place. Are you optimistic that we can dent this problem or make some progress?
Robin Feldman: I am eternally optimistic. I am also realistic. It's not going to be easy. What I worry the most about is legislative fatigue. That is, it is so hard: given the way that the various industries fight this, given the amount of money that's at stake, it's very difficult to get legislative changes. I worry that a few small changes will come into place. It will be so exhausting for the legislators and regulators that they'll declare a victory, bring the troops home; we'll get a little bit of improvement, but really, um, the system remains as it is, and we don't get what we need.
Russ Roberts: That's not so helpful. Got anything better for me, Robin?
Robin Feldman: Hah, ha, ha, hah. I'll go back to: I remain eternally optimistic. I do believe that this is an important moment historically. That, given the fact patients are feeling this amount of pain and are frightened about being able to afford their medications, that there is an opportunity to act. If we take it. And if we take economics seriously, and think about how the incentive structures flow, and how we want to allow competition to happen.