Our Current Pharmaceutical Payment System Isn’t Neutral

By Rachel Sachs

Last week, former Pfizer Global R&D head John LaMattina wrote another of his columns for Forbes, this one on the subject of pay-for-performance deals for pharmaceuticals.  These deals, in which insurers contract with pharmaceutical companies to pay for drugs based on how well they perform in practice, are becoming more common as the public conversation over drug prices escalates (examples here, here, and here).  There are many interesting questions around pay-for-performance deals, but LaMattina closes his column with a focus on one: their impact on the direction of pharmaceutical R&D.

Specifically, LaMattina argues: “Biopharmaceutical companies will closely watch how pay-for-performance evolves. Should payers become overly enthralled with rebates and continue to raise the bar, companies could move their R&D efforts into areas where a drug’s impact can be easily defined and measured. In such an environment, therapeutic areas like depression and obesity could give way to diseases like psoriasis or rare diseases where patient advocacy remains strong. In its efforts to rein in costs, payers might unwittingly force R&D out of areas where new drugs are still needed. That would be unfortunate.”

LaMattina is exactly right in one sense – and highly misleading in another.  First, underlying LaMattina’s argument is a critical claim that the way in which drugs are paid for affects the types of drugs that are developed.  This is absolutely right.  Although it may be perfectly obvious to some, as someone who just wrote a 25,000 word article on this very topic (oh hi, SSRN), I can attest that recognition of this idea is too often absent from the legal literature.  We largely focus on prescription drug insurance and payment as a way to encourage access to medications that already exist, but we ignore its effects on the types of drugs that are produced in the first place.

Decisions we make about which drugs to cover and at what reimbursement rates matter for companies making decisions about their drug development pipelines.  Medicare Part D provides perhaps the clearest empirical evidence here.  The creation of Medicare Part D in 2003 provided a prescription drug benefit to many seniors who did not previously have one, and as such it both expanded the population of seniors who could now afford prescription drugs and increased the prices pharmaceutical companies could expect to recoup for drugs sold to seniors who had only been eligible for Medicaid, previously.  As such, the passage of Medicare Part D has been empirically associated with increased pharmaceutical investment into drug classes with higher consumption among the Medicare population (here and here).  And so LaMattina is right that an explosion of pay-for-performance deals would likely influence the direction of pharmaceutical R&D.

But in making this descriptive argument, LaMattina also makes a more normative claim: that a move toward pay-for-performance would be problematic.  The argument here is somewhat implicit, but he seems to suggest that our current payment system is in some way “neutral” as it relates to the types of drugs and diseases that companies choose to investigate, and it would be biased by pay-for-performance deals.  That is wrong.  Our system is by no means “neutral.”  The choices we have made in constructing the system – to mandate coverage of certain drugs and services and not others, to have drugs bought by Medicaid reimbursed at lower amounts than drugs bought by Medicare or private insurance, to pay for Medicare drugs differently depending on where they’re administered, etc. – already bias companies to invest in some areas and not others.

In fact, the two examples LaMattina gives – depression and rare diseases – are textbook cases here.  Pay-for-performance deals aren’t needed to get companies out of the depression business – they’ve been leaving in droves for years, as recent empirical work has shown.  I agree with LaMattina that we need more investment here, not less, but this pipeline is not healthy even now.  And there has been an explosion in the number of drugs designated and approved for rare diseases over the past thirty years, since the passage of the Orphan Drug Act in 1983 created a series of special incentives for their development.  It’s difficult to imagine that a few pay-for-performance deals could materially change the already steep upward trajectory of that field.

I don’t mean to ascribe an extreme position to LaMattina here.  He certainly doesn’t suggest that we have a Platonic ideal of a reimbursement system, but for those pesky pay-for-performance deals.  But the “baseline” of our current system against which such deals are disruptive is in itself highly biased in favor of some drugs and diseases and against others –  and this point is much too often ignored.

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About rachelsachs

Rachel Sachs is an Associate Professor at the Washington University in St. Louis School of Law. Previously, she was an Academic Fellow at the Petrie-Flom Center. Rachel earned her J.D. in 2013 magna cum laude from Harvard Law School, where she was the Articles Chair of the Harvard Law Review and a student fellow with both the Petrie-Flom Center and the John M. Olin Center for Law, Economics, and Business. Rachel has also earned a Master of Public Health from the Harvard School of Public Health, during which she interned at the United States Department of Health and Human Services. Rachel's primary research interests lie at the intersection of patent law and health law, with a particular focus on problems of innovation and access and the ways in which law helps or hinders these problems.