The American pharmaceutical industry is rigged to make a handful people fabulously wealthy while everyone else gets screwed over. Because of intricate patent laws, we pay double what people in 29 other rich countries pay. Experts and change-makers Priti Krishtel and John Arnold join Nick and Jasmin to explain how we got into this mess (Monopolies! Patent law!), and what we can do about it.
Priti Krishtel is the Co-Founder and Co-Executive Director of I-MAK, a global organization that works to increase access to lifesaving medicine. A 15-year veteran of the global access to medicines movement, she helped lead the movement to a pivotal moment in treatment access history with the passage of a health-friendly patent law.
John Arnold is a former hedge fund manager who, with his wife Laura, now focuses on advocacy through their organization Arnold Ventures. Arnold Ventures has distributed more than $175 million in grants to over 80 healthcare nonprofit organizations, universities, and institutes with the ultimate goal to lower healthcare spending without compromising quality.
It’s Time for Pharmaceutical Companies to Have Their Tobacco Moment: https://www.nytimes.com/2019/02/24/opinion/drug-prices-congress.html
A Humira Prescription Costs $38,000 A Year Because Our Patent System Is Being Abused: https://www.huffpost.com/entry/opinion-humira-costs-patents_n_5bd0c893e4b0a8f17ef3961f
How Big Pharma Reaps Profits While Hurting Everyday Americans: https://www.americanprogress.org/issues/democracy/reports/2019/08/30/473911/big-pharma-reaps-profits-hurting-everyday-americans/
Comprehensive Reform to Lower Prescription Drug Prices: https://www.americanprogress.org/issues/healthcare/news/2019/01/29/465621/comprehensive-reform-lower-prescription-drug-prices/
A Supreme Court victory for lowering drug prices: https://thehill.com/opinion/judiciary/385326-why-scotus-ruling-in-oil-states-v-greenes-energy-group-is-a-win-for-working
How a billionaire couple greased the skids for Nancy Pelosi’s drug pricing bill: https://www.statnews.com/2019/11/26/laura-john-arnold-billionaire-greased-the-skids-for-drug-pricing-bill/
Billionaire Philanthropist John Arnold On Drug Prices: Congress Needs to Act: https://www.forbes.com/sites/denizcam/2018/11/29/billionaire-philanthropist-john-arnold-on-drug-prices-the-congress-needs-to-act/#b6097ee57a25
Millions in U.S. Lost Someone Who Couldn’t Afford Treatment: https://news.gallup.com/poll/268094/millions-lost-someone-couldn-afford-treatment.aspx
Our website: https://pitchforkeconomics.com/
Our twitter: @PitchforkEcon
Our instagram: @pitchforkeconomics
Nick’s twitter: @NickHanauer
Nick Hanauer: Americans are paying more for drugs than Germans, or Swedes, or Canadians.
Priti Krishtel: 34 million Americans have lost a family member or friend in the last five years because of high drug costs.
Nick Hanauer: There’s no reason for an EpiPen to cost more than 25 bucks.
Jasmin Weaver: We have a completely broken market when it comes to prescription drugs.
John Arnold: We need to make sure that the industry is aligned with the goals and needs of society.
Speaker 5: From the offices of Civic Ventures in Downtown Seattle, this is Pitchfork Economics with Nick Hanauer. In honest conversation about how to make capitalism work for everyone.
Nick Hanauer: I’m Nick Hanauer, founder of Civic Ventures.
Jasmin Weaver: I’m Jasmin Weaver, I’m the executive vice president here at Civic Ventures and I do a lot of our policy work, including our work on minimum wage.
Nick Hanauer: So Jasmine, in this episode of Pitchfork Economics we’re going to talk about the debacle which is pharma pricing, pharma drug pricing in the USA. It’s not a surprise to listeners that drug prices in the USA are wildly inflated. On average, people in other countries spend about 56% of what Americans spend on the exactly the same drug, but I know you did some work on this earlier in your career, didn’t you?
Jasmin Weaver: Yeah, about 10 years ago I did some advocacy on prescription drugs and prescription drug prices, and to me it’s just amazing to see how things have just gotten worse.
Nick Hanauer: It’s really terrible and getting more dire all the time, and the pod is devoted to this broad economic issues, and what’s particularly acute is that for most folks, their wages have been flat for 40 years.
Jasmin Weaver: Absolutely.
Nick Hanauer: But critical life inputs like prescription drugs and all kinds of drugs have gone up every year. So it’s a terrible double whammy, and the statistics really are dire. One in four Americans report they or a family member didn’t fill a prescription in the past year because of cost.
Jasmin Weaver: Yeah. I mean, this is something that impacts either I’m sure our listeners or people that our listeners know, and it’s really tragic because these are not nice to have things, these are things that people absolutely need for their quality of life, and their health, and their longevity.
Nick Hanauer: Yeah.
Jasmin Weaver: So it’s critical.
Nick Hanauer: This is stuff that is hitting people super hard, and I think if there’s a silver lining it is that folks are finally waking up to this crisis and there’s new interest in congress around it, and certainly a lot of folks are mobilizing to try to make this better, and on this podcast we get to talk to two fantastic people about this. First, we’ll be hearing from Priti Krishtel, who is the co-founder and co-executive director of I-MAK, which is basically a global nonprofit devoted to trying to reform the patent systems that enable these drug companies to hold their prices up for basically and infinite amount of time, and then also our friend John Arnold from Arnold Ventures who has been at the forefront of fighting the political and advocacy fight on these issues, so it should be a fascinating conversation with both of them.
Jasmin Weaver: Absolutely. I think it’s really exciting because both of these people are attacking this issue in very different ways.
Nick Hanauer: Yeah.
Jasmin Weaver: Priti is going to talk about something that’s often blinded people, which is a broken system, not our healthcare system, which is absolutely broken, but the part before the healthcare system, which is how these drug companies can monopolize the market and drive up prices, even before they enter our healthcare system. Then John, talking about the really innovative work they have done to try to attack this broken system and think of ways that shift power and try to solve the system. So two really great guests and how to approach solving this very complex problem.
Nick Hanauer: Should be really cool.
Priti Krishtel: My name is Priti Krishtel, I’m the co-founder and co-executive director of an organization called I-MAK, the initiative for medicine’s access and knowledge. I-MAK was co-founded in 2006, and we work to fix the patent system because it’s driving drug prices out of reach and costing human life.
Nick Hanauer: I’d be very interested in starting with you giving us kind of a lay of the land. Tell us what the problem is, particularly in the United States, and what problems generally are you trying to solve.
Priti Krishtel: So when we launched our US program in 2016 we realized that there was very little information available to the public about medicine monopolies, we also call those patent walls. So last year we produced a report called Overpatented, Overpriced, that investigated these patent walls on the top 12 best selling drugs in America. Now, these drugs have very high patent walls, and what I mean by that is that pharmaceutical companies on average had filed 125 patents for these drugs, so this allows companies to-
Nick Hanauer: Each or total?
Priti Krishtel: So on average some had many, many more and some had less.
Nick Hanauer: Wow.
Priti Krishtel: That’s right. So what happens is it allows companies to go from 20 years of monopoly protection, which is what the law allows, to nearly 40 years or even longer, and during that time, prices. Sorry, go ahead.
Nick Hanauer: No, we’re stunned.
Jasmin Weaver: We’re just stunned, yeah.
Nick Hanauer: You’re hearing people be stunned. Okay, keep going.
Priti Krishtel: So prices for these medicines, now these medicines we looked at, the 12 best selling drugs in the country have all been on the market for 15 years already, but now what we’re seeing is prices have increased by an average of 68% since 2012. That’s over seven times the rate of inflation. So that’s the core of the problem.
Nick Hanauer: Unbelievable, and when these prices should be coming down, scale economies are achieved.
Priti Krishtel: That’s right. So after a patent expires, we should have competition, right? And we’re not getting the competition we need.
Nick Hanauer: So typical bestselling drug has a 100 separate patents filed around it, and one of the outcomes that the drug maker is trying to produce is to lengthen the time of patent protection, from the statutory 20 years to 40 years by continuing to lay on patents.
Jasmin Weaver: That’s right.
Nick Hanauer: Holy crap.
Jasmin Weaver: I mean, that’s astounding. Can you give us a little bit of a sense of what type of drugs are in these 12 drugs and how they might impact people? Because I think I’d be helpful for our listeners to understand what kind of drugs we’re talking about.
Priti Krishtel: Absolutely. There’s drugs in the top 12 best selling drugs in the country that are for diabetes, that are for rheumatoid arthritis, that are for breast cancer, they’re really for a variety of conditions. One thing that we found really interesting actually when we were looking at the data is that these drugs by and large disproportionally impact seniors, and so that’s why we’re hearing from seniors around the country that they’re really struggling to be able to afford their medicines.
Nick Hanauer: I realize this is sort of a goofy question, but how many dollars do these top 12 drugs represent annually? Do you have any idea?
Priti Krishtel: I could give you an example on one of the drugs, if that’s useful.
Nick Hanauer: Sure, sure.
Priti Krishtel: So Humira is America’s top selling drug, and it treats rheumatoid arthritis, as I just mentioned, and Americans aren’t going to get cheaper versions of this drug until 2023. So we called in our report AbbVie, the company our worst offender. AbbVie had filed for 247 patents on this drug at the time the report was released in 2018, and a 136 at that time had been granted. So just to put that in perspective, that’s nearly four times the number of patents they filed for in Europe or Japan, and because of that lengthened monopoly period we were just talking about, the cost to Americans is at least an extra $14 billion compared to other countries.
Nick Hanauer: Per year or an aggregate?
Priti Krishtel: So it depends on the time period. America spends about $13 billion a year on Humira. So if you look at the next 10 years for example, we’re looking at nearly a $100 billion.
Nick Hanauer: Unbelievable.
Priti Krishtel: On one drug, yeah. It’s pretty surreal.
Jasmin Weaver: Can you talk a little bit about just the basics, which is why we in this country give companies a 20 year patent? Because there’s economic reasons why we do that, but then to extend it for another 20 years, giving a company a monopoly on something for 20 years should be something that’s highly regulated and highly reasoned why we do that. So can you talk a little bit about what rationale is being given, both for the 20 years, which I just think is helpful background information, and then that extra 20 years?
Priti Krishtel: Sure. So the patent system was originally brought in by the Founding Fathers to motivate people to invent. At that time, they rewarded inventors with a time limited monopoly that was supposed to be a 14 year maximum, and over time, understandably inventors asked for more and more protection, which is why today we have 20 years allowed by law, and it’s supposed to be in social contract. An inventor gets a reward of this monopoly period, during in which time they’re the only ones on the market, and then after that time limited monopoly ends, the public gets competition and gets the benefit of that invention much more cheaply. Over time, that’s been eroded, but the lobbies have been very successful in either trying to lengthen the time period or asking for extra protections and exclusivities, or what we’re seeing now is that there’s a lot of legal innovation. It’s innovation by the lawyers to figure out where are the loopholes in the system, how can we game the system and hold on to our monopolies as long as possible. I think what’s really positive right now is that legislators seem to be at the beginning of understanding what these games are and trying to figure out how to stop them, but it’s going to take a lot of public pressure to actually get policies that stop this kind of gaming.
Jasmin Weaver: And who are the winners and the losers? Who is benefiting from this and who is losing out?
Priti Krishtel: That’s a great question. There’s a reason that drug prices are top of mind going into the election this year. According to a recent Gallup West Health poll, 34 million Americans have lost a family member or friend in the last five years because of high drug costs. So in that sense, ever American is being affected, right? Because either your own health or the health of your family is costing you money, or as tax payers this is costing us money because our public programs are spending money on these medicines. Our most vulnerable communities, those are who are incarcerated, women, senior citizens, these are the folks who are bearing the brunt of what’s happening. So we are all losing in this moment.
Who is winning are our biggest drug makers. This is really a war of attrition. The more patents you file, the more you keep putting pressure on the patent office, the more patents you’re being granted and you’re lengthening your monopoly period and keeping your prices high.
Jasmin Weaver: Our understanding is that this problem is the worst in the developed world, in the United States of America. Is that true?
Priti Krishtel: I would say based on our data, that is what we’re seeing. Like I told you about Humira, we saw that in America companies are filing almost four times the number of patents they’re filing even in other developed companies like Europe or Japan. So lengthening the monopoly period here is happening because our patent system here in America is allowing for more patent filing and more granted patents. We need to raise the bar and not hand out so many patents, except for truly breakthrough inventions, and we need to amend the incentives. Right now how the patent office runs is bank accounts, is directly tied to the number of patents it grants. It runs on the maintenancy that it gets from granted patents. So we have to change that as well.
Nick Hanauer: Wow. In general, Americans are paying more for drugs than Germans, or Swedes, or Canadians, or Australians, correct?
Priti Krishtel: That’s right. In general that’s certainly true.
Nick Hanauer: Can you give us some examples.
Priti Krishtel: Sure. That situation is very complicated because it relates to a lot of things, right? It relates to our healthcare system and how we think about paying for drugs. Specifically on the patent issue, I think that our over patenting syndrome is supporting that system to keep drug prices high. One example is the breast cancer drug, Herceptin. For a one year course Herceptin costed somewhere in the range of about $70,000, and that drug, which is sold by Roche and Genentech, had its first patents filed on it in 1985. Now, Roche was filing so many patent applications on it, because it was trying to extend its monopoly until 2033, which would have given them about 48 years of complete and total market dominance. Now, luckily that didn’t happen. We now have two competitive products on the US market that are 15% cheaper, but more competitors would’ve meant that prices could’ve come down even more. What Roche did was they made settlements with a number of companies that delayed their entry, and then in turn that delays a more competitive market. So we’re seeing a whole toolbox of tactics being used, the over patenting, the settlements with competitors, the launch of new combination products.
Nick Hanauer: How can that not be, and I trust, how can that not?
Priti Krishtel: Yeah, no, it’s a great question. This is a major issue we have in the States right now. We need extended authority for the FTC to be able to pursue this type of activity as antitrust activity, and unfortunately the law is not set up that way right now, and that’s going to have to be a core part of any reforms that we look for in the coming years.
Jasmin Weaver: That’s shocking to me. I mean, if another company decided to buy out its competitors and prevent it from providing, that would be antitrust. I mean, that would be, you can’t do it in another history.
Nick Hanauer: You don’t have to buy them out. All you have to do is do a deal with them to say don’t enter the market so I can keep my prices high.
Jasmin Weaver: It’s amazing.
Priti Krishtel: That’s really interesting. Pay for delay is what it’s called. It’s come under a lot of scrutiny as of late.
Nick Hanauer: What the hell.
Priti Krishtel: And certainly the practice has been curbed a lot in recent years, but we’re still seeing this type of activity. In some ways we’re really concerned that we actually don’t have a true generic competitive market anymore.
Jasmin Weaver: Yeah.
Priti Krishtel: And that concern is growing. We need to be able to strengthen the ability to have a competitive market going forward.
Jasmin Weaver: Priti, what you’re highlighting is so important because it’s very clear that we have a completely broken market when it comes to prescription drugs. Now, one thing that’s interesting is any time people try to, and I’m sure you hear this argument all the time, when people talk about this and say look, we look around the world, we see people being able to access these drugs at far lower prices in other markets, why can’t we have that in the US? And one of the things you hear as a response is well, we have to pay higher prices because we need to make sure that these companies can invest in research to keep creating these important life-saving drugs, but I’d love to hear your response to how you respond to these type of arguments, because they’re very frequent and you hear of it in many different forms.
Priti Krishtel: Absolutely. I usually answer this question in two parts. First, this is a scare tactic. As of 2017 research showed that 89% of the industry’s revenue is actually coming from older repurposed products. That means that only 11% of the industry’s revenue is coming from newly launched products, or products that were launched in the last five years. So our system is not right now incentivizing new research and development as much as it could be. The other thing I like to raise is that I think it’s a really dangerous argument that is being advanced to frame this that other countries are getting drugs in such an affordable way, when in reality over two billion people around the world live without access to medicines, and governments including in developed countries and the emerging markets are actually struggling to pay for treatments. So drugs are being overpriced all around the world, it’s just that here in America we’re paying even more, and so we’re bearing the brunt of it more than most.
Jasmin Weaver: That’s a helpful framework. I appreciate that, because that’s not, I don’t always think about that, and I think we do frame it frequently as other people have access and we don’t, and for the most part, and so thank you for clarifying that. It’s a great point.
Nick Hanauer: So Priti tell us what are the top five things we should change, like if you were dictator for a day, what would you do?
Priti Krishtel: It’s really funny you ask the question that way because we just named the top five solutions that we see as the most promising. We named them raise, R-A-I-S-E. So the first is that we think that we need to raise the bar. We just shouldn’t be allowing hundreds of patents to be filed on a single medicine.
Nick Hanauer: Yeah, it’s nuts.
Priti Krishtel: So we need to reform the law and take care of that right away. The second, the letter A is amend the incentives. Right now the system is skewed towards the granting of patents, like I mentioned. The financial incentive they’re set up towards the grant, not towards rejecting, and so we really need to reform the law to address that as well. The third is increasing participation. Right now patent systems serves primarily corporations, and we think that we need to democratize the system, make it transparent and accountable to serve people not just corporations.
The fourth is standing. The public does not have legal standing to go to court after a patent is granted, it’s just for corporations. So we want to see the right to go to court be expanded to include members of the public, particularly patients. Then lastly, we need to expand the oversight. There is no independent unit monitoring the patent office right now and reporting to congress. That’s how we would catch the bad decisions, that’s how we would’ve been able to spot trends like the fact that today the top selling drugs have on average a 125 patents filed on them, and monopolies are being lengthened from 20 years to nearly 40 years. So we believe that a stronger oversight would help curb those types of problems.
Jasmin Weaver: The interesting thing also about your framework that you just outlined is this doesn’t have anything to do with our healthcare system, right? These are all things that have to do with the legal structures we set up to advantage prescription drugs in the market, and oftentimes when we talk about prescription drug pricing, we are talking more about our broken healthcare system, which brings them, kind of gets them in the hands of people, which is interesting because it compounds the problems that you’re talking about, right? Because if the drug is expensive in the market, when it goes through our healthcare system, that only unfortunately makes it more expensive. You are compounding a problem, a market failure, and then putting it through a system that then delivers those drugs at a even higher price that is our healthcare delivery system for prescription drugs is not transparent and is also broken.
Priti Krishtel: That’s right. What you’re saying is so important right now because I think there’s a huge thought light on the healthcare system, and there’s not one on the patent system and there’s needs to be. The patent system is a black box. People do not know about it, they do not understand it, they don’t even know that there’s the connection between the patent system and their everyday lives. So that is exactly what we’re trying to change right now.
Nick Hanauer: Can I ask you a personal question, what’s your background? How did you get into this mess?
Priti Krishtel: Sure. So I went to law school in the early 2000s, and when I graduated I went to India actually and worked at a legal aid office, and most of my clients either had cancer, or HIV, or TB or other diseases and they lived below the poverty line, and medicines were, that existed, were being priced out of reach. So it was there that I really learned about the patent system, and how it affects drug prices, and I dedicated the rest of my life to this work.
Nick Hanauer: And your organization operates globally?
Priti Krishtel: We do, we work globally and in 2016 we were asked to launch a US program to focus on the drug pricing issue here. So we maintain active litigation in many countries, but here in the US we’ve shifted really from thinking about litigation to really focusing on these investigations and starting to educate more and more people to understand the system so people can become agents for change themselves.
Nick Hanauer: In order to fix this we’re going to have to make some really profound policy changes, and those policy changes will be fiercely resisted by the pharmaceutical companies that have so taken advantage of these circumstances in the public. So it’s going to take a lot of organizing and a lot of education.
Priti Krishtel: It’s both, it’s policy change and it’s also culture change. We’re used to not paying attention to the patent system at all. For most other government agencies, whether it’s the FBI, or ICE, we’re following in the news. Patent office is responsible, according to their own website, I think for upwards of 38% of our GDP, and yet we know nothing about it. So I think that shift is what’s going to be most catalytic and needs to start happening now.
Nick Hanauer: By the way, it’s not just pharma that is manipulating the patent system, it’s taking place in the technology business and in tons of other businesses, where we’ve allowed. Our podcast is devoted to revealing the evils of neoliberalism, and all of these things are connected, giving corporations more power in the service of the idea that by doing so, everyone will benefit. You find it everywhere, everywhere.
Priti Krishtel: That’s right.
Jasmin Weaver: I know you’re early in your work here in the United States, but do you have any success stories that you’d like to end on, either from the US or from another country that you guys have been working in?
Priti Krishtel: Globally we’re most known for our impact litigation. So we first filed cases on unjust HIV drug patents in the early 2000s, and those cases were able to bring down the prices of medicines by up to 87%. On 30 drugs alone we were able to save health systems half a billion dollars. Now that we’re working here in the US, we are seeing the early successes of our investigations. Overpatented, Overpriced went viral in 2018. It had something like six million views and we’ve seen congress take it up in hearing, but the success we’re really looking for now is the day when everyday Americans are going to know what’s going in the patent office aren’t going to be engaging. So that’s really the direction we’re headed in and what we hope to achieve in the next five years.
Nick Hanauer: That’s fantastic.
Jasmin Weaver: Yeah, that’s a great goal.
Nick Hanauer: So we always ask our guests this one question, which is why do you do this work?
Priti Krishtel: I do this work because I think that our children and grandchildren are going to feel the effects of the choices we make right now. Every time we go to the pharmacy we’re feeling the effects of the system. It is only going to grow by the time my son is grown up, and so that’s why I do this work.
Nick Hanauer: Well thank you so much for spending the time with us. This has been fascinating, and good luck on your work. I hope it goes well.
Priti Krishtel: Thank you so much for having me, thank you.
Nick Hanauer: Yeah. This is really super interesting. Thank you.
Jasmin Weaver: Yeah, thank you for joining us.
Priti Krishtel: Appreciate it.
Nick Hanauer: Bye, bye.
Priti Krishtel: Bye.
Nick Hanauer: So that was an amazing conversation and in it I think both you and I sort of audibly gasped around this fact of how the drug companies are manipulating the patent system to extend the length of the monopoly from 20 to 40 years or even longer. Honestly, I had no idea.
Jasmin Weaver: I agree a 100%. I mean the level of disfunction in the market that came out in that conversation is amazing.
Nick Hanauer: Oh my god. It’s so terrible, and I’ve been around some pretty awful and crafty people, I just had no idea that that was going on. It’s really, that is super dispiriting.
Jasmin Weaver: And the pay to keep people out of the market.
Nick Hanauer: Oh my god.
Jasmin Weaver: I mean, just the level of nefarious activities to try to ensure that people can’t have access to life changing drugs.
Nick Hanauer: At a reasonable price, it’s just, it is shocking. Well, now we’re going to talk to our friend John Arnold. I hope what he tells us is not as upsetting.
John Arnold: I am John Arnold, I’m a recovering member of the finance industry who now focuses full-time on philanthropic efforts. So Laura and I co-founded and co-chair of Arnold Ventures, which is a policy foundation.
Nick Hanauer: John and I have gotten to know each other through The Giving Pledge, which is, I don’t know what you’d call it, a club for wealthy citizens who are willing to dedicate themselves to philanthropy, and it has been super fun to watch what you guys have done and do. Could you describe a little bit more about what Arnold Ventures does in the broadest sense, and then we’ll zoom into pharma?
John Arnold: Sure. I think it leads back to our view of what the role of philanthropy should be, and if you step back and look at it, about 60% of the economy is the private sector and about 40% is government, and 2% is philanthropy or charity. So the question is what’s the right role of what 2%? And when you take away giving to cultural institutions and take away giving to religious institutions, you’re down to about 1%. So we viewed the best role of philanthropy is trying to identify the areas where there was either a market failure or a political failure in the system. That is what are the problems that private industry is not incentivized to tackle and that government for some reason is refusing to tackle. So that’s led us to kind of a number of issues of public policy, including education, public finance, criminal justice, and then the one that I think has the most market failures and political failures of all, that is healthcare.
Nick Hanauer: Yeah, your commitment to structural change is super inspiring and it’s something that we watch, our team at Civic Ventures watches super closely, but let’s dive into pharma. So can you tell us first what the problem is?
John Arnold: So a Hatch-Waxman Act was passed in 1984, and it’s set the framework for how the pharmaceutical industry is structured that largely persists till today. There are two primary problems. I think the law was generally very good, is two things have changed. Number one is the bill was written when most drugs were small molecule for large population groups, while today the most expensive drugs are biologics and treat small populations. Then the second problem is that just like any industry with large financial rewards, whether tech, finance, or healthcare, just over the years that very smart people have figured out what the loopholes are in the system, and created or found ways around the spirit of the rules they found ways to abuse the system. So the question is kind of how do you create a more modern framework that addresses those issues?
Nick Hanauer: Right, but can you dimensionalize in economic terms the size of the problem or the nature of the problem?
John Arnold: Total pharmaceutical spending is somewhere between 15 and 18% of total healthcare spending. Total healthcare spending is about 18% of the total GDP, and both parts are growing. So healthcare is growing greater and greater part of the GDP, and pharmaceutical spend is growing in relation to healthcare. So you have these two things that are both growing greater than inflation, and that creates the structural problem. So after continuing for a couple decades, we get to a point where the system is just breaking, that consumers can’t afford their pharmaceuticals, governments can’t afford the large subsidies that they’re providing, employers can’t afford it, and to top it off, we’re not getting good access. So you would think that for the amount of money that we’re spending that people should get access to the drugs that they need, but the United States is paying the highest prices in the world and has very mediocre access.
Nick Hanauer: Right. Just in round numbers healthcare spending in the United States now is in the range of three and a half trillion dollars, and pharma is six, 700 billion of that, plus or minus, right?
John Arnold: Right.
Nick Hanauer: One of the ways in which the pharma industry pushes back on this egregious practice is to say well, that’s not what consumers pay, right? The insurance companies pick it up, but that’s bogus too, right?
John Arnold: Right. Insurance companies, whoever is subsidizing that, at the end of the day it comes back to the consumer, whether that’s government.
Nick Hanauer: We’re all paying.
John Arnold: Right, we’re all paying, or whether it’s your employer.
Nick Hanauer: Yeah.
John Arnold: So there’s been lots of talks about how median income has stagnated in this country, and that’s very true from a salary standpoint. From a total compensation standpoint, they tell us a different story because of the price escalation of healthcare and then employers provide, they subsidize significant healthcare expense that the total compensation is going up, but the individuals aren’t seeing it because it’s being eaten up by health expense, even more telling than what the profit margin is between cost of production and what you’re selling it for in the United States is what the same manufacturers are willing to sell it at to our economic peers. So why is a company selling in Canada at $30 a vile when it’s 10X the price in the United States?
Nick Hanauer: Right. I always like to sort of characterize the size of these problems. So have you ever thought about the problem in this way? If Americans are presently spending $700 billion a year on drugs, if you fix the system, how much would we be spending? In other words, if we were Swiss, or Canadian, or Japanese, how much would that $700 billion bill go down?
John Arnold: So there is an interesting proposed legislation by the House right now that does a number of things. It includes Medicare negotiation, and CBO has scored that and the projected savings for when the bill kicks in middle of next decade, is about 75 billion a year. To take that in context, middle of next decade the projected global pharmaceutical revenues will be about a trillion and a half dollars a year, growing it four to 5% a year. So do that math. $1.5 trillion, growing it 75 billion a year. The House bill will be almost exactly the same of as one year’s price increase for the pharmaceutical industry, and that, just that, is being labeled by the industry as a radical bill that’s going to destroy innovation and the incentives to innovate, and is just a crazy argument.
Nick Hanauer: Yeah. Well, it’s the classic what we call trickle-down argument. Is it anything which constraints us will harm you, right? It’s not that our profits will go down and our executive bonuses will go down, that’s not the problem. The problem is we will stop innovating and you’ll all die.
John Arnold: Right.
Nick Hanauer: One of the most exciting, or I’m not sure if you call it exciting, but certainly snazzy and enticing projects that you’re working on is something called Civica Rx. Can you tell us about that?
John Arnold: One of the market failures in pharmaceuticals is that there are some drugs that are relatively low revenue drugs that once they go generic, it is no longer a regulated monopoly, but becomes more of a natural monopoly, that it really only makes sense for one producer to be making the drug, and if there is competition, the profit margins are so slight on the generic drug companies that oftentimes they’ll either skimp on quality control or they will just stop making the pill because the production line is better producing something else. So you have cases where a drug goes generic, starts out with three manufacturers over time, you only end up with one manufacturer, and oftentimes that manufacturer is not very reliable because they have no incentive to invest in quality control. So once it’s down to that one manufacturer, you can have monopolized pricing, that is you can have these price spikes because there’s no option, and it takes an investment and time for a competitor to reenter the market. So for a period of time there is only one provider, and again, that provider is producing the highest quality drugs, so you sometimes have shortages based upon a manufacturing defect.
So a group of hospital systems and three philanthropies got together and decided that the way around this problem, this market failure, was to create a nonprofit generic drug company. Now, to date the focus has solely been on part B, or the drugs that are infused at the hospital, so not drugs that you buy at the pharmacy, but the hospital infused drugs. Again, because the founding partners were a number of hospital systems, but it was if we can create the drugs in a safe way and in a manner that guarantees stable pricing and low pricing, that that creates a huge benefit to society.
Nick Hanauer: It sounds like an extraordinary civic opportunity. Can you give us a perspective on what the price differences would be between what Civica RX could deliver for a particular thing versus what people are forced to pay in the existing pharma market?
John Arnold: Sure. So the effort is relatively new. We just released our first drugs this year, and the highest priority to date has been drugs where the production pipeline has had a long history of being tainted. So oftentimes these drugs end up on shortages, and a doctor will order a drug, find out that the hospital or their distributor doesn’t have access to the drug and has to use something else. So even with that, with the priority being on drugs that are on shortages rather than drugs that have had price spikes, there were some drugs where we were able to go in at 20, 25% of current market price.
Nick Hanauer: Wow, that’s fantastic, but does the ambition of the effort include things like insulin? Like why not make insulin?
John Arnold: Right.
Nick Hanauer: And sell it at three times cost of goods sold.
John Arnold: The regulatory framework for insulin is changing in the next two years, and the expectation is that we will have a price competitive generic insulin that’s very similar to today’s insulin that you’d buy branded within those two years, and it is a huge market, as you can imagine. So the private industry should be well incentivized to come in and make those prices come down. So the market failure on insulin is less clear than the market failure on some of the small revenue drugs. What has been the failure on insulin has been a policy failure, that the regulatory framework was not set up well to encourage or to even allow the generic insulins, and so that’s why they’ve been delayed vis-à-vis insulin in other countries.
Nick Hanauer: Just being ambitious, John, there’s no limit to the number of things an organization like this could take on. I mean, there’s a massive incentive within the hospital industry I would presume to buy these drugs at good prices.
John Arnold: But I think the private market, private industry, whenever it’s competitive, generally leads to a good result. So what’s the role of philanthropy and of nonprofits if the private sector is behaving appropriately and is aligned with the interest of society. So there is a belief, we’ll see what happens, but there is a belief that when generic insulin or the biosimilar insulin is available, that it will be competitive and that a number of for profit providers will be creating a competitive marketplace with the retail price being much, much closer to marginal cost versus what it is today.
Nick Hanauer: Yeah, but the world is your oyster. I just can’t think of a more fun project than to just sort of pick the top 100 selling products, figure out what the real marginal costs are, and just start whacking away. It’s just such and exciting way to create positive change and frankly to animate a policy framework. I mean, that creates a lot of motivations to fix the policy framework. I’ve done a lot of policy change, and external pressure is the secret sauce.
John Arnold: Right. The rules and regulations of this industry need to be updated to the types of drugs that we use in 2019, not the drugs that we used in 1984.
Nick Hanauer: So if John Arnold was benevolent dictator, this is a question we often ask our guests, what would he do, and therefore by extension, what should the listeners of this podcast prefer and yearn for from a policy perspective?
John Arnold: The policy solution I think has three components to it, and the first component is we have to end the anti competitive behaviors that manufacturers engage in today, and this stems back from that the spirit of the rules and the loopholes that have been found around those have now become so great that in many aspects, like EpiPen, like insulin, that they’re not competitive even though they should be. So there’s a whole kind of framework of solutions under that category of ending the anti competitive behaviors.
The second broad category is we have to align the incentives of the industry and end the market distortions. So things like PBM behaviors where they’ve been incentivized in many cases to choose the drug or procure the drug that has the highest rebate rather than the one that’s the cheapest. Things like drug coupons, where you’re trying to make it free for the patient to choose the more expensive drug. So it costs more for society even though that there is a cheaper drug that has the exact same efficacy. Paying doctors consulting fees to go use and prescribe your drug, or co-opting the patient groups. So for that whole category of where are the market distortions.
Third, and I think one that you can’t get around is what’s the right price? What’s the launch price and how much should price inflation be? So it’s a question about how do you price a drug that’s been granted a regulated monopoly by the government, that a US taxpayer has subsidized the creation of, where a third party has subsidized most if not all of the purchase price, and that is important to human vitality? What’s the right price in that circumstance? So if you think about the utility sector, with water, it meets many of those criteria, right? It’s not a regulated monopoly, it’s a natural monopoly, but there is strong price regulation. In America, and this is counter to how our economic peers have dealt with the problem, but in American we’ve been unwilling to put any real price regulation on what the right price of drugs while they’re under the exclusivity period should be.
Nick Hanauer: Right. Would you personally be an advocate for that kind of price regulation?
John Arnold: There is a concept of value based pricing, where you look at what’s the value of a drug, and it’s typically calculated by what’s the QALY, Q-A-L-Y, quality-adjusted life years. So by taking the drugs, how much does it improve life versus what’s the cost of it? Other countries have all faced this same problem as to how do you price a drug that’s a monopoly and that is important to human vitality, and they’ve more or less all ended up with some type of system that has a value based pricing mechanism, and that is a drug that improves quality of life by X has a maximum price of Y. Largely the drug companies all abide by that, they all make money, they all have the incentives in the system to do so. It encourages drug companies to focus their R&D on things that really do increase quality-adjusted life year, it creates a fair price, and starts creating a common currency between pharmaceuticals and other healthcare spending. In a world with no constraints you could say that’s double the price of pharmaceuticals. That way we feed even more incentive for innovation.
Nick Hanauer: Right.
John Arnold: But we don’t like in a world with no constraints, we live in a world with very real constraints. The first is that there’s a very real relationship between the price and access. So the higher the price, the less people have access to it. We have a lot of drugs today that people should be taking and aren’t taking just because of price. It all kind of faded back to how do you pay for quality or pay for value in the healthcare space, and recognize that there are trade-offs that a dollar spent in the pharmaceutical system is a dollar less that you can use to provide more access to healthcare, or to hire more general practitioners, or to put toward medical devices, or even to put toward housing.
Nick Hanauer: John Arnold, there are friends of ours who would call that position socialist.
John Arnold: I strongly disagree, and I think if you look at-
Nick Hanauer: I do too, but.
John Arnold: So if you look at the House, the Senate, and the White House today, where you’ve seen different proposals emerge from all three places, and the house bill, which the industry is running around using the words Pelosi and extremist in every sentence that they have to describe it. If you look really into the details of that bill, it’s largely has two components to it. One is it mirrors the issues in the Senate, a finance bill that was passed with bipartisan consensus, that really gets at this anti competitive behavior and aligning incentives, and then it combines a feature that the White House, that Trump speaks about, which is setting a reference price. That is what is Europe and our other economic peers paying for a drug, and that we should be paying some price-
Nick Hanauer: Similar, yeah.
John Arnold: That’s based on that, right? And the house bill combines those two things and the industry goes crazy and says it’s an extremist bill.
Nick Hanauer: Yeah, that’s right.
John Arnold: I don’t get it.
Nick Hanauer: A big government attack on freedom, a job killing big government attack on freedom.
John Arnold: I’m a huge defender of private industry when there aren’t externalities and when it’s competitive.
Nick Hanauer: Yeah. I’m with you.
John Arnold: But we have the product here by its nature, we’re granting a regulated monopoly on the product. So you must have some type of price regulation on it.
Nick Hanauer: Counter [crosstalk 00:46:41].
John Arnold: Also we don’t allow the payers to say no. Medicare is not allowed to say no if a doctor prescribes it, even the private insurers aren’t allowed to say no. So the whole notion of a demand curve.
Nick Hanauer: It doesn’t exist.
John Arnold: Largely doesn’t exist.
Nick Hanauer: Yeah, right. Exactly.
John Arnold: So how do you price that? How does a free market work? If we want to have free market principles, then we need a free market, but there’s no free market on this.
Nick Hanauer: In healthcare, right. John, this has been absolutely fascinating. I want to finish with a question we ask every guest, which is why do you do this work?
John Arnold: At its core or mission through our philanthropic work is to maximize opportunity and to minimize injustice, and with pharmaceutical pricing we saw the system that was being abused, not meeting the needs of society, and Laura and I are in this unique position where we have the resources, the time, and the interest to work on this problem. So we’re proud to try to create a system that benefits society and serves the interest of everyday Americans better.
Nick Hanauer: I love it. Do you need any more money for your Civica RX?
John Arnold: We always need money. We’re really looking for, there is a number of hospital systems that have signed on. I think more and more are seeing the value of it. There’s a chance that we start a part diversion of it so the drugs that the consumer is buying it directly through the pharmacy and I think at that point there will be opportunities for any other philanthropist to step in and provide some funding.
Nick Hanauer: Okay. I might be down with that. It’s a super cool project.
John Arnold: I’m going to give you a call.
Nick Hanauer: I’m really proud of you for doing it, so cool.
John Arnold: Got your name down.
Nick Hanauer: Okay. All right.
John Arnold: All right.
Nick Hanauer: John, thank you so much for spending the time with us, and we’ll talk to you soon.
John Arnold: Sounds great.
Nick Hanauer: Okay.
John Arnold: Take care.
Nick Hanauer: Take care, bud. Bye.
So Jasmin, those were fascinating conversations and yikes, I learned a lot.
Jasmin Weaver: Absolutely. I mean, they were great conversations. I mean, it’s no wonder that 80% of people think that drug prices are way too high and want congress to act.
Nick Hanauer: Right, and it’s a complicated problem, but it is just one of those perfect instantiations of how neoliberalism and the neoliberal perspective, and the policy agenda that followed from it ended up benefiting a few people at the top and harming almost everyone else, and all the same tricks were used here as they are in other domains, from the classic trickle-down thing that pharma uses, which is well if anything you do to regulate our ability to gouge consumers will harm the very people we intend to help.
Jasmin Weaver: Absolutely, absolutely.
Nick Hanauer: Right, the idea that well, but then we won’t be able to invent drugs anymore and you’ll all die.
Jasmin Weaver: But importantly, we will rig the rules to benefit us, while telling you that you shouldn’t regulate anything else.
Nick Hanauer: Yes, which sounds a lot like if you raise wages it’ll kill jobs, right? It’s always the same. I mean, if there is anything useful that we can do in this podcast, it’s to inoculate our listeners against those claims, that when you hear that nonsense, you automatically know that they’re lying.
Jasmin Weaver: Absolutely.
Nick Hanauer: I’m not sure if I should be happy or sad about the stuff that we learned today, but for sure it’s stuff that people should know because it’s going to be a long fight to get it all straightened out.
Jasmin Weaver: Absolutely, and I think these interviews help people understand who is benefiting from this broken system, who is being harmed, and a little bit about what you can do about it.
Nick Hanauer: Yep.
Jasmin Weaver: Pitchfork Economics is produced by Civic Ventures, the magic happens in Seattle in partnership with The Young Turks Network. If you like the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer, follow our writing on Medium at Civic Skunk Works, and peek behind the podcast scenes on Instagram at Pitchfork Economics. As always, from our team at Civic Ventures, thanks for listening. See you next week.