Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Drug pricing is a conundrum for the country, and apparently for Donald Trump too. 

Last week, some pharma CEOs came out of a meeting with the new president believing he'd dropped his previously stated support for direct Medicare negotiation of drug prices. But at a press conference on Tuesday, Press Secretary Sean Spicer said Trump had not, in fact, dropped that support. 

Investors seem understandably confused about where exactly the president stands. The Nasdaq Biotechnology Index fell on Wednesday, but mainly due to a 10 percent drop in Gilead Sciences Inc., and less than when Trump expressed support of price negotiation last month.

But the back-and-forth is the umpteenth reminder that pharma is unwise to make self-serving assumptions about Trump's goals. Failing to confront the pricing issue head-on has the potential to backfire. 

Pared
Sean Spicer's revelation that Donald Trump still supports Medicare negotiation of drug prices took a bite out of biotech stocks Tuesday
Source: Bloomberg
Intraday times are displayed in ET.

Express Scripts's latest annual report on drug pricing and spending by employers shows drug-cost growth did slow last year. The unit cost of specialty drugs, the most expensive category of medicines, rose by 6.2 percent after drugmaker discounts. That's the smallest increase in five years.

Dig Deeper
After accounting for drugmaker discounts to payers, price increases for drugs slowed in 2016. But much of the slowdown was due to just one drug class; other prices kept rising
Source: Express Scripts

It would be nice if this price-increase slowdown was a reaction to widespread criticism. But the vast majority of it was due to a new generation of hepatitis C drugs, the unit costs of which fell by almost 7 percent due to rising competition and discounts. Prices accelerated for inflammation, diabetes, multiple sclerosis, and HIV drugs.

The pharmaceutical industry's proposed alternative to Medicare negotiation is reportedly value-based pricing -- offering discounts if drugs don't work as advertised. It's an interesting concept. But it's difficult to actually measure the impact of many drugs, and it hasn't been proven that such pricing structures result in substantial, large-scale savings. Widespread implementation would take years, and prices would stay high for many medicines. 

Medicare negotiation would be politically difficult to enact and is not a silver bullet. But it would certainly have a more immediate impact than value-based pricing. It's popular with voters from both parties. And there's no question other countries use it to great effect, as Spicer mentioned in his press conference. 

Plenty of drugs in competitive classes such as diabetes could come under significant pricing pressure if Medicare negotiation becomes policy.

Doctor's Bill
Many drug companies will suffer if Medicare is permitted to directly negotiate drug prices, some of which see big annual price increases
Source: U.S. Centers for Medicare & Medicaid Services, Bloomberg
Note: Januvia, Eylea, Rituxan, and Xarelto are Medicare only. 2015 drug-price change is for Medicare only.

In the face of such a threat -- and a president who has called prices "astronomical" -- pharma is offering only a possibly ineffective experiment that requires little near-term sacrifice. This suggests the industry is still not facing the impact of ever-escalating prices on patients and its reputation.

Some companies have independently taken positive pricing steps. In recent months, Allergan PLC, AbbVie Inc., and Novo Nordisk A/S have promised (relatively) modest annual price increases of less than 10 percent on their drugs. 

A 10 percent increase is still four times consensus U.S. inflation expectations for 2017. That's not much of a sacrifice. But it's the type of concession, if adopted broadly, that might let a very image-conscious president take a victory lap and leave the industry mostly alone.

If it puts Medicare negotiation to bed for more than a week, such a sacrifice is worth it. 

Graphics help from Rani Molla

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net