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BYU Law Review

Authors

Cami R. Schiel

Abstract

Many recognize escalating drug prices as a significant dilemma related to America’s rising healthcare costs. Yet few can agree on what to do about them. Unaffordable drug prices are a result of many complex forces. One theory to address this problem is to reduce all government intervention and let normal market forces act as they usually do to bring the goods’ prices down to consumer-friendly ranges. However, the prescription drug market is not, and perhaps never can be, a normal market. Reasons for this include (1) a lack of price transparency, (2) information and control asymmetries between patients and physicians, (3) third-party payors, (4) demand that remains constant irrespective of any exorbitant price increases (i.e., market inelasticity), and (5) patent-ensured monopolies. These factors disrupt the normal market forces that usually maintain prices at levels amenable to the general public (i.e., price equilibrium). Left unchecked, Big Pharma increase their prices partly to pay for elevated marketing and other expenses and partly to recoup greater earnings. Consequently, they rake in substantial profits—at an average greater than any other industry. Thus, rising drug prices burden not only those who need them but also those who are expected to help pay for them. To right this abnormal market, this Note suggests an alternative theory: that Congress should apply a medical loss ratio framework to the pharmaceutical drug industry, similar to the ratio framework applied to reform the health insurance industry. This framework seeks to balance corporate profits with consumer benefits by separating profits and “other” less value-adding expenses from those that add greater value to the consumer (i.e., “medical loss”). In the health insurance industry’s 80:20 ratio framework, if the less value-adding expenses (e.g., profits, sales and marketing) cross the ratio threshold (20%), then the companies must reimburse the excess back to the consumer. This measure has eased some insurance premium increases. Similar reform is needed in the pharmaceutical industry, as currently the industry averages 21% profit— significantly above that of other industries—while also spending around 23% on sales and marketing and around 30% on manufacturing.Therefore, the average medical loss ratio is roughly 30:70 (30% on medical loss and 70% on less value-adding areas). Imposing a stricter ratio threshold, such as 40:60, would provide some much-needed incentives for drug companies to reduce their lesser-value-adding expenses and, as a result, reduce drug prices. If Big Pharma failed to meet the 40% threshold, then the excess would be returned to the consumer. Imposing a medical loss ratio regulation in the pharmaceutical industry is a promising solution to one of our nation’s greatest healthcare cost concerns.

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© 2018 Brigham Young University Law Review


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