What happens if President Biden’s drug pricing plan passes?
By David Beier and Peter Kolchinsky
David Beier is Managing Director of the San Francisco-based life science venture capital firm Bay City Capital. He previously held senior positions at Genentech and Amgen and also served in government as Vice President Al Gore's Chief Domestic Policy Adviser.
Peter Kolchinsky is a founder and Managing Partner at RA Capital Management and author of The Great American Drug Deal.
August 20, 2021
What if the Biden drug pricing plan passes?
No, the sky won't fall. But unanswered policy questions about the plan leave the biotech industry with two competing future scenarios, neither of which looks particularly promising:
A nation with far fewer new innovative medicines, fewer jobs, and a less competitive position relative to China, or
A bureaucratic muddle that leaves investors so uncertain that they sit on the sidelines, leaving patients with fewer and less innovative treatment options in the future.
The central thesis of Biden's plan assumes that massive savings for everyone can be achieved if the government can somehow engineer much lower drug prices.
Specifically, Biden proposes four actions on drug prices:
promoting greater use of generics (already 93% of prescriptions) and biosimilars;
unspecified steps toward importation of drugs from countries like Canada or members of the European Union;
capping drug price increases that exceed a preset inflation index (CPI or CPI-Medical); and
government "negotiation" for branded drugs without competition.
Promoting the use of generics and biosimilars is consistent with the intent of US drug policy for the past 40 years. Drugs offer great value once they become a public good by going generic, so it only makes sense to use them.
Importing drugs from Canada simply wouldn’t work. Canada has only one-tenth of the US’s population and it frankly doesn’t want to send its drugs our way. While a few individuals might be able to buy drugs from Canada, if that happened at scale, Canada’s inventory would be quickly cleared out, leaving nothing for Canadians. It’s not like drug companies would keep shipping limitless amounts of drugs to Canada at low prices knowing that they were being rerouted to the US. And drug companies could also start selling drugs to Canada at US prices, with the result that Canada might not buy them, depriving patients. The end result of reimportation is that it doesn’t lower prices in the US but actually raises them elsewhere.
Limiting drug price increases to inflation would be a big political win for the administration, but is not likely to save money in the long run, as drug companies may simply increase prices at launch to account for any perceived future loss in revenue. Furthermore, net prices of drugs are already growing at rates below inflation. There would also be some kinds of drugs that may not be developed because of too much uncertainty about market size and therefore an inability to engage in price discovery post-launch. (Shifting the inflation cap so that it only kicks in five years after a drug’s launch would solve that problem.)
If the Biden drug plan is enacted, it means the United States will be consciously volunteering to put less capital to work in a very large industry where the United States leads the world in making products that improve lives and save money in the long run.
So what exactly does Biden mean by “negotiation”?
That leaves the final point in the proposal, government “negotiation” for the prices of drugs without competition.
On its face, this proposal may seem simple, even logical - for any drug that does not face competition, the government will intervene to determine a “fair profit” for the manufacturer.
But the devil is in the details and “negotiation” is a word with a broad definition. A manufacturer is more likely to receive a 'take it or suffer the consequences' offer from the United States government, the largest drug purchaser in the world and the financial source of more than half of national health spending. Being forced to choose between a government-determined price or a 90% tax on profits isn’t a negotiation, it’s a price control.
It’s supposed to be reassuring that these calculations will only apply to medicines with no competition. But no one knows what that phrase means. Most drugs on the market today have “competition” in the form of other drugs in the same class or a related class, surgery, or surrogate remedies. If the Biden administration means to extend this designation to “branded drugs with no generic or biosimilar alternative,” then the number of products being reviewed (and the administrative burden of such review) expands by a great deal. That broad definition would mean that the four SGLT2 inhibitors currently competing with one another for share in the diabetes market (their net prices already reduced by rebates aggressively negotiated by PBMs, which do not pass on savings to patients), would be deemed to not have “competition” and therefore qualify for government “negotiation.”
What is meant by a "fair profit" is also unknown. If the federal government proposes a cost-plus contract (e.g. including development, manufacturing, and sales costs), who will audit those costs? What can and cannot be included?
Will companies be able to include the costs of failed drug research? Of acquiring or licensing a drug?
Will the government calculate the real but hidden costs of the time value of money?
We doubt it - or rather, we have no confidence to assume otherwise.
Apart from Medicare negotiation, the most frequently discussed tools to exercise federal power over prescription drug spending are restrictive formularies and overt price controls. Each tool has its own set of objections.
Formularies are meant to limit access to medicines that suit subsets of patients with a particular disease. Often those patients are from disadvantaged populations.
And price controls have been uniformly understood as a method for deterring investment in a particular sector of the economy. It’s simple - if investors have a choice between a product with no explicit limits on price and profitability and one burdened by profit caps they will uniformly choose the former.
Other tools, such as the mandatory Medicaid rebate program, have the perverse effect of raising list or sticker prices to finance the required discount.
It’s telling that when The Economist explored the question of where the majority of excess profits in healthcare go - defining excess as being over 10% return on capital - they concluded that the lion’s share goes to middlemen like insurers and PBMs.
IQVIA reports that while total drug spend in the US might appear to be as high as $697B in 2020, drug manufacturers received roughly half of that - $359B - of which patients paid $77B out of pocket. So insurance plans, including Medicare, paid only 40% of the headline number.
All those rebates and discounts and pharmacy markups and PBM fees create the appearance that drugs cost far more than they do. For all the talk of drug price increases and the need for caps, net drug prices on average have been growing at less than inflation for the last five years. Critics point to examples of drugs whose prices have gone up, ignoring the average. But that’s like complaining about rising prices of a few food items in a store while ignoring overall declines. The evidence points to there being a highly functional market for drugs with plenty of payer leverage keeping drug prices in check.
Despite that, some think the government could adopt a national health technology assessment (HTA) or value calculation as an attempt to systematically determine what a given drug is worth. These schemes, prevalent in European countries, are complex to administer and can lead to underpayment for innovative medicines, undervaluing patient-centric quality of life concerns and stymying breakthrough drugs’ route to market. Fundamentally, they are based on oversimplified math that looks only at a drug’s launch price and a restricted set of the benefits it would offer a patient treated today (ignoring, for example, that drugs go generic, benefit caregivers, and that improvements to medicines are iterative).
So, what exactly does Biden mean by “negotiation”? Either he literally means true and proper negotiation where government plans preferentially direct patients to use the lower cost treatment from among several competing acceptable treatments, which is what you would expect of a properly functioning market, or he means price controls. And unfortunately, based on all the evidence, Biden means price controls.
If the Biden drug plan is enacted, it means the United States will be consciously volunteering to put less capital to work in a very large industry where the United States leads the world in making products that improve lives and save money in the long run.
No real argument can stand against the fact that less capital means fewer new products for patients.
Do we as a society really want fewer new medicines? Or is it just politically expedient to pretend we’re saving money while destroying the very industry in which we most excel?
Moreover, would such price controls make any significant impact on what patients pay? No. For a patient who can’t afford a $5,000 deductible, even slashing a $50,000 treatment’s price by 90% would still leave that patient unable to afford his or her $5,000 out-of-pocket obligation.
The real solution to affordability is hidden in plain sight amidst all the rhetoric about drug prices. And on this, Biden’s instincts are correct. He recognizes that soaring out-of-pocket costs create an insurmountable barrier to care for many American families and is committed to expanding health insurance coverage to those who go without.
The Affordable Care Act outlawed coverage discrimination against patients based on their pre-existing health conditions. But today’s high out-of-pocket costs essentially discriminate against low-income individuals: even if they pay for insurance, they can’t afford the copays when they get sick. That's crazy - that's not insurance, it's false advertising.
Non-profit organizations like No Patient Left Behind advocate for mandating low, affordable monthly caps on all out-of-pocket costs (disclaimer: the authors serve on No Patient Left Behind’s Advisory Board and Steering Committee). It’s straightforward: the most impactful way to take the undue financial burden off of patients is to reduce out-of-pocket costs, not just for Medicare but for all commercial health insurance plans.
Some say we need to charge high out-of-pocket costs to prevent people from over-utilizing treatments - from getting care they don't need. Academic experts call this “putting skin in the game.” But insurance plans charge out-of-pocket costs even when their own specialists explicitly agree via prior authorization that a treatment is right for a patient. So this has nothing to do with proper care and is simply a tool for selling a false safety net to people with lower incomes, including seniors. There is broad, bipartisan support for out-of-pocket cost reform among policymakers and citizens alike and we can all align behind this simple mission.
We have to ensure that health insurance is actually insurance, which means that it must cover appropriate care for everyone. Rather than pass an ill-informed drug pricing plan that sounds nice but won’t pass on any savings to American patients, Biden and Congress should update the ACA to cap what any insurance plan can charge out of pocket. Out-of-pocket costs should never be the reason a person in America can't get appropriate care.