But what about …
November 27, 2024
You’ve read one of our articles about why the amount we pay for branded drugs while they’re on patent is worth it, or our calls for insurance reform. But you still have some questions. We hope this answers your question, and if it doesn’t, write to us to let us know why.
Because some people will say “but what about…” and follow that up with something about patent monopolies, other countries paying less, old drugs not going generic, executive compensation, direct to consumer advertising, and other concerns. For more on why all those issues are either not the problems they are made out to be or solvable with careful policy that preserves incentives for innovation and, in any case, not a reason to ignore our core arguments, please keep reading and, when you’re done, visit www.nopatientleftbehind.org.
What about drugs that don’t go generic as they are supposed to after their patents expire?
That’s not okay. It makes sense to keep novel drugs highly profitable so that innovators and investors are incentivized to keep making more novel and better medicines. That’s what the patent system was designed to do. So provisions like Medicare “negotiation,” which is really a price control, make sense when applied after initial patents have expired as a backup plan that enforces the intent of the patent system for drugs to go generic and drop in price. The patent system under the Hatch-Waxman Act of 1984 provided for an average of 14 years after a drug launches before it goes generic. The IRA allows biologics 13 years before their prices are cut. That’s a touch short – but it’s close enough that it’s hard to say that it will interfere with the intent of the patent system. But price controlling small molecules just nine years after they launch is far too short and renders discovery research of such drugs for diseases of aging unfundable. A simple legislative fix would be to change nine to 13 for small molecules, eliminating the IRA’s “pill penalty” on innovation. After all, why would you want to discourage the most equitable form of medicine there is?
Those who suggest going the other way by lowering biologics’ 13 years to be nine and expanding such “negotiation” from Medicare to all insurance would simply discourage investment in all medicines.
But what about other wealthy countries paying less for medicines than the US?
Yes, that’s annoying. Those countries are free-riding on the US, as they do in other domains, such as military spending. They count on the US paying what it takes to create medicines (or have our navy patrol the oceans) and then claim they are too poor to pay similar prices (even adjusted for GDP/capita). And because these countries often have government-controlled healthcare rather than the competitive marketplace of insurance plans we have in the US, those countries can simply state what they are willing to pay and drug companies are told to take it or leave it. Since making some money is better than making no money, companies facing that option generally decide to accept whatever price each country claims is its limit, especially since rejecting their prices means denying patients access to treatment and courting bad press.
If these countries had proper, competitive insurance markets, then companies could find out how citizens in those countries really feel about the value of novel medicines. But UK citizens can’t switch plans when they don’t like the drug formulary. What the UK decides centrally for everyone is what everyone gets. And drug companies, not wishing to forego making at least some small profit, typically cave to those countries’ demands. Were the US to take the same take-it-or-leave-it approach, investment in R&D would cease. Because while those countries are freeriding on the US paying enough for novel medicines to drive investment in R&D, the US can’t freeride on itself. The solution is for the US to use its trade policy to coerce other countries to pay more for medicines. We’ve done it before, as in the case of NAFTA getting Canada to stop violating US drug patents by making generics of novel still-patented medicines.
If there were no co-pays, can drug companies then just charge any price they like? Won’t America be taken advantage of collectively, out of our premiums?
No. Because drugs are priced in a marketplace and plans can either directly say no or can induce prescribing friction that reduces a drug’s market share. This happens all the time. It’s important to remember that price is not anyone’s reward. A company can charge $1B per patient for a drug, sell nothing, and go bankrupt. Society pays revenue, not prices. And simply not covering a $1B/patient drug means society pays nothing and the company makes nothing. Revenue is a function of price times volume, which is to say the number of people who get the drug. Insurance plans say no to drug companies all the time. That’s why they are able to negotiate discounts, particularly in competitive markets where more than one company sells a certain kind of drug (typically, those discounts take the form of rebates drug companies pay back to plans – unfortunately our system doesn’t require those rebates to be passed on to patients).
Even uniquely effective drugs like Vertex’s Trikafta offer surprisingly great value to society even though there are no competitors because Vertex priced the drug in the realm of other orphan disease drugs rather than pushing for an unprecedentedly high price. In fact, it’s the very concept of precedent that is so important to pricing assumptions and to guiding investors and innovators to what projects they are willing to fund. When they see that society has been willing to cover a drug like Trikafta at a price of roughly $270K/patient, allowing Vertex to make billions of dollars in the US, that suggests that America would pay similar prices for similarly effective drugs for other diseases. But when we see that a particular drug, such as a novel drug for heartburn, cannot command an attractive price and makes very little money, that’s a signal for innovators and investors to stay away from similar kinds of projects. The market is made of millions of products at various prices selling well or poorly and thereby instructing everyone as to what society values highly enough to pay for. Investors don’t have to ask society what it wants; they can just look at what it actually pays for. That’s core to capitalism and market-based innovation.
It’s the competition among insurance plans in the US with all the competing drug companies that ultimately sets the prices at which medicines generate revenue for their companies. So when cancer drugs generate high revenues but drugs for treating alcohol abuse generate low revenues, innovators and their investors focus on continuing innovation in the treatment of cancer. The market for today’s novel medicines therefore guides what novel medicines innovators and their investors work on to launch in the future.
And since only the US has an attractive market for novel medicines (the high cost of marketing medicines across the rest of the world at lower prices results in low profits ex-US), nearly all the innovation that the world gets is the result of innovators catering to the needs of Americans. When other countries suffer from a disease not found in the US, there is little funding towards solving those problems. At best, those diseases attract some philanthropy, but the pace of innovation is far slower than what for-profit markets are capable of driving.
American readers of this article should appreciate that the 8% they spend now from their premiums has been driving the quest by innovators and their investors to their healthcare problems. Spending a few percent more is an affordable fix to making medicines affordable to all Americans. Imposing price controls on novel medicines will mean that the world’s biomedical innovation engine will no longer hum for the benefit of America. Americans would then eventually lose hope of progress in the treatment and cure of the diseases that plague them, something people in other countries know well.
The healthcare solution set
So there’s no question as to what solutions I support, it’s the same as what No Patient Left Behind has been promoting for years. We must solve affordability of novel medicine not through price controls but through 1) insurance reform by capping out-of-pocket costs for patients and 2) removing roadblocks to first-dollar coverage by self-insured employers (e.g., removing the requirement for high deductibles and/or high cost-sharing as precondition of a company’s offering employees the option of funding health savings accounts for future medical expenses).
Lowering OOP costs on appropriately prescribed medicines that insurance plans claim to cover would ensure that patients get honest coverage, though that also requires that prior authorizations (PAs) be used reasonably. That means PA should be real-time and electronic whenever possible; they should be designed to confirm an appropriate prescription, not grind down physicians into not wanting to even try to prescribe a medicine. And as in the case of the law Minnesota recently passed, we should ban repeat PAs for chronic treatments that cause patients to miss doses as they deal with extra bureaucracy when it’s clear that they still have the condition.
To preserve incentives for investment in innovation, we must preserve market-based pricing for a patent-intended period of time, which has typically been around 14 years. That means we must change the nine-year limit on market-based pricing imposed on small molecules by the IRA to at least the 13 years that the IRA grants to biologics. Drugs going generic is indeed a source of great value to society and keeps the biopharmaceutical industry working on making new and better medicines. So to get value from medicines, we should leave the market to set prices during the patent period, rely on genericization after patents expire to bring their costs to society down in the long run, and, when a drug can’t be copied, rely on price regulations to achieve the intent of the patent system (which is for prices to come down after patents have expired).
Ideally, we would incentivize the continued upgrading of launched drugs, such as with additional indications, by granting an extension to a drug’s patent and market-based pricing period (i.e., added time before IRA price setting) for each new indication or notable upgrade, akin to pediatric extension.
And as for America paying more for medicines than other countries, that is best addressed by having the US government make the same case to other countries about paying for medicines as it does about paying for military spending and contributing to global security. Shout “pay more, damn it!” and then consider what trade policy (e.g., tariffs) might get them to. Should trade policy result in other countries paying more of their fair share for novel medicines so as to help incentivize continued innovation, that’s a wiser approach than passing laws that cap what America pays at prices paid by other countries.
We wouldn’t pay as little for our military as other countries spend on theirs; we pay what we must to protect Americans. Neither should America pay less for medicines than what it takes to protect ourselves from diseases.
This is not meant to be a comprehensive set of reforms for all of healthcare. These are meant to address most of what drives America’s anger about drug prices and barriers to access.
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Photo by Mike van den Bos on Unsplash
Photo by Mike van den Bos on Unsplash
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