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Sudy: Medicare Price Control Bill Would Lead to Fewer Cutting Edge Drugs

Prescription drug price controls in a bill passed by the U.S. House of Representatives would reduce investment in drug research and development by $663 billion over the next 17 years, leading to 135 fewer new drugs available to patients, concludes a study by two economists at The University of Chicago.

“This drop in new drugs is predicted to generate a loss of 331.5 million life years in the U.S., 31 times as large as the 10.7 million life years lost from COVID-19 in the U.S. to date,” states the analysis by Tomas Philipson and Troy Durie entitled, “The Impact of H.R. 5376 on Biopharmaceutical Innovation and Patient Health,” published on November 29.

H.R. 5378 passed the House as part of the Build Back Better reconciliation legislation, on November 19, and its provisions are being considered in the U.S. Senate.

Philipson’s and Durie’s projections far exceed those by the Congressional Budget Office, which projects a reduction in drug research spending of only 0.63 percent and the loss of just five drugs through 2039.

Drug Price Negotiation

The current prescription-drug pricing plan would have the federal government negotiate drug prices with pharmaceutical companies, the White House announced on November 2.

“Medicare will negotiate prices for high-cost prescription drugs,” said the White House. “This will include drugs seniors get at the pharmacy counter (through Medicare Part D), and drugs that are administered in a doctor’s office (through Medicare Part B).

 “Drugs become eligible for negotiation once they have been on the market for a fixed number of years: 9 years for small molecule drugs and 12 years for biologics. Medicare will negotiate up to 10 drugs per year during 2023, with those prices taking effect in 2025, increasing to up to 20 drugs per year.”

‘Clearly Defined Negotiating Process’

The “negotiations” will occur between the U.S. Department of Health and Human Service’s Centers for Medicare and Medicaid Services (CMS) and drug manufacturers.

“The policy will establish a clearly defined negotiating process that is fair for manufacturers and gets the biggest savings on drugs that have been on the market a long time,” said the White House.

“This prevents drug companies from abusing laws to prolong their monopolies, while encouraging investments in research and development of new cures.”

Excise Tax Stick

“Drug companies that refuse to negotiate will owe an excise tax,” said the White House.

The excise tax to be imposed on reluctant drug companies would be 95 percent on gross sales, and they will face another tax penalty if “prices for a drug increase faster than inflation.”

Once the law goes into effect, “future drug price increases will be compared to current prices,” said the White House. “We will finally put an end to the days when drug companies can raise prices with impunity.”

Generics, Biosimilars Undermined

It is expensive to come up with competing drugs, says Dan Leonard, president, and CEO of the Association of Accessible Medicines (AAM), a trade group of drug manufacturers that produce generic or slightly different versions of name-brand drugs.

“The development of a biosimilar can cost $100 million to $250 million and it can take up to ten years to achieve FDA approval,” Leonard wrote at statenews.com on November 6.

Brand-name drug manufacturers could be forced to lower their prices in a few years, thereby undercutting the price of generics, says Monet Stanford, director of policy at AAM. “This means that the bill would generate less savings for patients than simply encouraging generic competition,” said Stanford.

Fewer Generics Competing

If enacted into law, H.R. 5378 would likely reduce the number of generics and biosimilars as well as new drugs by an unknown amount, say Tomas and Durie. Because prices will artificially be set for brand-name drugs, there will be little incentive to develop cheaper alternatives.

“This is not ideal as more generic competition leads to more price declines,” wrote Tomas and Durie. “Generics and biosimilars are an effective way to create competition and affordable easy to administer drugs to improve access to these treatments.”

Value from Competition

Price competition is the answer to improving prescription drug affordability, says the Council for Affordable Health Coverage (CAHC) in a set of proposals published in May 2019.

“Competitive markets do more to lower drug costs and improve access than government price controls,” states CAHC.

CAHC recommended reducing barriers to generic and biosimilar drug development, increasing price transparency, using value-based payment models in prescription drug coverage, and changing regulations to make it easier for Medicare beneficiaries to pay for drugs in Part D.

No Incentives, No New Drugs

The price controls in an earlier proposal, the Lower Drug Costs Now Act (H.R. 3), were stricter than the provisions of the bill approved by the House. Tomas and Durie also made projections under that proposal, estimating there would be 167 to 342 fewer new drugs approved.

Price controls will stifle innovation, wrote Grace-Marie Turner, president of the Galen Institute, in the Daily Signal on September 21, 2021.

 “The U.S. will forfeit its leadership in this global industry if [such bills] were to pass by eviscerating the incentive for investors to risk capital to bring new drugs to market, already an arduous, high-risk process,” said Turner.

Bonner R. Cohen, Ph.D. (bcohen@nationalcenter.org) is a senior fellow at the National Center for Public Policy Research.

Internet info:

Tomas J. Philipson, Troy Durie, “The Impact of HR 5376 on Biopharmaceutical Innovation and Patient Health,” The University of Chicago, November 29, 2021:  https://cpb-us-w2.wpmucdn.com/voices.uchicago.edu/dist/d/3128/files/2021/08/Issue-Brief-Drug-Pricing-in-HR-5376-11.30.pdf

This article was updated on December 9, 2021.
Bonner R Cohen
Bonner R. Cohen is a senior fellow with the National Center for Public Policy Research, a position he has held since 2002.

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