New Drug Pricing Bill from Democrats Balances Innovation, Access

Yesterday, a group of 20 Democrats in both the House and Senate introduced the Improving Access to Affordable Prescription Drugs Act, a 129-page bill designed to lower drug costs while increasing innovation and promoting transparency.  The bill aims to accomplish a number of different goals, and in this post I’ll go through the different functions it serves and consider some notable provisions.  For those who are interested, here’s a provision-by-provision summary.  This is going to be a very long post, so I apologize in advance.

On the whole, I think there’s a lot to like in this bill, particularly in its promotion of innovation and in the way in which it seeks to curtail bad actors within the industry.  However, I don’t agree with all of its provisions (as you’ll see) and I view some of its proposals as kludge-y solutions to kludge-y problems our complex system has created.  I’m not yet sure whether I see that as a bad thing, to be clear – it works to create meaningful change within a system that was cobbled together over decades, mostly accidentally.  But it isn’t the platonic ideal of a value-based pricing system, or anything similar.

The bill presents its provisions in four parts: Title I, Transparency, Title II, Access and Affordability, Title III, Innovation, and Title IV, Choice and Competition.  I actually view the functions of the provisions of the bill as being organized a little differently, and I’ll present my analysis in that order.

Category 1: Pharma Behaving Badly.  About half of the provisions in the bill are designed to remedy undesirable practices in the pharmaceutical industry, and this is true in two different senses.  A number of provisions (101, 102, 303, 406) instruct the pharmaceutical industry itself to submit reports to the government or instruct the government to complete reports on behaviors that have been criticized in different ways.

Section 101 requires the industry to report a whole range of information about its R&D costs, information which will then be made public.  A number of state transparency bills have been designed to collect this information, but they either have not become law or do not require the information to be made public.  Section 102 requires companies to report on their use of patient assistance programs, which have come under fire as being more about ensuring pharmaceutical profits rather than real patient needs.

Section 303 requires the GAO to complete a study of the Orphan Drug Act, examining whether companies are attempting to game the system to access the additional incentives created by the law.  It is unclear from the text how this study is meaningfully different from the investigation of the Act already underway at the GAO, initiated at the request of three Republican Senators.  And finally, Section 406 requires the FTC to complete a study of the practice of product hopping, which is essentially when a pharmaceutical company develops a new formation of a drug and then takes steps to shift patients from the old product to the new one, attempting to stave off generic competition.  This practice has already come under antitrust scrutiny in the courts.

A number of other provisions (202, 304, 401, 402, 403, and 405) would either withhold benefits from or actively punish companies who engage in bad behavior, in different ways.  Many of these practices have been criticized for a long time, and the bill places strict limits on “pay-for-delay” agreements (401) and prevents the first generic entrant from receiving the statutory 180-day exclusivity period where the generic company has engaged in pay-for-delay behavior (402, 403).  Section 405 would remove the tax deduction available to pharmaceutical companies when they engage in direct-to-consumer advertising.  Importantly, 405 does not prohibit the practice, but it makes it more costly.  Section 304 terminates the exclusivity periods of any products where the companies have found to violate criminal or civil law as specified in the section. (Note: this provision reminds me a little of Senator Warren’s Medical Innovation Act, from a couple of years ago.)

Section 202 is designed to limit the kind of egregious year-over-year price increases that companies like Valeant Pharmaceuticals have engaged in and been intensely criticized for.  Companies which engage in large, unjustified price increases (yes, the bill considers that some might be justified – see p. 29 and 33) will be made to pay a tax that depends on the size of the increase.  To be sure, the details here matter – we can fight about the exact amount of the tax and when it kicks in, and that’s important.  But to the degree that unjustified price increases are of concern, this is not a bad way to attack them.  For those who oppose the tax, I’d remind you that many other options presumably on the table, including a Medicaid-style clawback, are more draconian.

Importantly, a number of these provisions are likely to lower drug costs.  Pay-for-delay deals definitely contribute to lengthier monopoly periods than might otherwise be legally justified, and speedier generic entry without those deals would lower prices for these drugs more quickly.  If the bill can reign in price spikes, which have been a primary driver of increased revenue for many companies in the industry, that will be beneficial to consumers as well.  But in general, many of these provisions are designed to punish bad actors – or to collect information that will enable policymakers to decide whether to punish others.

I should also say that there are a number of other proposals which have been put forward in recent years which would remedy other anticompetitive practices within the industry.  For instance, I’ve written favorably about the CREATES Act, which would limit a tactic companies sometimes use to delay generic drug approval and was endorsed by the bipartisan Senate Committee on Aging.

Category 2: Lower Out of Pocket Costs.  Other provisions of the bill would lower patients’ out-of-pocket costs.  Section 203 accelerates the closing of the Medicare Part D coverage gap.  The ACA wanted to close it by 2020, and the bill would close it by 2018.  Section 206 flat-out puts a cap on prescription-drug cost-sharing, capping it at $250 per month for individuals and $500 per month for families.

To be clear: these provisions on their own will result in increased overall costs, even as they lower individuals’ financial exposure.  If patients can afford their medications, they’re more likely to fill their prescriptions – and therefore more likely to make their insurance pay for the bulk of the cost.  In most cases, this would be a positive development.  But provisions like these merely reduce consumer anger over the high prices of their drugs, and do not address the underlying drivers of the cost.

Hence, Category 3: Just Lower the Prices Already.  Sections 201, 204, 205, 303, and 404 contain things I put into the dreaded category of “price controls.”  Some will not agree with me that section 404, designed to increase generic drug competition by publicly identifying products with few competitors or products at risk of shortage, deserves the label of “price control.”  So too with section 303, which takes the HUGELY POLITICALLY BIG (GUYS I’M SERIOUS THIS IS BIG) step of reducing the length of exclusivity periods, most notably reducing the period of exclusivity awarded to biologic drugs from 12 years to 7 years.

Importantly, 303 is vulnerable to the traditional critique of “but if you permit generic/biosimilar competition earlier, you’ll decrease the amount of profits these companies can expect, and you’ll decrease the amount of innovation going forward.”  I’ve pushed back against this critique in the past, arguing that it’s not just the amount but the kind of innovation that’s important, and here I want to make just one point about this.  Reducing the exclusivity period for biologics isn’t just about enabling speedier biosimilar competition.  It’s also about equalizing incentives between different kinds of drugs.  Is there a really good economic reason why small-molecule drugs should get five years of exclusivity, orphan drugs seven, and biologics twelve?  There’s a clear argument as to why orphan drugs should get more than small-molecule drugs, but why should biologics have almost twice as much as orphan drugs?  I’d love to hear the argument, especially because the FTC argued that twelve years was completely unnecessary during the negotiation of the BPCIA.  To be sure, there is some “right” amount of exclusivity, depending on a range of assumptions and values.  And this bill “equalizes down,” rather than up.  But I don’t have a strong prior about whether that’s the wrong choice.

Section 201 is an interesting take on the traditional “let Medicare negotiate drug prices” refrain, something that President Trump has called for in the past.  As has been clearly explained repeatedly, Medicare probably isn’t going to be a good negotiator if it can’t get up and walk away from the table.  And if Medicare doesn’t like the deal a pharmaceutical company is offering, Medicare often can’t say no, as it’s required by law to cover many (and for some diseases, all) prescription drugs.  This provision allows Medicare to negotiate with the relevant pharmaceutical company for a year, and if they can’t reach agreement in that time, HHS gets to use the price used by the VA or by other federal agencies.  This should be effective in forcing companies to the bargaining table, but it’s interesting to me that it relies on the fact that other agencies – including the VA, which only gets great deals because it has the ability to say no – get better prices.  That may no longer be true if companies know that the VA price is the fallback for Medicare.

Section 205 is maybe the wonkiest of all the sections, but it’s important.  It puts the duals back on Medicaid prices.  For those who aren’t familiar with this, I can’t express it much more cleanly than the bill summary does: “Prior to the creation of Medicare Part D, dual-eligible seniors received drug coverage through the Medicaid program, which requires drug manufacturers to offer discounts on their products in the form of rebates. When Medicare Part D was introduced … drug manufacturers no longer had to pay rebates for drugs provided to dual-eligible seniors.”  Essentially, pharmaceutical companies currently get paid at Medicare rates for dual-eligible beneficiaries – this bill would extend Medicaid rebates to that population.  This was part of President Obama’s budget for FY 2016, and it was estimated that it would save about $116 billion between 2017 and 2025.

Importantly, 205 is another provision of the law that can be viewed both as a price control AND as a method of equalizing payments between Medicare and Medicaid.  We have a tiered pricing system in this country, in which pharmaceutical companies get paid more when they sell drugs to Medicare than when they sell drugs to Medicaid.  That may make sense from an access perspective, but I have long worried that it affects pharma’s incentives to innovate in diseases that primarily affect low-income Americans.  Section 205 partially “equalizes down,” and I have elsewhere argued that we should “equalize up,” but this is not obviously wrong to me.

If you’re still here after almost 2,000 words, it’s time for some real talk about section 204, drug importation.  Guys, I have never understood the fascination with drug importation beyond its use in temporary situations, such as times of shortage (in which case I think it’s important for public safety).  When I’m in a bad mood, I think importation is a crude way of trying to use other countries’ price controls and avoid having the difficult conversations ourselves as a country.  When I’m in a good mood, I take the provision seriously and try to critique it on its own merits.  I’ve got a big cup of coffee, so let’s see if I can pretend to be in a good mood.

Section 204 is admirably long, detailed, and thorough.  In short, it allows drugs to be imported from a “certified foreign seller” under a whole range of terms and conditions.  It takes pains to ensure that the drugs are safe and identical to those sold in the US, and the idea is to allow the same drug to be obtained more affordably.  Here is my problem with it: how is this going to be okay with other countries or pharmaceutical companies?  Pharmaceutical companies don’t want us engaging in arbitrage, going to countries where the same drugs are sold more cheaply and bringing them back to a country in which they’re more expensive.  And other countries (hi, Canada) presumably don’t want us doing this either, as it might jeopardize the favorable deals they’ve been able to receive from manufacturers.

The bill seems to foresee that this might be a problem, and so it actually attempts to restrict pharmaceutical companies from preventing resale of their products or trying to avoid the law (p. 54-55).  But the bill doesn’t seem to do anything to prevent other countries from retaliating.  So here’s my question: what if Canada or another country passed a law prohibiting pharmacies within its borders from applying to be a “certified foreign seller” under the bill?  It doesn’t need to permit them to do so.  What incentive does Canada have to go along with this?  I’m not sure I see it.  This is my least favorite provision in the bill.

Finally, Category 4: The Most Awesome Innovation Ideas Ever.  Okay, that’s a bit of an overstatement, but if you’re still with me, please go take a couple of minutes and read section 301 of the bill creating a prize fund for the development of new antibiotics.  I’ll wait.  (Drinks coffee, contemplates why I’ve written a 2500-word blog post when I’m behind on a writing deadline.)  This is one of the best things I’ve read in a very, very long time.  I almost stood up and cheered when I finished reading it.  That is how weird I am.  As I said at the beginning, this bill as a whole isn’t the platonic ideal of anything.  There’s no deep economic theory underlying the entire thing.  But this provision.  THIS PROVISION.  This is more or less what a prize fund should look like.  Section 301(f)(1)(D) and 301(f)(3) in particular (p. 82 and 83) are HUGE deals and are often missing when members of Congress talk nicely about prizes.

Section 302 is fine, I think?  Section 302 creates a Center for Clinical Research within NIH and provides funding to enable it to conduct clinical trials.  I don’t have a problem with this, but I’m wondering what the motivation was for the section and what it adds to existing agency authority (especially through, um, the National Clinical Center or National Center for Advancing Translational Sciences) and practice.  If anyone knows, please email me.

Going forward, I’ll be following this bill closely.  One of its House co-sponsors is Representative Elijah Cummings, who has done some terrific work on drug pricing over the years and who has met with President Trump several times on the subject.  While it’s probably unlikely that much in the bill makes it into law, I wouldn’t be surprised to see similar provisions turn up in whatever Secretary Price is reportedly working on.

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This entry was posted in FDA, Health Law Policy, Intellectual Property, Medicare/Medicaid, Pharmaceuticals, Rachel Sachs, Reimbursement by rachelsachs. Bookmark the permalink.

About rachelsachs

Rachel Sachs is an Associate Professor at the Washington University in St. Louis School of Law. Previously, she was an Academic Fellow at the Petrie-Flom Center. Rachel earned her J.D. in 2013 magna cum laude from Harvard Law School, where she was the Articles Chair of the Harvard Law Review and a student fellow with both the Petrie-Flom Center and the John M. Olin Center for Law, Economics, and Business. Rachel has also earned a Master of Public Health from the Harvard School of Public Health, during which she interned at the United States Department of Health and Human Services. Rachel's primary research interests lie at the intersection of patent law and health law, with a particular focus on problems of innovation and access and the ways in which law helps or hinders these problems.

One thought on “New Drug Pricing Bill from Democrats Balances Innovation, Access

  1. I am troubled by several of your conclusions, which seem at times to be reflexively negative with respect to the biopharma industry, and also to omit consideration of the realities of drug development. I am a Board certified internist who serendipitously found my way to the biotech industry over 30 years ago. I have lived every day since grappling with the risks and realities of bringing novel medicines to patients. For now, I will focus only on your argument concerning reducing exclusivity periods.

    As my company has just had to lay off over 100 associates in the aftermath of an adverse District Court patent decision, my views are informed by particularly relevant experience. It takes on average 10-12 years to develop a new drug this is an average; it often takes often far longer). Only about 10% of drug development programs succeed at all. Further, about 70% of all drug innovation now takes place in small, entrepreneurial biotech companies like mine. If a company is among the fortunate 10% that develops a drug successfully, it can count on its next success requiring 10-12 years, assuming it will again be among the fortunate 10%; thus, an exclusivity period for its first drug of 10-12 years would be a reasonable period in which to allow the company to try to achieve its next innovation, funding these efforts with the revenue from the first product.

    In the case of my company, we stand to lose our current product’s exclusivity 8.5 years post-approval, even as we have been investing over 40% of our net revenue in R&D and are not profitable. Interestingly, we have developed a potentially important therapy for Parkinson’s disease for which we will soon file an NDA. With luck, this may be approved in 1-1.5 years, and will then require some time post-launch to provide revenue that may replace that of our original product—so we’re pretty much on track for that 10-12 year window. We have another promising drug for Parkinson’s in Phase 3. But we are now uncomfortably close to running out of time. I would argue that a guaranteed exclusivity period for all new drugs, as is the practice in the EU, would make more sense that our current haphazard system, and would give innovation and fairer opportunity to succeed. Given the average at-risk development timelines, 12 years seems not unreasonable to enhance the prospects for successful new drug development..

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