By James Love
The Senate HELP committee held a hearing on June 12 on “The Cost of Prescription Drugs: Examining the President’s Blueprint ‘American Patients First’ to Lower Drug Prices” where Secretary Alex Azar was the sole witness.
It was a moment for the Democrats in the Senate to draw a sharp contrast with the Trump Administration on an issue voters care about: drug prices.
In a few areas, the contrasts were clear, but overall, it was not an impressive performance by either party, or the Administration.
The primary issues raised by the Democrats were the broken promise by President Trump to negotiate drug prices for the Medicare program, the disparities between U.S. and foreign prices, and the fact that the promised “massive” price decreases had not been forthcoming.
Azar’s response on Medicare price negotiations was to argue that this was the role for the Pharmaceutical Benefit Managers (PBMs). Azar said that if the government did negotiate prices directly, there would be a formulary restricting reimbursements to some drugs. The Secretary used the United Kingdom as an example of a country in which access to drugs for cancer is restricted. Drug patents were mentioned infrequently, and by the Senators attending the hearing (rather than by Azar), only in the context of ever-greening rather than abusing the monopoly.
Azar was the only person to mention compulsory licensing of patents, in a reference to “socialist compulsory licensing” used by foreign governments to “expropriate” drug products, a reference that bodes ill for the prospect of using 28 U.S.C. § 1498 or Bayh-Dole march-in rights on drug patents. Senators often seemed paralyzed by the challenge of weighing the trade-offs between high prices and incentives to invest in R&D for new drugs.
Senator Sanders (D-VT) arrived at the end of the hearing, and focused on parallel trade in drugs with Canada, which Azar dismissed on the grounds the Canadian government would not cooperate in ensuring the supply of drugs was safe.
At one point Senator Burr (R-NC) asked Azar whether it was true that drug companies determine prices by dividing R&D costs by the number of years of exclusivity, and if longer exclusivity periods would result in lower prices. Azar seemed to agree with the premise, up to a point, although he certainly understands that companies maximize profits, and do not limit prices to just recoup R&D costs. (Examples of cumulative revenues here). Azar was also quick to assert that if Congress make exclusivity shorter, prices would increase.
Here are a few comments on the hearing’s hits and misses:
First off, Azar was generally confident and frequently arrogant when questioned by the Democrats, often lecturing the Senators with talking points unrelated to the questions asked. Senator Warren (D-MA) (and others) were not getting yes or no answers on camera, to simple yes or no questions.
Azar is doing everything he can to protect the unfettered freedom of companies to set their own prices, to protect the primary term of exclusive rights under patents, to keep Medicare from negotiating prices for drugs, and to avoid unwanted transparency and parallel trade. Despite this, he claims to be negotiating price reductions himself, in non-transparent discussions with drug company executives. So far, Azar is doing a good job of protecting large drug companies from anything that would have significant negative impact on their profits.
Senators also failed to bring up some important issues.
Bayh-Dole Act. There were no mention of the fact that the U.S. government owns patents itself and also owns rights in patents that it has funded through research grants and contacts, and that HHS has a statutory mandate to ensure that drugs or treatments sold using those patents are “available to the public on reasonable terms.” There was no mention of the NIH’s poor job of policing the obligation to disclose federal funding in patented inventions, or that the NIH has defined “reasonable terms” to be any price a company wants to charge. When it comes to U.S. residents paying more, why is this allowed when a drug was invented on a taxpayer grant?
R&D cost transparency. There was no discussion of the need for transparency of R&D costs, let alone the type of detail that would make such disclosures useful. The only reason for high prices is to reward R&D investments, and every argument about prices is also an an implicit argument about the adequacy of the incentive.
Parallel trade in Europe. Senator Sanders represents Vermont, a state that shares a border with Canada, so bringing up parallel trade with Canada makes some sense. But members of Congress often seem oblivious to the fact that parallel trade in pharmaceutical drugs has been common in the European Union for decades, and it is safe, because they regulate parallel traders. Among the biggest users of parallel trade in the EU are high income countries with excellent regulatory agencies. If anyone wants to press Azar on why he can’t make parallel trade safe, why don’t they ask how the Netherlands, Sweden and the UK make it work?
Compulsory licenses. Secretary Azar is fond of telling anyone who wants foreign drug prices that they may come with restricted access. This is a fair criticism, since the primary tool in price negotiations is to delay, limit or altogether withhold reimbursements or purchases of products that are not considered cost effective. These limits on access for patients even extend to effective drugs, such as Kadcyla for HER2+ breast cancer, or Spinraza for spinal muscular atrophy (SMA). KEI and others have urged Congress to use compulsory licensing of patents when prices are excessive and access would otherwise be restricted. In short, we want the federal government to put the monopoly at risk rather than the patient. The United States can do this now, but the primary instrument, 28 U.S.C. § 1498, was not designed for this purpose and the statute is ambiguous as to how royalties are set when used to address excessive prices. Congress needs to enact a more robust compulsory licensing statute, one that provides better guidance on royalty setting when the compulsory license is designed to curb excessive prices and expand access.
“Medicare only” is too narrow. If drug prices are too high for the U.S., why focus on Medicare only?
The United States is a huge market, and while Medicare is large by itself, it’s only a fraction of the U.S market. In 2015, less than 15 percent of the U.S. population was eligible for Medicare, and while that number is slowly climbing, it’s worth noting that the Democrats have put a lot of energy into talking about solutions that address drug prices for just 15 percent of the U.S. population. Many diseases, like breast cancer, hit people before they even qualify for Medicare. For some expensive drugs that treat rare diseases, Medicare is largely irrelevant. Also, several federal programs that require discounts for drugs have the effect of creating disincentives to lower prices for persons on private insurance programs. Those privately insured people include the U.S. workforce that is striving to compete with foreign firms around the world—firms that have lower costs of providing health insurance to their workers.
If the United States wants to issue a compulsory license and buy a generic or biosimilar drug, Medicare will be a small market for some products. The likelihood of generic or biosimilar entry and lower prices will always be more favorable if the entire U.S. market is open.
The progressive delinking of R&D incentives from prices. Every effort to lower drug prices runs into the very same blocking argument: lower prices reduce incentives for private companies to invest in R&D. After decades of hearing the same objection, members of Congress need to have an answer, and it’s not as hard as one might think.
There are a million ways to frame this, but consider a simple thought experiment. Suppose a policy is proposed that would reduce U.S. drug prices collectively by 20 percent. In that case, what would a 20 percent reduction in revenues mean in terms of reduced R&D investments? Suppose the U.S. market was rounded up to $0.5 billion, to make the math simple, and a 20 percent reduction was $100 million in lower sales revenue. Suppose that you accept an inflated estimate that 15 percent of sales is reinvested in R&D, on average. That would mean a $15 billion reduction in private sector R&D outlays. No need to panic. What policy responses could offset this? How about a $15 billion increase in the NIH budget, or a deeper and broader transferable tax credit for clinical trials, or some combination of both? What about cash market entry rewards instead of high prices as the incentive? How much would that cost?
Full delinkage of R&D incentives from prices is a legitimate and important long term goal. But in the short term, progressive delinkage is the available path to address the R&D incentives issue.
Secretary Azar actually hinted at this solution earlier, when he noted that getting foreign governments to increase public sector outlays on funding R&D would be one way to prevent the U.S. from bearing an excessive share of the global costs of incentives. At this hearing, only one Senator, Johnny Isakson, a Republican from Georgia, seemed to even imagine that incentives can be anything other than a patent monopoly or high prices.
Isakson asked if Azar was working “to come up with a mechanism we can incentivize the development of the new drugs and find a way to ameliorate the impact of the dramatic costs at the beginning, to spread it enough where the cost are somewhat affordable for the average American family? Is anybody in your agency thinking about that?”
Isakson’s question could have been framed more elegantly, but he was thinking about doing something different that would reconcile innovation incentives and access. This is exactly the conversation we need.