The revised drug plan passed by the House last month may be well-intended, but by robbing seniors of the health gains from future drugs we find it will be 31 times as deadly as COVID-19 to date.
The plan regulates price growth during the life cycle of a drug through price negotiations that will stifle innovation and reduce competition, as well as inflation caps that compound in damage over time. The plan also abandons seniors by raising their total costs — premiums plus cost sharing — by shifting government costs onto competitive plans resulting in premium hikes larger than cost-sharing cuts.
I have argued that drug price controls will raise the price of better health in the future because a new drug makes a healthier life go from being prohibitively expensive down to patented prices and then even lower generic ones.
In a new report, we find the revised plan will reduce R&D spending by 18.5 percent or $663 billion through 2039 resulting in 135 fewer new drugs. This will generate a loss of 331.5 million life years in the U.S., a reduction in life spans about 31 times as large as from COVID-19 to date. The cut in new drugs is about 27 times larger than CBO’s predicted loss of 5 drugs over the same period, a mere 0.63 percent reduction compared to baseline.
Our analysis is fully transparent, as opposed to CBO which only publishes its results. This makes it impossible for taxpayers funding CBO’s analysis to evaluate it and differs from peer-reviewed publishing that aims to make replication feasible. In particular, the Street and others interested in funding medical R&D have to rely on CBO flawed results.
Our predicted drops in industry revenue are larger than CBO’s. Though CBO scored the overall bill too low, correct scoring of the drug provisions would have made it even lower highlighting that CBO scores of budget impacts often poorly reflect economic well-being.
Several factors drive the larger revenue and innovation impacts we find. The new plan is argued to have small impact as price negotiations only apply to 10 top selling drugs the first year, rising to 220 drugs in 12 years. However, those blockbusters represent 17 to 64 percent of drug spending in 2019. They earned their blockbusters status not only because of their price but also their volume and often help many patients in larger diseases at fair prices. Indeed, their large volumes at times are partly due to low prices as for Pfizer’s $6 billion pneumonia vaccine Prevnar selling at $200 per dose before discounting.
Targeting blockbusters in Medicare will affect pricing outside the program as well as non-targeted drugs inside it. First, blockbusters are the winners that fund all the losers in the development pipeline where about 90 percent of drugs fail. Drug development is a portfolio business and cutting the winners will drastically reduce shots on goal.
Second, negotiated drugs will put downward price pressure on competing non-negotiated drugs, thereby cutting additional revenue that drive innovation. Third, pricing in Medicare will affect Medicaid pricing mandated to be 23 percent cheaper than paid anywhere else. Fourth, negotiated prices will affect the hospital discounts in the 340B program, designed for hospitals that serve poor populations but abused to serve many rich ones.
Lastly, to avoid becoming negotiated blockbusters, some companies will cut volume by limiting utilization, limit modifications and not offer improved formulations, not extend the drug to new diseases, or stay away from innovating into large diseases. Indeed, innovation into large diseases such as diabetes and Alzheimer’s will be discouraged which will prevent cuts in other forms of health care spending, as when antidepressants cut spending on psychotherapy. Bottom line, there will be an incentive to avoid helping too many patients.
Our estimated drops in revenue from the bill are larger than CBO’s but throughout are estimated conservatively. For example, we assume price negotiations are the most favorable to companies. However, the price cuts on negotiated drugs is unclear at best and frightening at worst as the plan sets price ceilings but not floors. Blockbuster revenues can lawfully be pushed down by up to 95 percent with companies forced to agree, as the alternative is a 95 percent excise tax if they don’t. One such downward price pressure comes from the bill’s attempt to tie prices to R&D spending on the negotiated drug. But earnings on blockbusters must be many multiples of their R&D costs to fund R&D spending on all the drugs that fail. Good luck asking R&D investors to pay $100 for a lottery ticket that pays $100 if you win.
Government price controls often stifle more competition which is the preferred remedy to slash prices, and this plan is no exception. By cutting prices at the end of market exclusivity, fewer generics and biosimilars will enter to compete. Indeed, the controls proposed mimic those in European countries by proposing a “consistent methodology” to guide price-setting. This is technocrat speak for using price controls, or so called “cost-effectiveness thresholds”, to control budgets in the nation’s capital rather than have prices reflect the value of health improvements.
A more effective way of lowering drug prices is having the government get out of the way of normal price competition, but it may have to wait for an administration that believes markets are superior to bureaucrats.
Philipson is an economist at the University of Chicago and served as a member and acting chairman of the White House’s Council of Economic Advisors 2017-20.