Opinion

Half-Baked Drug Pricing Proposals Are a Nightmare for American IP

Consumer access to affordable and effective medicines is an important issue for all Americans. 

As policymakers head into the campaign cycle, there is no shortage of ideas being thrown around to lower drug costs at the pharmacy counter for prospective voters. Unfortunately, the most recent salvo of drug proposals touted by both parties largely ignores the vital role that free-market competition plays in the pursuit and discovery of tomorrow’s cures and treatments.

Most recently, Congress is considering House Speaker Nancy Pelosi’s (D-Calif.) drug pricing package, the Lower Drug Costs Now Act of 2019 (H.R. 3), which grants the federal government virtually unfettered power to base prices for drug treatments on those set by foreign governments. The measure would allow the Health and Human Services secretary to “negotiate” prices on up to 250 drugs every year based on the average price of that drug in six countries (Australia, Canada, France, Germany, Japan and the United Kingdom).

If a company refuses to comply with the “negotiation” process, it will face a punitive excise tax of up to 95 percent of gross sales of the drug. You may otherwise know this as government extortion.

Furthermore, the Pelosi bill also requires that manufacturers hand over inflationary rebates to the federal government for prices of drugs whose prices increased above the general rate of inflation since 2016. The retroactive nature of this penalty is particularly worrisome as it gives the federal government a hunting license to go after companies based on actions that took place well before H.R. 3 became law.

Perhaps the most disturbing aspects of the bill are the numerous and blatant violations of the Constitution including the Eighth Amendment’s protection against “excessive fines” as well as the Fifth Amendment’s “Takings Clause.” Pelosi claims that this bill will be a “powerful incentive” for the drug companies to negotiate and abide by the final price. The reality is this strong-arm tactic could force America’s entire pharmaceutical industry insolvent.

This is nothing new. The Pelosi bill closely mirrors the International Pricing Index announced last year as well as the inflationary penalty proposed as a means of reducing prices in the drug pricing package voted out of the Senate Finance Committee in August.

There have also been calls in both chambers by Sen. John Cornyn (R-Texas) and Rep. David Cicilline (D-R.I.) to force lower drug prices by eroding America’s patent system. These anti-intellectual property proposals would give the Federal Trade Commission authority to label modifications and incremental improvements to an existing drug as anti-competitive “product-hopping.” American innovation is between a rock and a hard place under threat of presumptive anti-trust action as well as foreign price controls.

What these proposals ultimately fail to recognize is the importance of the American IP system and the long-term consequences of price controls on medical innovation and patient access.

The United States leads the world in medical innovation, developing more than half of breakthrough cures over the last decade. Domestic pharmaceutical companies devote more profits and resources than any other industry to future research and development.

That path to drug discovery is plagued by uncertainty and sunk costs for private companies. On average, it takes an average of $2.6 billion and between 12 and 14 years of research, development and clinical trials for manufacturers to bring a drug to market.

Innovators face further financial risks as reportedly 80 percent of all new drugs in the market in the last 15 years have lost money. Despite these pitfalls, America’s patent system is a critical safeguard for inventors by protecting their incentive to innovate by ensuring patent pirates don’t steal their IP.

Not so long ago, the European Union was the epicenter of medical innovation with 24 percent higher R&D investment than the United States. However, the creation and implementation of state-sponsored foreign price control programs across Europe led to a brain drain of innovation at the same time free-market reforms and pro-IP policies such as the Bayh-Dole Act propelled the United States to lead the world in medical research and advancement.

In 2014, the United States was 40 percent higher than the E.U. in terms of R&D. Competition serves as a catalyst for scientific advancement while heavy-handed regulations only serve to stifle ingenuity and creativity in its tracks. Impeding free-market incentives for more competition ultimately hurts consumer choice or, in this case, patient access.

Currently, American patients have access to over 90 percent of the past 290 medicines launched in the last seven years, while European patients have access to fewer than half of all new drugs. According to the U.S. Chamber of Commerce’s Innovation and Creativity Access Barometer, the United States stands atop the global ranking of patient access to innovative medicines while the E.U. countries lag behind due to the continued use of direct price controls, import bans and regulatory approval delays. American patients will suffer if lawmakers abandon market-based pricing for the same cost-containment regulation currently crippling Europe’s drug supply.

It doesn’t look as though the Trump administration will back Pelosi’s plan due to the socialist aspects of her pushing the Democratic political agenda. We need to pursue policies that champion innovative industries instead of extorting them for political points.

Free-market solutions and transparency will increase affordability and patient choice at the pharmacy counter. Injecting price controls and government intervention into the domestic market is no more than a prescription for disaster. 

 

Dee Stewart is president of the Center for Innovation and Free Enterprise.

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