You Can’t Haggle Over the Price of a Medicine That Was Never Made

Legislation recently proposed by the House of Representatives risks sending the wrong message to pharmaceutical drug developers. Intended to curb the growing costs of drugs, the process proposed in the legislation isn’t really a negotiation.

It amounts to price control and all its consequences. As it is written currently, the law will most likely curtail investment in personalized medicines (when medical treatments are tailored to each person’s unique molecular and genetic profile), cutting edge cell therapies, gene therapies and many other treatments that improve the lives of Americans.

The new law would give the federal government the power to negotiate the price of several hundred drugs for Medicare. Participating companies would be required to also provide the federally “negotiated” price to private customers outside of Medicare.

The drugs selected for the price “negotiation” would meet two criteria: They would have fewer than two generic competitors, and they would be among the most expensive ones in the Medicare program. This includes new cures, most personalized medicines, cancer therapies, the treatment of rare diseases and cell-based therapies.

The maximum price for specific medicines would be based on prices paid by selected other governments. Should the pharmaceutical company walk away during negotiations, it would be assessed a fine equal to 75 percent of its entire U.S. sales.

This legislation may well make today’s medicines less expensive and more accessible but at a huge cost. Large pharmaceutical corporations would likely take the “negotiated” prices on the drugs they already have developed. Smaller biotech firms, which often depend on larger drug companies to co-market and commercialize their drugs, would struggle to remain viable.

Research and development investment would flow to companies working on medicines in therapeutic areas where there are already established generic treatments, as these would be outside of the scope of “negotiation.” There are thousands of diseases with no medicines at all to treat them, and this legislation would direct drug companies to not pursue treatment for those patients. This bill should be called the “The Me-too Drugs Investment Act.”

There are numerous examples of drug companies making price concessions today for medicines without generic alternatives — including those for hepatitis C, vaccines, HIV, insulins and cancer therapies — both in the United States and globally. While these private price negotiations may not lead to the low prices that could be established by federally enforced price control, they also have less of a deleterious effect on the supply of treatments.

You can’t force companies to invest in making life-changing medicines when they don’t see a market for them — they just won’t do it. Once companies exit a therapeutic area, it is very difficult to get the research started again.

Today, this is the case with antibiotics. There are more and more medicine resistant infections and fewer drugs being developed to treat them. You can’t haggle over the price of a medicine that was never made.

When in our history have we seen price controls stimulate growth, creativity and improved products? Federal programs set prices for physician and hospital services, and we see upcoding (when a bill is inflated by charging for a more expensive procedure than was performed), consolidation and other similar behavior. It just isn’t possible to force people to do exactly what we want them to do for the price we want.

It is a fallacy that only government price setting can lower the cost of drugs that have no generic competition. Insurance health plans have the power to limit the use of new drugs or, conversely, remove barriers when drug companies offer price concessions.

There are other possible changes to the Medicare drug program that would foster greater savings for expensive medicines. Requiring drug and health insurance companies to subsidize higher drug costs for Medicare beneficiaries is a better approach, for example (as described by MedPAC).

Passing laws is a long process, so while this legislative proposal is unlikely to be enacted exactly as currently written, it sends a negative signal to those willing to invest in new pharmaceutical drugs. It warns them not to invest in companies developing drugs with no generic equivalent, and it encourages them to invest in drugs for diseases where there are already treatments.

The current system is flawed, but it can be fixed. It should not be completely thrown away and replaced with something worse.


Kirsten Axelsen is a visiting fellow at the American Enterprise Institute, where she focuses on domestic and international pharmaceutical policy, and she is also a health innovator fellow at the Aspen Institute and previously worked for Pfizer.

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