By Kirsten Axelsen

A recent proposal that would allow the US federal government to set drug prices has been critiqued for being too small to meaningfully constrain costs. While this price control proposal would have a more limited impact when compared to some of the other recent price control proposals, it will have a broad and meaningful influence on investment decisions for all drugs in development. This type of policy achieves maximum distortion in future investment for minimal healthcare savings.

Beginning in 2026, the prescription drug pricing proposal under consideration by the Senate Finance Committee would require the federal government to select 10 drugs from among the biggest selling drugs in Medicare that have been on the market for seven or more years (11 for complex biologics), with the number of drugs selected growing over time. For the selected drugs, the federal government would set the maximum price paid by Medicare according to a formula in the policy, with the government paying less for older drugs, irrespective of their benefit to health. Certain drugs would be ineligible for price controls, including those from some smaller biotech companies for a few years, certain vaccines or drugs for some small populations. Manufacturers that do not comply with the price-setting process would be penalized with an excise tax of nearly all their US sales. The federal government price would replace the price that had been established by the pharmaceutical company for that successful medicine, which often includes additional discounts negotiated with insurers to provide the drug at a lower co-pay on the formulary.

To counter the federal government price “offer,” the
manufacturer can provide information for the qualifying drugs including how
much they spent on the drug’s research and development, the amount of federal
funding used to develop the drug, and evidence of efficacy. It is unclear from
the proposal how this information will affect price. If, for example, taking
federal funding to develop the drug results in a lower price, then this will discourage
biopharmaceutical companies from partnering with the federal government or with
academics that accept federal funds. While this price control seems modest in
scope, the impact goes far beyond the selected drugs and target companies.

Consider if this type of approach were used in secondary education,
which is like drug development in that there is a long period of investment with
unknown future payoff. What if students were told when they enter their post–high
school education that salaries would be reset for some of the most highly paid
aerospace engineers after seven or more years if they are working on technology
purchased by the federal government? Only a few would experience a change in
earnings but nearly all would be influenced by this potential disruption to
earning power. Students would make different decisions about their education
and work. Companies would avoid contracts with the federal government so they
could attract the best workers. The fallout would be fewer trained people and less
of the technology they develop.

Pharma companies and investors decide if they will spend
money on the high-risk venture of drug development based on the expected
efficacy and revenue. If a candidate for a disease that is prevalent among
older or disabled people could be subject to future government price setting—then
the expected returns from the investment will be lower and more uncertain. If
the drug is already on the market and close to the price negotiation time frame,
then there is limited payoff for investing in more indications or in post-market
evidence such as pediatric studies. While some small biotechs are initially
excluded from price controls under this policy, many rely on getting funded or
purchased by larger biotechs, so their future value is diminished even though
the language in this policy appears to intend to shield that type of company
from impact. Furthermore, since complex biologics have a longer time before
potential price controls, they become a relatively more attractive investment,
but they are typically higher cost and without the same generic savings as
generated by small molecules. This policy discourages all the right behavior
that has saved lives, increased longevity and generated billions in savings for
decades.

If the federal government wants to get more benefit from the money spent on drugs, it should create policies that encourage data and evidence generation and make the drug companies defend their prices. It isn’t this policy that distorts investment away from successful innovation. If the government wants more scrutiny on the value of medicine, it could live up to its promise to develop more real-world evidence. This policy is the worst of all outcomes: minimal cost savings on the healthcare dollar for today and maximum disruption to science for tomorrow.

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