Feeling the Pain of High Drug Prices? We Prescribe Market Forces
Trump administration officials keep searching for solutions to rising prescription drug prices, which are increasing faster than inflation. “Drug makers and companies are not living up to their commitments on pricing. Not being fair to the consumer, or to our Country!” President Donald Trump tweeted last year.
However, it’s hard to know what “fair” prices are. After all, pharmaceutical research and development is expensive and high risk. Bringing a drug to market may take 10 or more years and costs, on average, more than $2.5 billion. Most of the administration’s suggested remedies have been threats of the imposition of various types of price controls. (Predictably, those proposed by the Democrat presidential hopefuls have been much more draconian.)
A conservative, reform-minded administration should know better than to go down the path of innovation-stifling, heavy-handed government intervention. Responsible regulatory reform is a better way to foster pharmaceutical innovation, drive prices down, and help patients.
We suggest two ways to do that.
The first would be to correct a glitch in patent laws. Patents are granted to inventors by the U.S. Patent and Trademark Office if their product or process is judged to be useful, novel and non-obvious. The driver of pharmaceutical R&D investment is the promise that after a drug receives Food and Drug Administration approval, a manufacturer will be able to market it exclusively, without generic competition, for a period of time at the price it chooses. After the patent expires, the introduction of generic versions of the drug reduces drug prices dramatically.
The Hatch-Waxman Act of 1984 established an effective balance between the interests of brand-name and generic drug manufacturers. It created the abbreviated new drug application process that requires generic manufacturers to demonstrate only that the generic is “bioequivalent” to an approved brand drug, and granted brand-name drugs certain periods of market exclusivity and patent-term restoration.
That tradeoff worked well, but in 2011, when technology patent trolls (who buy up patents but don’t intend to actually make a product) were wreaking havoc in the tech world, Congress attempted to protect true innovators by creating a patent adjudication process called inter partes review (IPR). That made it possible to challenge patents at the Patent Trial and Appeal Board (PTAB). Congress didn’t intend for the IPR to disrupt Hatch-Waxman protections; rather, it intended to create a streamlined process to challenge technology patents, an area not governed by Hatch-Waxman.
But because IPR can also be used by challengers of drug patents, the process inadvertently created a form of double jeopardy, allowing pharmaceutical patent challengers to try their hand in two separate venues: both the federal courts and in IPR’s PTAB. The use of both adjudication forums not only raises fairness questions, but it also drives up the cost of branded medicines through unnecessary legal costs and greater uncertainty about the patent life of a drug.
Since 2011, not only have pharmaceutical innovators had to defend their patents in two different venues, a scenario not intended under the delicate balance created by Hatch-Waxman, but under significantly different legal standards in the two forums. For instance, in federal court, there is a presumption that a patent is valid, whereas in IPR, there’s a presumption a patent is not valid.
To address that problem, last year the Hatch-Waxman Integrity Act was introduced in the House and Senate. Although it would not harmonize standards between venues or prevent drug patent challengers from using IPR (as might have been wise to do when IPR was created), it would require challengers to pick their legal venue and stick to it, thereby restoring the balance between promoting innovation and fostering generics. Doing so would reduce legal costs that manufacturers have had to bake into the price of branded drugs, while still offering ample opportunities for generics to challenge patents.
A perennial favorite idea for lowering drug prices is allowing Americans to import drugs from countries with price controls. Trump said in a November tweet that Americans should import drugs from Canada “that are MUCH CHEAPER than what we have now.” But as the Pacific Research Institute’s Sally Pipes has pointed out, that would be futile; even Health and Human Services Secretary Alex Azar dismissed it as a “gimmick.”
Remove the sleight of hand and it’s just the price controls that will be imported.
If we want to import something, we’d recommend instead importing regulatory authorizations from countries that have drug approval regimes comparable to ours. That would mean that an approval in one such country would trigger approval automatically in the U.S. upon application by the foreign drug manufacturer or licensee (subject to the creation of approved labeling in appropriate format, etc.). That would put more safe and effective drugs in the U.S. marketplace and provide additional choices for hospital formularies and physicians.
The availability of more options means more competition, which would put downward pressure on prices.
Reciprocity would also alleviate shortages of critical drugs in the U.S., another driver of increased prices. An analysis by STAT News published last year found a 27% increase in new drug shortages in 2018. As of the beginning of December last year, the FDA was reporting shortages of 116 different drugs, including key chemotherapy drugs and other medications used to treat serious diseases. This has resulted in U.S. hospitals and medical personnel sometimes having to resort to second- or third-line medicines. Moreover, according to an academic study, “[t]hese shortages cause an estimated $230 million in additional costs each year because of the rising prices of drugs under shortage and the higher costs of substitute drugs.”
Reciprocity of approvals could have been in place decades ago if only the FDA had met its long-standing commitment to pursue it through the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use. Now, Congress must step in, both to pass the Hatch-Waxman Integrity Act and to establish reciprocity of approvals. Market forces are more effective than bureaucrats’ price controls.
Miller, a physician and molecular biologist, is a senior fellow at the Pacific Research Institute. He was the founding director of the FDA’s Office of Biotechnology. Stier is a senior fellow at the Consumer Choice Center.