The pre-election clamor about prescription drug pricing took an interesting turn last week following President Trump’s meeting with prescription drug-makers at the White House. Earlier this year pricing abuse by rogue firms whose lack of competition in certain markets enabled upward price ratcheting attracted glaring press outrage leading to presidential campaign promises to curb prescription drug pricing if elected. Unfortunately, top down price controls cannot cure this market malady. Indeed, by choking-off investment in basic life science research to develop cures advancing competition they will only worsen it. Post-AIA uncertainty plaguing commercialization is shrinking independent private investment in the long and costly development of high-risk life science products, shielding sole suppliers to certain patient markets from competition. To be sure patent exclusivity can temporarily shield new therapies from direct competition but more often price abuse occurs in post patent health care markets where life-saving patient demand is either too small or is prescribed too often thereby blocking market entry from all but one supplier. Resultant scarcity invites rent-seeking. And that can be curbed only by the cheaper, faster, better competition emanating from more life science R&D and more attractive private sector investment in its development. Limited demand for competing life-saving life science therapies is effectively countered by increased product development and supply which often emanates from congressionally appropriated R&D distributed through NIH and other federal grant agencies.
Washington Post contributor Steven Pearlstein recently sought to expose the political “flim-flam” surrounding drug pricing control politics by taking aim at what he termed a Trump turnaround on the issue after the President’s meeting with the drug barons. Steve is a brilliant economics “whisperer” to non- economists like us. He cannot avoid enlightening his readers whenever he digs into an issue. His article linked below is no exception. The article also has an important lesson for research universities and medical centers counting on continued government support for basic life science and its commercialization. Price controls will contract life science research and development. Price containment through completion will enhance it. And hat where research universities come in.
Free market-based systems are always open to abuse. In a properly balanced mixed economy regulation and market supply operate in tandem to optimize efficiency and consumer benefit. Top down government price controls have consistently reduced product availability’s public benefit “baby” whenever abusive pricing “bathwater” is tossed out by top down pricing. That’s why anti-competitive pricing oversight has traditionally been so carefully crafted. Our life science innovation ecosystem needs private sector investment to function efficiently. Unfortunately, the recent bright light of enhanced press coverage of abusive drug pricing drew well-deserved opprobrium but it also attracted activist” moths” hoping to revive old and dormant policy agendas. Left-leaning perennial activist Jamie Love of KEI and his congressional “comrades in aims” led by TX Rep Doggett recruited another army to pursue Bayh-Dole (BD) price-based march-in to force Congress and/or NIH to convert B-D’s proven stimulation of critical commercialization into a compulsory licensing politically propelled weapon of mass destruction. There is no surer way to sabotage B-D. Such failure will inevitably be followed by deficit hawk cutbacks in congressional R&D support. Prescription drug importation boosters like Senator Sanders are again arguing that opening our borders to lower-priced foreign prescription drugs will somehow trigger consumer savings without exposing patients to the dangers of unsupervised distribution through prescription drug conduit countries like Canada. Perhaps if thalidomide’s consequences are not enough to discourage such thinking, the possibility of funneling terrorist poison into our prescription drug supply will sharpen congressional focus on drug importation’s peril.
Pearlstein’s piece also reminds us of the old bromide warning us to “look for what we drop where we dropped it, not just where the light is better”. As his article explains, over-hyped hoopla about point-of-sale drug pricing ignores the pricing influence of a veritable daisy-chain of intermediaries including PBMs and big insurers separating consumers from drug makers. The “light” may be better at the drug store’s counter but as Pearlstein explains, drug prices are piling up because of other less visible pricing pressures. So, despite fresh campaign echoes of patient savings from directly negotiating Medicare pricing, the notion that government bureaucrats are better suited to negotiate lower Medicare drug pricing than the PBM and insurance experts engaged in it now defies common sense, especially when neutral experts confirm that direct Medicare negotiations cannot result in Trump’s earlier predicted savings. In fact as Steve points out, “Americans pay roughly twice what patients in other countries do for the most widely used drugs still under patent. What that means, in effect, is that Americans pay for the 20 percent of drug industry revenue that is invested in researching new drugs, giving the rest of the world a free ride. In exchange for this largesse, a disproportionate share of the high-paying research jobs is in the United States. development.” And what that means is American research universities have existential skin in the prescription pricing game!
Pearlstien notes that Trump whose principle policy objective is more US jobs appears to be going PhRMA’s “value pricing” proposal calculating drug prices by measuring their effectiveness and savings on the overall cost of providing health care to US citizens by all providers. This price containment policy leads to more life science emphasis. As Pearlstein expertly unpacks opaque health car pricing his readers can feel a piece ostensibly aimed at Trump morph into a polemic promoting value pricing. And this is why Trump’s end of meeting conclusions made more sense than his campaign bloviation. They fit quite nicely with his quest for more US jobs while keeping competitive pricing pressure vibrant. They make sense to us because they inevitably lead to funding more life science research not less. In short, when new life science therapies are evaluated in the context of today’s full panoply of existing and competing medical responses to human ailments “value” pricing strategies are better understood. As Pearlstein points out.” The industry is hoping that the next generation of pills and biologics will dramatically reduce the number of days people spend in hospitals, the number of operations they have and the number of visits they make to doctors’ offices.
We would add that although Donald Trump may not fully understand a lot of policy issues but he clearly understands the NY real estate market. He knows how rent control affects investment in up- keep and new development. He knows how planning and zoning regulators have cost him delay, raising initial investment outlays. He knows that pricing is determined by the availability of competing options. That he is expressly committed to FDA reform, more biopharma high paid jobs and more biopharmaceutical research should come as no surprise to Trump watchers. He knows that cheaper- faster- better cures for human ailments will reliably result in piece containment in more and smaller patient markets. Unlike his campaign promises his post meeting pronouncements inevitably lead to more life science R&D and commercialization. That’s why research universities should now explain to Congress why life science price containment through the competition of advanced life science R&D and its commercialization is the best and most reliable way to address prescription drug price abuse. Pearlsteins piece and its helpful links are here.