Drug Price Negotiation Is A Second-Best Fix. Here's What Will Really Work

from the drug-prices-are-a-patent-problem dept

As Democrats struggle to bring together 50 votes to pass the Build Back Better Act, a major sticking point with the legislation has emerged. That is, whether it should include provisions changing the law to allow Medicare to negotiate drug prices, with caps on payments set based on prices paid by other wealthy nations.

Concerns about such an extensive, centralized program are not unreasonable. On the other hand, patent reform is a market-friendly approach that embraces the benefits of competition and free entry to cut costs and better align the incentives for new drug development.

Negotiation would indeed take a bite out of drug prices. Analyses of proposed drug price negotiation plans find savings around half a trillion dollars over ten years. That’s serious money needed for the bill to pass reconciliation. But there’s more than one way to achieve this and bring down drug costs. To that end, patent reform would be a much more worthwhile endeavor.

The savings needed don’t have to come from drug price negotiation. For that matter, the popularity of such a provision doesn’t come from the specific policy. Rather, it’s popular because it means lower drug prices. Drug price negotiation is a policy with potential (though melodramatically overstated) harms. Well-designed patent reform, on the other hand, can trim prices while better orienting drug development.

Drug price negotiation isn’t a riskless proposition. The Congressional Budget Office estimated that a significant reduction in revenue would reduce new drug discovery by 3-5 percent (8 to 15 fewer drugs out of an estimated 300 approved). Market size and the potential return inform the decision to invest (or not) in R&D. As the largest prescription drug market in the world, the U.S. isn’t just the arsenal of democracy; it’s also the medicine cabinet. Negotiation will bring down prices and the return on investment for new drug discovery without the benefits of a competitive market created by patent reform.

If savings is the goal, going after drug patents is the best way to achieve that. Dean Baker found that patent protections added over $300 billion per year to the price of pharmaceuticals in 2018. According to the FDA, the entry of one generic competitor reduces drug prices by 40 percent, increasing to a whopping 95 percent of the original price when there are six or more generic competitors.

But aren’t patents necessary to ensure a return on the enormous investments needed to develop a new drug? Generally yes, even if the costs of such investments are overstated. But it’s possible to have too much of a good thing and, unfortunately, that’s where we are today. Analysis by the Initiative for Medicines, Access, and Knowledge (I-MAK) reveals that the effective patent terms for the top-selling drugs in the U.S. are nearly twice as long as the 20 years patents are supposed to last. Drugmakers pull this off by loading up dozens of patents per drug, including ones for therapeutically trivial changes (like going from two pills to one pill a day). As a result, they can continue to charge sky-high prices long past the point when they should be facing real competition. Reforms are needed to change the incentive structure that makes extending monopolies more profitable than developing new treatments.

Raising the bar for patent eligibility is a structural reform to ensure quality. But what if the holders of good patents still abuse their exclusivity? In these cases, there are tools available to the federal government to license the patents needed to legally manufacture drugs (that is, allow competitors into the market).

The first is march-in rights under the 1980 Bayh-Dole Act, which helps “subject inventions”–those made under a government contract–to be licensed. Since this power has never been utilized, its usefulness in fighting high prices is technically an open legal question. Still, there’s no time like the present to find out. Even without march-in rights, the government can use other compulsory licensing powers to pay a reasonable royalty while reaping the benefits of low costs under free-market competition.

There are two ways to fight monopoly power: with the bargaining power of a large, centralized buyer like the federal government or with increased market competition. Drug price negotiation takes the former approach, and there’s a place for it. But whenever an opportunity to pursue the latter is possible, we should take it. Making sure the incentives created by the patent system don’t turn into excesses will cut costs and ensure the rewards of a patent go to innovative activity.

Daniel Takash is the Niskanen Center’s regulatory policy fellow.

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Comments on “Drug Price Negotiation Is A Second-Best Fix. Here's What Will Really Work”

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PeterScott (profile) says:

Either way it's an uphill battle.

Both initiatives will be fought by the same congress members, since Big Pharma will be unhappy either way, and Big Pharma heavily funds those congress members campaigns.

If anything, general patent reform would be a harder sell, because there are lot of deep pocket Patent Maximalists, outside of Pharma that will that will have their funded congress members fight against it.

A core issue in solving any problem these days, is corporate funding on politicians. It’s a corrupt system, with corrupt results.

Anonymous Coward says:

Drugmakers pull this off by loading up dozens of patents per drug, including ones for therapeutically trivial changes (like going from two pills to one pill a day).

Reducing the number of patient actions required per day is consistently the most effective method of improving patient compliance with treatment (except for replacing required outpatient visits with at-home treatment), and is rarely a trivial pharmacokinetic problem. It’s very therapeutically relevant.

Just… please if you’re going to make these arguments, make them good. It’s hard enough to lobby for this kind of reform without teeing up free hits at your credibility.

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TKnarr (profile) says:

Re: Re:

From the standpoint of the drug itself, this is therapeutically trivial. The drug and it’s mechanism often don’t change at all, the only changes are in the packaging to slow the rate at which the active compound gets made available in the bloodstream. There’s a bunch of standard things pharmaceutical chemists can do to achieve that goal, and one of the first things on the agenda once a drug is developed and approved is to work through that set to see what you get. The results of that sort of work should absolutely not be patentable, once you have the drug the remainder of the process is just SOP.

Where it should become patentable is when SOP fails. Sometimes you work through the standard tricks and nothing works. You need to change the drug’s structure slightly to get it through the liver in higher quantities, or you need to go back and work out a precursor compound whose metabolization into the active drug you can control better to make it amenable to extended-release packaging. That’s the kind of novel stuff that ought to be patentable, not just applying one of the standard methods used to create extended-release forms of other drugs that’re already well-documented and just need tested to see which one works best for this particular case.

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Bruce C. says:

Re: Re:

If it’s general knowledge in the industry that "Reducing the number of patient actions required per day is consistently the most effective method of improving patient compliance…" then that is not a patentable change, as it’s common knowledge in the industry.

PartTimeZombie (profile) says:


The proposals in the article are so weirdly complicated and unnecessary.
The entire world has solved this problem and America could easily have a look at what works well and what doesn’t, adopt the bits that work best and provide proper, nationalised healthcare to all Americans and save a huge amount of money.
But you will carry on bankrupting people when they get sick because the corporations that profit from that want to keep profiting.

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Annonymouse says:

The research and development angle is the biggest lie used as a smokescreen.
All that was already paid for by taxpayers through research grants and charity donations.
The only monies paid by investors is for commercial development in the small startups. Those inevitably run into financial issues just as they become viable, surprise, and get bought out for next to nothing by the megacorps leaving the investors holding an empty bag. The research by the megacorps is in marketing where we get insane product names for branding purposes.

Alister (profile) says:

Australia can be a good example here

In Australia, under the National Medicines Policy, the Australian government largely is the sole purchaser of medicines. They’re then sold to the people who need them at about AU$40, or under AU$10 at concession. If you (or your family) spend more than around $1,600 ($400 concession) in a year, the cost drops to $10 or free. The fact that the government is the buyer has a huge effect on the power imbalance that you’d otherwise see. Patent reform may be helpful, but the biggest thing the US could do to limit drug prices is simply look at what everyone else has done, and copy someone else – anyone else.

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Scary Devil Monastery (profile) says:

Re: Re:

"How about outlawing monopolies entirely? They do nothing but harm."

Monopolies, with rare exceptions, are actually outlawed. The enforcement of this, in the US at least, is…lacking.

As a result of which the cost increase of just about everything in the US is a lot higher than inflation and supply cost increases can account for. The few major actors in each market raise their prices literally in lockstep and the antitrust legislation expressly prohibiting this type of behavior lies unused in some drawer in the capitol basement.

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