Here we go again. Congress is considering legislation to lower drug prices and, lo and behold, the pharmaceutical companies are returning to their old argument that innovation and new drug development will suffer terribly.
If the drug makers’ strident response to the Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3) gives me déjà vu, it’s because the exact same thing happened when Congress considered and passed the Drug Price Competition and Patent Term Restoration Act in 1984.
This 35-year-old law, also known as the Hatch-Waxman Act, created our current generic drug industry, and has saved consumers more than $1 trillion. Despite PhRMA’s howls that the Act would destroy innovation, we have set many records for approval of new brand and generic drugs in the years since its enactment, most recently in 2018 and 2019. We have also seen brand-name drugmakers’ profit margins increase to more than twice the average of the S&P 500 today.
The current pharmaceutical company warning — just like the 1983 warning that Hatch-Waxman would “substantially reduce the attractiveness of investing in new drug research” — is wrong. In fact, both Hatch-Waxman and H.R. 3 strike the right balance between ensuring access to safe, effective and affordable drugs, and continuing to provide appropriate incentives for innovation.
H.R. 3 does so by finally empowering Medicare to conduct price negotiations with the drug companies, just as all other industrialized countries do, which is why their residents pay roughly 30 cents for every dollar Americans spend on the same drugs. The bill limits the maximum price for any negotiated drug to 120 percent of the average price in other countries. It reverses years of unfair price hikes of many drugs covered under Medicare. And it will make the lower drug prices Medicare negotiates available to seniors and those with private insurance.
Furthermore, H.R. 3 limits Medicare beneficiaries’ out-of-pocket drug costs to $2,000 annually, while ensuring that seniors never lose access to the prescriptions they need. And the bill’s summary says it will reinvest in innovation, using billions of dollars of the savings from lowering unjustified drug prices to fund the search for breakthrough treatments and cures at the National Institutes of Health (NIH).
In total, drug price negotiation as laid out in H.R. 3 will save Medicare Part D alone $345 billion over the next decade, according to the Congressional Budget Office; and it will save American households $120 billion in reduced premiums and out of pocket costs over the same period, according to the Centers for Medicare and Medicaid Services.
Here’s why it won’t harm innovation: Less than one of every five dollars the big drug makers collect is invested in research and development (R&D) today. The rest is being used for stock buybacks, profit-padding, mergers and acquisitions, marketing, and overhead. Indeed, nine of the ten largest pharmaceutical companies spend more on marketing, sales and overhead than on research, according to The Washington Post. They didn’t even use the multi-billion dollar windfall they received from the tax reform legislation in 2017 to increase R&D spending.
By their own admission, these companies do earn profits in countries that negotiate lower drug prices, so they will still earn handsome returns for shareholders if H.R. 3 becomes law. Even in the lower-price environment created by the bill, there will be absolutely nothing preventing the big pharmaceutical companies from increasing their R&D investments above the 18 to 20 percent of revenue they historically spend. It’s a matter of priorities, not resources.
And H.R. 3 provides and protects incentives for innovation — it directs the Secretary of Health & Human Services to specifically take into account R&D costs and any therapeutic advances above existing treatments in negotiating a fair price for each drug. Companies will be able to negotiate higher prices for innovative medicines than for the third, fourth, or fifth similar drug for the same disease, creating a strong incentive for groundbreaking R&D, frequently spearheaded by biotech startups and other small companies. The process will distinguish between innovation and price-gouging, ensuring that investors can realize fair returns for life-saving drugs. Plus, other long-established incentives for new drug development, such as FDA exclusivities, tax credits, patent restoration and longer patents will remain in place.
Pharmaceutical company wolf-crying also conveniently ignores the fact that NIH funding contributed to research associated with every one of the 210 new drugs approved between 2010 and 2016. That’s why the use of some of the savings from lower drug prices to increase NIH’s research budget would likely accelerate the development of new, life-saving drugs.
The reality is there is currently no correlation between a drug’s list price and its R&D costs. The price of insulin has skyrocketed by 64 percent since 2014 not because of innovation, but because the drug companies could get away with it. The same is true of the anti-inflammatory drug Humira — the top-selling drug in the world. The manufacturer AbbVie doubled Humira’s price from about $19,000 per year to $38,000 per year for Americans. But in Europe, the company cut the drug’s price by 80 percent and is still not losing money.
Above all, an innovative drug doesn’t help anyone if it is unaffordable.
I urge Members of Congress to ignore pharmaceutical company fear-mongering and instead focus on the facts and Americans’ health care needs, just as Congress did 35 years ago. If they do, they’ll swiftly pass H.R. 3 and make drugs more affordable without harming innovation and new drug development.
