A recent Stat News article highlighted plans in the new Congress to reduce drug prices by abridging the intellectual property rights of pharmaceutical companies.
There is a certain irony here. On Dec. 7, the same day the article appeared, the U.S. government’s Centers for Medicare and Medicaid Services reported that prescription drug spending in the U.S. last year rose by only 0.4% and that the price of the average medicine declined by 1.4%.
This disconnect has, unfortunately, become the new normal for policy debates involving pharmaceuticals. We will come back to the details of the CMS report shortly, but first let’s examine Lev Facher’s Stat article. It began:
Democrats, newly empowered in D.C. and on the hunt for bigger and bolder ways to lower drug prices, are suddenly taking aim at a far more central part of pharma’s monopoly power: the patents the industry holds on its drugs.
For years, lawmakers from both parties have shied away from addressing the industry’s intellectual property. Muck with a drug company’s government-granted monopoly, the thinking goes, and investments in research and development will disappear.
“Monopoly power” for developers of drugs is limited. As we noted in Newsletter No. 37, patents on medicines generally run for 20 years from filing, or about 12 years from the time the average medicine hits the market. (By contrast, Disney has held a copyright on Mickey Mouse since 1928.) After the patent expires, makers of generic medicines, which now represent 85% of all prescriptions, rush in and prices fall.
Scott Gottlieb, the Food & Drug Administration commissioner, has made a priority of lowering regulatory barriers to bringing generics to market, and the effort is paying off. In 2016, the FDA issued 73 first-time generic approvals. Through the first 10 months of this year, the figure is already 82. The U.S. has trailed Europe in bringing biosimilars, which have “no clinically meaningful difference” from reference biological products (sophisticated treatments, often targeted at cancers and autoimmune diseases), to market, but Gottlieb has focused attention here as well. The FDA this month approved the seventh biosimilar of the year, compared with five in 2017 and three in 2016.
Often, however, competition for patented drugs emerges well however, well in advance of the patent expiration. After all, the patent does not prevent other companies from patenting different molecules and biological products to address the same indication. For example, since an innovative cure for Hepatitis C was approved by the FDA in 2014, four other companies have brought patented drugs to market to fight the disease, and prices have fallen sharply.
Why Patents in the First Place?
The economist Stan Liebowitz of the University of Texas explains the purpose of patents:
If anyone can make a copy (embodiment) of an idea or expression without the permission of the original creator, the price of embodiments would be expected to drop to zero (plus the transmission/reproduction costs), leaving nothing for the creator. to provide producers with a pecuniary incentive to create intellectual products, creators must be given some degree of control over the use of their products, prohibiting others from copying their ideas or expressions. This is where copyrights and patents come in.
Intellectual property rights are so important, they were written into the U.S. Constitution (Article I, Sect. 8, Clause 8), giving Congress the power to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” In the case of medicines, patents provide the incentive to invest the $3 billion it costs to bring a single new medication to market. Who would spend vast sums on research and development to invent something that could be immediately appropriated by someone else who spent nothing on R&D? Without patents, a competitor could let someone else try and fail until getting it right – and then swoop in to steal the invention.
The latest approaches to limiting patent rights for medicines either seize intellectual or create doubt about whether that property is secure, thus diminishing the incentive to create. One proposal goes by the euphemism “compulsory licensing,” which is defined by the World Trade Organization as occurring “when a government allows someone else to produce the patented product or process without the consent of the patent owner.”
Importing Compulsory Licensing From Indonesia to the U.S.
Compulsory licensing – or merely the threat of this kind of expropriation -- is a favorite tactic around the world, and not just in countries such as India andIndonesia, which want to boost their own drug industries, but even in developed economies such as Canada. Under the TRIPS agreement that is part of WTO, compulsory licensing (CL) can be deployed only in highly limited circumstances.
The National Governors Association in August endorsed a proposal “to explore whether the federal government should invoke 28 U.S.C. 1498…which allows them to use or acquire patents (such as those for pharmaceuticals) in exchange for ‘reasonable and entire’ compensation to
Therefore, if markets are to be used the patent holder.” In fact -- as Adam Mossoff, Sean O’Connor, and Evan Moore argue in an article on the website of the Center for the Protection of Intellectual Property at George Mason -- University, the claim on which the proposal is based, with roots in an article in the Yale Journal of Law and Technology, “is false.” Mossoff and his colleagues write “to use § 1498 for the government to set drug prices charged by private companies in the healthcare market would represent an unprecedented use of a law that was not written for this purpose.”
They add that contrary to the Yale Journal article and a New York Times editorial endorsing the compulsory licensing scheme, the federal government would have to reimburse a drug company the full list price of an expropriated drug. Also, they write….
The federal government has never used § 1498 to authorize private companies to sell drugs to private consumers in the healthcare market in the United States. In these cases, the Department of Defense (“DoD”) relied on § 1498 to purchase military medical supplies from drug companies that infringed patents. Statements from agency heads during congressional hearings at the time confirm that the DoD, NASA, and the Comptroller General all understood the law as applying to procurement of goods for government use.
Still, the Stat article notes that the governors’ proposal tracks language in legislation introduced by Sen. Bernie Sanders (I-Vt.) and Rep. Ro Khanna (D-Calif.), and separately by Rep. Lloyd Doggett (D-Texas). “Those bills,” wrote Facher, “either use international reference prices to cap U.S. payments for drugs or allow Medicare to negotiate drug prices. Each would allow the health secretary to issue a second license to a competitor company if those negotiations end in a stalemate.” In other words, compulsory licensing – or (let’s be blunt) confiscation of property rights -- would be used as a threat in price negotiations with drug companies.
The Stat article also notes that in the past Rep. Nancy Pelosi (D-Calif), the presumptive House Speaker next year, threatened to abridge drug patents by using an existing law that allows the HHS secretary to seize property rights to medicines in national-security crises, such as the anthrax scare after 9/11.
‘A Great Way to Kill Venture-Capital Investment
in a New Alzheimer’s Drug’
A third approach, Facher wrote, “would pressure the NIH to re-interpret the Bayh-Dole Act, which governs intellectual property developed using federal research, and ‘march in’ on licenses for drugs that were excessively priced by their manufacturer.” Those “march-in rights,” in Sect. 401.6, are highly controversial, and NIH itself opposes changing the interpretation of the law.
The Administration has taken a strong position. In its recently released Green Paper on the “Return on Investment Initiative for Unleashing American Innovation,” the National Institute of Standards and Technology listed as an intended action, under the heading “Clarify Ambiguities in March-In Rights Processes and Terminology,” the following:
Implement regulatory change under the Bayh-Dole Act by specifying that march-in rights should not be used as a mechanism to control or regulate the market price of goods and services. Provide a clear and consistent definition for “reasonable terms” contained within the existing statutory definition of “practical application.” Clarify the intent of reasonable licensing terms to allow a product or service to reach the marketplace but not as terms (i.e., price control mechanism) for consumer use.
Joe Grogan, the Office of Management and Budget’s associate director for Health Programs, said at a conference last month that breaking patent rights under the “march-in” clause would “be a disaster.” According to Politico, he referred to the idea as “stealing.”
At a STAT event recently, Sen. Bill Cassidy (R-La) said that changing the march in interpretation would be “a great way to kill venture-capital investment in a new Alzheimer’s drug…. If you start marching in, saying we don’t care what your [intellectual property] is, we’re going to now take it over, VC is going to evaporate.”
CMS Report Shows Prescription Drug Costs Rose 0.4% and Prices Fell
Seizing property rights is an extreme step. Is it necessary? Not if we are to believe the latest data from CMS. In 2016, prescription pharmaceutical costs rose 2.3% over the previous year, and in 2017, they rose 0.4%. During each of these periods, utilization – that is, the number of prescriptions filled, increased by about 2%. As a result, the price of the average prescription over the last two years actually declined.
The CMS data also show that the average American spent $12 a month out of pocket on prescription drugs – a figure that has been steady for the past two years.
In addition, spending on prescription pharmaceuticals totaled $333.4 billion in 2017 while spending on hospital care totaled $1,142 billion.
And drugs are a powerfully efficient way to keep patients out of hospitals, where costs in 2017 rose by $49.8 billion, or 4.6%. As J.D. Kleinke, a health care entrepreneur, wrote in Health Affairs back in 2001:
The added costs associated with breakthrough medicines represent a major structural shift from the provision of traditional medical services to the consumption of medical products; they also represent the creation of economic, social, and public health utility that we value as a society.
Kleinke might have included “incremental innovation” along with breakthroughs. Those improving Hepatitis C drugs, for example, shortened therapy time, reduced side effects, and broadened application to more genotypes.
The Politics of Drug Prices
Then why all the commotion over pharmaceutical prices? Clearly, some politicians believe that their constituents like the idea of abridging patent rights for drug companies.
One big reason for the concern is the structure of health insurance policies. Insurance often covers all, or nearly all, the cost of inexpensive generic drugs but requires patients to pay a heavy share of the cost of the most innovative and expensive drugs. This is the opposite of how insurance should work.
For example, a study by the Kaiser Family Foundation last year found that one million Americans without low-income subsidies had costs that exceeded the Part D Medicare catastrophic threshold. They spent more than $3,000 each, on average, and one in 10 of them spent an average of $5,200. Studiesconsistently show that high copay requirements are causing sick people to go without their medicines.
The answer to rising costs is not to destroy the intellectual property regime that has served the U.S. economy and Americans’ health so well. The answer is to direct rebates to patients, restructure health insurance policies, and increase competition by easing the path for generics and their biological product equivalent, called biosimilars.
Perhaps these proposals to limit patent rights are just a threat, a way to secure other measures, such as price controls. But legislators are playing with fire. Even the threat of restrictions can deter innovation. And innovators throughout the economy should beware. If they believe they can control costs by constraining intellectual property guarantees, why would politicians stop with pharmaceuticals?
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