In a speech on Oct. 25, President Trump criticized pharmaceutical companies for having “rigged the system” by charging higher prices in the U.S. than abroad. In fact, the system-riggers are not drug firms but foreign countries. Nearly all of them operate nationalized health care systems, where prices are set -- and access to medicines determined -- by government agencies.
This is the system that Americans have consistently rejected and one that, according to a new study, would wreak havoc on pharmaceutical innovation, yet a Republican Administration wants to import a key portion of it to the United States.
There is another approach, however, to closing the disparity – one that would seem better suited to President Trump’s own style and political philosophy. It is for the White House to exert pressure on the Europeans, Canadians, and others, mainly through trade agreements, to end their own price controls and stop their free-riding.
Importing Price Controls
Drug companies would like nothing better than to insert some equity into what American and patients in other countries are paying for drugs, but they can’t without the help of their own government. Most foreign nations run monopsony drug purchasing operations; in other words, government agencies are the only purchaser of pharmaceuticals. The result, as the President said, is that “American consumers…subsidize lower prices in foreign countries through higher prices in our country.”
The gap is real, but is the best way to narrow it what the Administration is advocating?
A few days after the President gave his speech, the Centers for Medicare and Medicaid Services (CMS), an agency of the U.S. Department of Health and Human Services (HHS), proposed a rulemaking that would create an International Pricing Index (IPI) Model. If it goes into effect, the IPI would establish drug price controls based on an index of what other countries pay. The index would apply to single-source drugs and biologicals in Medicare Part B, which reimburses for physician-administered treatments, such as infusions of cancer medicines.
In other words, for some of the most innovative and sophisticated treatments, the U.S. will be adopting a critical component of foreign nationalized health care systems. While that component is limited, it is a classic foot in the door, and according to new research, it will have immediate and detrimental consequences.
Price controls have had a devastating effect on the pharmaceutical industry outside the United States. Not only will fewer drugs be developed, but, if the U.S. adopts the European system, restrictions on access will surely follow. Of the 74 cancer drugs launched between 2011 and 2018, some 95% are available in the United States. “Compare that to 74% in the U.K., 49% in Japan, and 8% in Greece,” said the Wall Street Journal in an editorial last October.
Opposition From Conservatives, Economists
What makes the IPI so strange is that it is being advanced by a President who has generally taken a free-market approach to constraining drug prices – and has been more successful than his predecessors in achieving that goal. Data from the Bureau of Labor Statistics show that pharmaceutical prices have fallen during the 12 months ending in March. Why? Mainly because of increased competition from generics, whose approvals have been eased bynew Food & Drug Administration policies. HHS is also getting ready to end opaque rebates and require discounts to go to patients at the pharmacy counter.
The IPI, both because it relies on direct price-setting and on the policies of Europeans, would seem to contradict the Administration’s strategy – not to mention a worldview that is highly skeptical of the outsized role other governments play in their economies.
Whatever the Trump Administration’s motivations, it was no surprise that, within a month of the proposal, 57 conservative groups, from Grover Norquist’s Americans for Tax Reform to the Tea Party Patriots Citizens Fund, vigorously opposed it. In a letter to HHS Secretary Alex Azar, they wrote:
Conservatives have long opposed price controls because they utilize government power to forcefully lower costs in a way that distorts the economically-efficient behavior and natural incentives created by the free market.
When imposed on medicines, price controls suppress innovation and access to new medicines. This deters the development and supply of new life saving and life improving medicines to the detriment of consumers, patients, and doctors.
In 2004, during another period of interest in mitigating the European-U.S. price disparity, more than 200 American economists made the same point, signing a public letter that said in part:
Imposing price controls here would have a major impact on drug development worldwide, harming not only Americans but people all over the world. On the other hand, removing foreign price controls would bolster research incentives.
Among the signers were the late Nobel Prize winner Milton Friedman; the late Paul McCracken, chairman of the Council of Economic Advisers under President Nixon; and President Trump’s own first CEA chair, Kevin Hassett, who was then at the American Enterprise Institute.
But what the economists warned against – “imposing price controls here” in the U.S. – is precisely what the Trump Administration wants to do. The President tried to repeal the Affordable Care Act, or Obamacare, because of concerns about increasing the role of the U.S. government in health care, but the IPI Model goes much farther and would actually bring government-run health care from Europe, Japan, and Canada to the United States.
Economists recognize that price controls have consequences. Limiting prices means limiting revenues and earnings, which in turn means limiting the funds available for the research and development that produces medicines that have been so effective in recent years in fighting cancer, heart disease, auto-immune disease, HIV/AIDS, Hepatitis C and many more.
A study released at the BIO International Convention in Philadelphia last week by the consulting firm Vital Transformation found that the IPI…
The study also refuted the claim by HHS that R&D would be reduced by only 1% with the implementation of the IPI.
What Is the IPI, Exactly?
The new price controls would apply only to certain Medicare Part B drugs. According to a press release from HHS, the new system “would be phased in over a five-year period [and] would apply to 50 percent of the country.”
We still don’t know all the details, but, according to a policy brief from HHS titled, “What You Need to Know About President Trump Cutting Down on Foreign Freeloading,” the U.S. government will survey prices from a group of countries and then set a target price of “126% of the average price other countries pay” for physician-administered drugs. Studies differ widely on the precise difference between U.S. and foreign prices, but recent HHS research pegs the U.S. figure at 180% of average prices in a set of 15 European countries plus Japan. The price controls would be applied under Section 1115a of the Social Security Act and would not require Congressional approval.
Because income is a major factor in the pricing of all goods and services, including drugs, the choice of some of the countries used by HHS in its price survey is highly suspect. Greeks, for example, have a per-capita income that is 53% lower than that of Americans, according to the World Bank; Croatians, 58% lower; Czechs, 42%. None of the 16 nations has a higher per-capita income than the United States.
In its filing in the Federal Register on constructing an International Price Index, CMS said it was going to jettison Croatia, but “we are considering using pricing data from the following countries: Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, and the United Kingdom.” Left off is Switzerland, which ranks second to the U.S. in per-capita drug spending, as well as seven of the nine countries with the highest per-capita global GDP.
The list has come in for some deserved ridicule, and sources say that it may be adjusted to include more rich countries and fewer poor ones. But such changes do not address the bigger problem – which is that, by importing foreign price controls, the U.S. will do significant damage to pharmaceutical innovation, harming the health of Americans.
The Effect of Price Controls
The IPI proposal in itself will have an impact on non-Medicare as well as Medicare prices, according to the Vital Transformation study. It will have little or no effect on the out-of-pocket costs of Americans but will reduce the revenues – and, thus, the R&D investments, of companies responsible for the world’s most effective medicines. As a precursor of broader policy changes, its potential dangers are evident.
A study by Thomas Abbott and John Vernon, published by the prestigiousNational Bureau of Economic Research, modeled "how future price controls in the U.S. will impact early-stage product development decisions in the pharmaceutical industry." The researchers estimated "that cutting prices by 40 to 50 percent in the U.S. will lead to between 30 to 60 percent fewer R&D projects being undertaken (in early-stage development)."
A 2004 study by the U.S. Department of Commerce found that government price controls across just nine OECD countries were associated with an annual decrease in pharmaceutical revenues of $18 billion to $27 billion and reduced R&D expenditures of $5 billion to $8 billion. According to DoC, that would mean that three or four new drugs would not enter the market each year. A 2015 study, using the 2004 DoC results and published in the RAND Journal of Economics, found that seven to 11 new drugs would be lost.
But the irony is that, if implemented, the IPI Model’s meager or non-existent benefits will almost certain disappoint the people it is supposed to help. A study by the research firm Avalere in December found that the…
vast majority of seniors in Medicare would not see a reduction in their out-of-pocket (OOP) costs from the proposed IPI model because more than 87% of Part B beneficiaries have supplemental coverage (e.g., Medigap, employer sponsored, Medicare Advantage, Medicaid) that covers their cost sharing for Part B drugs.
Avalere estimates that less than 1% of seniors in Medicare would see reduced OOP costs (in a given year) if the demo were to include the 27 drugs listed in the Office of the Assistant Secretary of Planning and Evaluation (ASPE) Report that was released in conjunction with the [proposal]. This figure is a result of the small number of beneficiaries taking 1 of the 27 included drugs (about 4% of all Part B FFS enrollees), and the low number (10–13%) of beneficiaries without any supplemental insurance.
If Not Price Controls, What?
A little over a year ago, the President’s Council of Economic Advisers (CEA), which has been producing some of the most sensible work in recent years about health care costs, issued a report titled, “Reforming Biopharmaceutical Pricing at Home and Abroad.” It explained:
The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations…. Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area.
It’s significant that the CEA did not cite any version of a foreign pricing index as a solution – but the Council did not offer anything else either. We assume that the economists at the CEA understand that by importing price controls, Americans themselves would end up the biggest losers. Forcing price cuts in the U.S. would lead to fewer new medicines being developed, particularly the kind of high-value medicines for very sick patients covered by Medicare Part B.
But there is another approach that could prove effective. Rather than the U.S. adopting the European system, the Europeans should adopt the U.S. system.
The benefits, both to Americans and Europeans, would be significant. An article by Dana Goldman and Darius Lakdawalla of the Schaeffer Center at the University of Southern California estimated that ending price controls in Europe would result in $10 trillion in welfare gains over the next 50 years for Americans and $7.5 trillion for Europeans.
President Trump could deploy carrots and sticks in trade negotiations to get other wealthy countries to relax or end their price controls. Currently, drugs seem to be immune to the rules that apply to everything else. For example, imagine if U.S. automakers were told by the French government that any car they export to France could cost only $15,000. No U.S. Administration would tolerate such a violation of basic trade fairness, yet this is precisely the situation that prevails with medicines.
The Steps to Take
There are precedents. Last year’s bilateral trade agreement with the U.S. required South Korea to “amend its Premium Pricing Policy for Global Innovative Drugs to…ensure non-discriminatory and fair treatment for U.S. pharmaceutical exports.” And the new U.S. Mexico Canada Agreement, the successor to NAFTA, requires all three countries to provide 10 years of protection for patented biological products. Much more could be done.
A good first step would be for the U.S. to appoint a dedicated official in the Office of the U.S. Trade Representative to handle pharmaceutical matters, with the aim of ending pricing disparities and increasing the volume of U.S. exports.
Second, just as the FDA under Scott Gottlieb eased approval of generics and created more competition with branded small-molecule medicines, it should also clear the path for the approval and marketing of biosimilars to enhance competition with many of the Part B biologics that HHS wants to target through price controls.
In 2017 and 2018, Europe approved 31 new biosimilars; the United States, just 12. This is one area where we can import something from Europe – not a price-control index but a smart regulatory policy that encourages competition and lower prices.
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