The White House
Surveys confirm that most Americans recognize the value of prescription drugs. But the same surveys also show that Americans are worried that they will be unable to afford needed medicines.
These conflicting feelings exemplify the inherent tension when it comes to prescription drugs – how do we incentivize innovation to help patients who lack efficacious treatments while also promoting greater affordability for medicines today?
Too often, proposals get this balance between innovation and affordability wrong.
Policies such as the Medicare price negotiations mandated by the Inflation Reduction Act (IRA), and signed into law by former President Biden in August 2022, essentially impose price controls on targeted medicines. Unless repealed by Congress, price controls on the first 10 drugs under Medicare Part D will go into effect on January 1, 2026. Additional new drugs under Parts D and B will be subject to controls in subsequent years. Price controls improve affordability but only by reducing the incentive for continued innovation. Consequently, these controls exacerbate the tension between patients who have access to safe and efficacious medicines and patients living with untreated or poorly treated conditions.
Unlike price controls, there are many potential regulatory changes that will improve drug affordability without diminishing the hope of patients who are waiting for an effective treatment to be developed. An Executive Order (EO) signed on April 15th is a solid first step toward achieving this goal.
While the EO contains some regrettable changes, the EO addresses the root causes of the current affordability problems and improves the incentives to develop new innovative treatments. As a result, the EO’s beneficial changes would meaningfully address many of the problems plaguing the pharmaceutical industry.
For example, currently the manufacturers of an innovative drug earn only 50-cents of every dollar spent on medicines. The other half of the revenues goes to insurers, pharmacy benefit managers (PBMs), and hospitals through rebates and discounts. These rebates and discounts are opaque and often fail to lower patients’ out-of-pocket costs. In fact, the current opaque discount system is largely responsible for the drug affordability problem. The EO calls for a regulatory review to improve market transparency and ensure patients directly benefit from the large discounts already being paid.
Then there are actions geared toward addressing the fraud and abuse plaguing the 340B program. 340B is well-intentioned – it is supposed to help at-risk, low-income patients, particularly in rural areas, by increasing the capacity of the hospitals and healthcare facilities that disproportionately serve these patients. However, rather than increasing drug affordability and strengthening the financials of the targeted institutions, the program has become a profitable revenue source for major hospitals and pharmacy chains.
Worse, the uncontrolled growth of the program is now having adverse impacts. The sheer size of the program creates a cost shift that raises drug costs on other private payers and patients. It encourages unwarranted healthcare consolidation that raises costs and denies patients’ choice of care. And, as if these impacts were not bad enough, due to the program’s excessive growth, the average 340B hospital now provides less charity care than the average hospital.
Saving the 340B program requires legislative action that returns the program to its original intention, which the EO intends to kickstart.
Beyond the affordability issues, the EO focuses on improving the innovative environment as well. Take the so-called “pill penalty” the IRA created. This disincentive exists because the IRA authorizes HHS to impose price controls on medicines derived from biological processes (e.g., biologics that are typically infused in a clinical setting) 13 years following FDA approval. However, small molecule drugs (e.g., typically pills patients take at home) that are typically more convenient and affordable for patients are eligible after 9 years.
This different patent protection of biologics versus small molecule drugs creates a disincentive that is already reducing investment into small molecule medicines. Also noteworthy, small molecule drugs have advantages over biologics for treating some diseases such as cancers. As a result, the “pill penalty” is biasing the innovation environment against these patients.
The EO will help here too by directing agency officials to work with Congress with the goal of aligning the treatment of small molecule prescription drugs with biologics under the IRA.
There are some unfortunate provisions to the EO, particularly its call to increase prescription drug importation. Since these are price-controlled drugs, the call for prescription drug imports is simply a backhanded call for drug price controls in the U.S. Whether imposed by the U.S. or a foreign government, adopting drug price controls in the U.S. will have the same deleterious impacts – rising drug shortages coupled with sharply lower incentives to develop new medicines. The result will be worse health outcomes today and tomorrow.
Despite some flaws, the recommendations contained in the April 15th EO meaningfully improve drug affordability and incentivize continued innovation in the pharmaceutical sector. It strikes the right balance that is lacking in the recent efforts to impose price controls and, if it eventually becomes policy, will improve outcomes for patients now and in the future.