Big Pharma’s Hot Streak — and What Could Stop It

T he pharmaceutical industry is on a bit of a hot streak. Last Monday, Pfizer announced promising results for its coronavirus vaccine. Later that day, Eli Lilly received emergency-use authorization from the FDA for its antibody treatment, which may prevent COVID-19 from growing serious in patients who contract the coronavirus and are not yet hospitalized. Not to be outdone, Moderna released similarly positive results for its vaccine candidate yesterday.

And yet, Republicans and Democrats alike are sitting on proposals that would make breakthroughs like these much rarer.

Specifically, they’re moving to peg domestic drug prices to the lower prices in other developed nations, a tactic known as “reference pricing.” Doing so, they claim, would save patients and taxpayers billions of dollars.

But reference pricing is a terrible idea. It would stifle the creation of lifesaving drugs in the future and limit Americans’ ability to access medicines already in development.

Last year, House Democrats passed H.R. 3, which would index reimbursements for prescription drugs — for both government and commercial insurance plans — to those drugs’ average prices in advanced economies.

Not content to let the Democrats have a monopoly on bad ideas, President Trump issued an executive order in September that, if implemented, would prohibit Medicare Parts B and D from paying more for drugs than any comparable country in the Organisation for Economic Co-operation and Development, a group of 37 developed nations.

Proponents of reference pricing complain that Americans pay more for drugs than citizens of  other developed nations — that they’re just trying to give Americans a fairer deal.

But drug prices are lower abroad because foreign governments forcibly cap them, which has all sorts of negative consequences for patients in those countries.

Consider Germany’s Federal Joint Committee, better known by its German abbreviation, G-BA. The G-BA allows pharmaceutical companies to charge market rates for one year, during which the board determines a drug’s clinical effectiveness. If the board decides that the medicine is no more effective than existing treatments, it sets the price equal to reimbursements for those drugs already on the market.

The G-BA has a problematic track record when it comes to judging drugs’ clinical effectiveness. German officials deem about 60 percent of medicines no more effective than existing ones. Yet between 2013 and 2017, half the drugs dismissed by G-BA as “no more effective” were considered breakthroughs by the U.S. Food and Drug Administration.

Drug manufacturers are reluctant to enter markets where they won’t be able to set prices at a level sufficient to recoup their research and development costs — and commensurate with the value their medicines deliver.

For German patients, that means going without lifesaving drugs. Between 2011 and 2019, Americans had access to 87 percent of the 356 new medicines launched worldwide. Germans had access to fewer than two-thirds of those drugs.

The story is similar in Canada. North of the border, patients had access to just 49 percent of new drugs launched worldwide from 2011 to 2018, largely because the country’s Patented Medicines Prices Review Board sets artificially low drug prices that discourage biotech companies from entering the Canadian market.

In 2019, just 15 of 54 drugs approved by the FDA were submitted for approval to Canada’s equivalent regulatory agency. Canadian patients missed out on numerous treatment options, including a breakthrough drug for cystic fibrosis.

Reference pricing would yield similar results here. Drug developers would delay launching their products in the United States, if the potential returns meaningfully shrank.

Americans would lose out not just on existing medicines but on future drugs, too. Developing a new medicine costs $2.6 billion and takes ten years, on average. Only 12 percent of drugs that enter clinical trials actually make it to market. Companies will drastically scale back R&D efforts if government price-setting renders the likelihood of securing a return on their investment slim.

Americans pay more for pharmaceuticals than the denizens of other rich countries. But the solution is to make Germany, Canada, and others pay market prices for drugs — not for the United States to adopt reference pricing that hurts present and future patients.