Stop Playing Politics with Drug Pricing

SACRAMENTO, Calif. — President Joe Biden announced this week that 2022’s Inflation Reduction Act has successfully lowered the cost of 64 drugs for seniors who are enrolled in Medicare. His administration is chalking it up as a major victory as...

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SACRAMENTO, Calif. — President Joe Biden announced this week that 2022’s Inflation Reduction Act has successfully lowered the cost of 64 drugs for seniors who are enrolled in Medicare. His administration is chalking it up as a major victory as the president heads into Thursday’s debate with a campaign that’s focused on bread-and-butter economic and cost-of-living issues. 

Americans are frustrated by high prescription drug costs, so this could provide him with a political win. However, the complexities of drug prices are such that few voters likely have a clue about that reform and its impact on prescription prices. The law allows “Medicare to negotiate the prices of certain high cost drugs, as well as capping how much people with Medicare Part D spend on prescription drugs per year,” per a report in the Hill.

Pharmaceutical companies have pursued legal action challenging its provisions that allow Medicare to negotiate with them for price reductions. If the companies don’t give in to the lower prices, they must not only exit this government-subsidized market, but also pay an excise tax on the drugs they sell elsewhere. Politico succinctly summarized the dilemma in an analysis last year:

The pharmaceutical industry thinks that this scheme is a charade. Facing a ruinous excise tax, drug companies say that they have no choice but to “negotiate” with CMS. Likewise, they’ll have to accept a cut-rate price because no company can possibly afford to withdraw from Medicare and Medicaid, which together account for 45 percent of the nation’s annual spending on prescription drugs. This isn’t a true negotiation; instead, as pharmaceutical company Merck argues, it’s “tantamount to extortion.”

Whatever the legal merits of the argument — or the political calculations involved in the legislation — this fracas highlights the difficulties in providing competitive pressures in a marketplace that is dominated by the government. Price controls quash innovation, as companies reduce their investments in life-saving drugs if they aren’t able to get a sufficient return. However, taxpayers pay these subsidies, and it would be wrong, as a Reason Foundation researcher notes, to “allow private companies to extract as much money as they can from taxpayers.”

There’s no easy free-market solution to this conundrum, but politicians interested in actually reducing drug costs without stifling research and development could — if they were more interested in useful policy than campaign talking points — pick the low-hanging fruit. One of the lowest branches involves the decidedly non-sexy and complex topic of patent reform. Simply put, the misuse of patents — monopoly rights the government grants to inventors — reduces innovation in this field (and others) and ultimately drives up the cost of medicine.

The first problem of the patent system, argues Forbes’ Avik Roy, is that the government officials who grant them must rely on subjective criteria: “In no other sector of the economy is the possession of property so dependent upon the subjective judgment of unelected officials. Because prescription drugs are so expensive, the decision to issue patents for trivial modifications of a major prescription drug can lead to $114 billion in revenue for the manufacturer of that drug, directly at the expense of patients and taxpayers.” So while a 20-year monopoly might be justified for a significant drug development, it’s less so to grant it to “those that make minor tweaks to a manufacturing process, or attempt to patent the use of a drug for a disease closely related to the original one.”

Fair points. My R Street Institute colleague, technology and innovation director Wayne Brough, reports that pharmaceutical companies are adept at gaming the system by employing “complex patent strategies … to keep competitors and low-cost generics out of the market for as long as possible to maximize the profits of blockbuster drugs.”

In just one example involving the cancer drug Revlimid, he notes that the company “filed for an additional 206 patents on the drug — 117 of which were approved,” resulting in the drug’s price increasing “from $6,000 per month in 2002 to $24,000 per month in 2022, resulting in a total estimated cost of $45 billion for Americans.” Adjusted for inflation, that’s still a boost of 4.5 times the original cost. Obviously, companies need the financial incentive to invest in the development of such ground-breaking pharmaceuticals, but not by abusing patent thickets.

Then there’s the problem with patent trolls. Investopedia says a “troll files patent claims without any intention of ever developing a product or service. The end result is bad faith infringement threats and licensing demands that require companies to spend a significant amount of money to settle these claims without any addition to the public good.”

Unfortunately, current proposals would make the problem far worse by expanding patent eligibility, overturning court cases that narrowed patents and reducing competition by enabling companies to patent extremely broad and ill-defined concepts. The legislation doesn’t target the main problems: trolling, patent thickets (a web of multiple patents protecting a single product), “evergreening” (filing patents over minor changes to, say, the color or packaging of the drug), and “product hopping” (new patents for reformulations of old drugs).

Granted, these are complex issues that resist easy solutions, but addressing them could do far more to limit drug-price inflation — and create fewer disincentives to innovation — than the current easy-button approach of price controls and government mandates. Then again, I can’t imagine any politician building a successful campaign around such reforms, which offers the most obvious explanation about why such ideas rarely move forward.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

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