Democrats Choose a Less Risky Way to Reduce Drug Prices

In early budget negotiations, it looked as if the Democrats were finally going to take on Big Pharma over spiraling drug prices. Then last week, drug pricing fell out of the bill altogether and it looked as if the drug companies had won again. Now there is a compromise that looks modest but could have real bite.

The drug price regulation Congress is now considering would achieve three main goals. It would limit the amount that Medicare patients can be asked to pay for drugs out-of-pocket. It would restrict how much drugmakers can increase their prices each year. And, for the first time, it would allow Medicare to negotiate directly with drugmakers on prices for their medications.

The provision on price negotiation was the one most substantially changed in the last week: It would apply to fewer drugs, require smaller discounts, and, most critically, shield new drugs from negotiations.

And yet a wide range of health economists and advocates say those compromises may have created a less risky way of balancing innovation with profits. The policy isn’t simply smaller than the original. If enacted, it will save the federal government less money than the legislation passed by the House two years ago. But it is also less likely to hinder the development of new treatments and cures, the experts said.

“There is a lot to be said for incremental changes that allow us to learn,” said Benedic Ippolito, a health economist at the American Enterprise Institute, who studies the drug market. “Especially when we think there are meaningful trade-offs to consider.”

The bill text could, of course, change or fail to become law. The Congressional Budget Office has not yet measured its effects, and House moderates are reluctant to vote on the social spending package without a comprehensive estimate of the bill’s many parts. But the drug provisions were negotiated with key senators, including Kyrsten Sinema of Arizona, who had suggested she would have voted against the previous version.

Policymakers tackling the system of drug prices have always been balancing competing interests. The unregulated U.S. pricing system causes huge expense and poor health care outcomes for people who can’t afford their medicines. But the system also encourages major risky investments in biomedical research that benefit the world. No one has a good model of how the machine works, but nearly everyone who studies the system says taking money out of the prescription drug business is likely to have some negative effect on investment in drug development.

“There is a real trade-off we face here between costs today versus treatments tomorrow,” said Craig Garthwaite, a professor of strategy at the Kellogg School of Management at Northwestern, who studies drug development.

Decades ago, most major drugs were developed by the large pharmaceutical companies that sold them. But that system has changed. Today, most drugs originate in small biotech start-ups. Those firms are often devoted to the development of a single drug, and they are financed by venture capital firms that are willing to make risky bets in the hopes that one will pay off big. In the case of biotech, the payoff usually comes when a promising drug comes along and the company is purchased by a bigger company.

Venture firms that invest in biotech now don’t necessarily have to. Their money could just as easily go into other profitable sectors of the economy, like technology. Early stage drug companies are funded, in part, because America’s high drug prices mean that a successful drug will be worth a huge jackpot. Since the rest of the world pays less, nearly all of that investment is directed at the U.S. market.

The original House proposal to regulate drug prices would have allowed the government to lower the price of up to 250 expensive drugs, no matter how new or how innovative they were. The new approach limits that power: Drugs would be subject to price regulation only after they have been on the market for about a decade. That would mean drug companies could still charge enormous prices for new drugs, but they could do so only for so long. The law would allow price regulation after nine years for most common medications, and 13 years for more complicated drugs known as biologics.

Peter Bach, the director of the Drug Pricing Lab at Memorial Sloan Kettering, and the chief medical officer of Delfi Diagnostics, has been a longtime outspoken advocate for drug price reforms. He said a delayed approach would protect the public and the government from what he sees as the industry’s most egregious practices — the endless price hikes and patent shenanigans that often insulate expensive drugs from competition for decades. But he also says it will keep the promises of the country’s intellectual property system by giving the companies a few years to profit off their new inventions.

“It all aligns with core premises in our system,” he said. “And reining in distortions that have crept in.”

The original legislation was almost guaranteed to discourage the creation of some future drugs. The nonpartisan Congressional Budget Office said it would lead to 3 percent fewer drugs in the first decade of its life, and 10 percent fewer in the decade after, as it affected drugs earlier in the pipeline. Other scholars of the system, including Mr. Garthwaite, say the effects could be even larger.

Stephen Ubl, the C.E.O. of the industry trade group PhRMA, had described the threat of the original bill as “existential” to his industry. He sounded no less concerned in a statement this week about the new proposal: “If passed, it will upend the same innovative ecosystem that brought us lifesaving vaccines and therapies to combat Covid-19.”

Mr. Ubl’s comments ignore the ways the new proposal is kinder to his industry than its predecessor.

The industry’s messaging “doesn’t scale down, even though, in fact, the innovation incentive changes would be less,” said Rachel Sachs, a law professor at Washington University in St. Louis, who studies drug policy. She said delayed negotiation was likely to mean less harm for early stage development, and noted that many of Medicare’s most expensive drugs have been on the market for years, meaning such negotiations could still make a difference.

The current proposal won’t succeed in making drug prices in the United States similar to those in peer countries. On average, Americans pay about 250 percent of drug prices in other developed countries, according to a recent study from the RAND Corporation. Those other countries tend to negotiate aggressively for lower drug prices, often by purchasing drugs for the entire nation centrally, and often by being willing to say no to newer, effective therapies that regulators deem not worth the expense.

The current bill would allow Medicare to negotiate over the prices of no more than 20 drugs each year, and only those that have been around for a while. That is a relatively small subset of the drug universe. The Food and Drug Administration approved 53 new drugs last year alone.

Advocates backing a more aggressive approach believe there are opportunities to lower prices much more without disrupting the flow of new medicines. There are also concerns that industry could game this new system in various ways, blunting its effects.

But the bill’s moderation does not mean it is not groundbreaking: It would mean a fundamental change in the way that drugs are priced and sold in the U.S. There’s a drug called Revlimid that treats the blood cancer multiple myeloma. It has been on the market since 2005, and costs nearly $17,000 a month. It’s the second-most costly drug in Medicare. And, if the new legislation were in effect today, that price would probably be a lot lower.