Democrats say they can lower drug prices without stifling innovation

Congress is again attempting to control the overwhelming cost of drugs in the United States. Last week, government committees revived conversations about House Resolution 3 (H.R.3)—a bill that, if enacted, would give Medicare the ability to negotiate drug prices, cap out-of-pocket spending on medications, and fine drug manufacturers for increasing drug prices faster than the rate of inflation. The main argument against the bill is that it will curb drug industry profits, therefore limiting the industry’s ability to invest money in what it does best: innovating.

So do Americans have to sacrifice innovation to get cheaper drugs?

H.R.3 was first introduced in 2019 and passed in the House that same year. It was then forwarded to the Senate where it languished. In April, it was reintroduced in the House with President Joe Biden voicing support for allowing Medicare to negotiate drug prices. The bill would extend those negotiated drug prices to private health payers. The bill was fiercely debated in hearings before the House Committee on Energy and Commerce’s subcommittee on health on May 4 and then again on the following day before the Committee on Education and Labor’s subcommittee on health, employment, labor, and pensions.

“We know the American people want lower prices, but they do not want to sacrifice access to life-saving treatment,” said Representative Brett Guthrie of Kentucky during a Committee on Energy and Commerce hearing on a slate of bills targeting lower drug prices. Guthrie instead favors H.R.19, which was introduced as a counter to H.R.3 back in 2019. The bill caps out-of-pocket spend for seniors on Medicare, prevents pharmaceutical companies from blocking new generic drugs, and requires more transparency around drug pricing and options at the doctor’s office.

Critics say H.R.19 doesn’t lower actual cost of drugs, it just lowers the expense for seniors. Supporters of H.R.19 say it preserves the ability for drug companies to make money that can be reinvested in breakthrough medicine. This line of argument from supporters suggests that Americans cannot both have innovative medicine and more affordable medicine.

Several analyses paint a different picture. Giving the government the ability to negotiate on drug prices may reduce the overall number of drugs produced. However, it could also push pharmaceutical companies to focus their energy on more novel, life-saving drugs.

The need for cheaper drugs

Everyone agrees the cost of drugs need to come down. The U.S. spends an estimated $100 billion to $300 billion in health-care costs annually because people do not take their medicines as prescribed. One in five prescriptions are never filled. The high cost of prescription drugs has lead a portion of Americans to ration their medications or stop taking them all together.

“Patients have died because of these impossible decisions,” said Rachel Sachs, associate professor of law at Washington University, during the Energy and Commerce subcommittee hearing.

There are a bevy of reasons why people don’t take their medications, including confusion or apprehension about their prescriptions, forgetfulness, and poor care coordination. But another factor is the cost of treatment. Diabetes is perhaps the best case study in understanding how the costs of drugs affect patient care.

Insulin, which treats diabetes, is notoriously expensive in the U.S. A report from the Health Care Cost Institute found that in 2016, patients with type 1 diabetes spent $5,705 out of pocket on insulin that year, up from $2,864 in 2012. The price of insulin has in turn caused roughly 13% of diabetes patients to stretch their medications by taking them less frequently, according to a survey from the National Health Survey. Patients who do not take medications for chronic illness are three times more likely to end up hospitalized, which in turn leads to more medical expense. Other countries spend far less on insulin. A report from the RAND Corporation found that where the U.S. spent on average $98.70 per standard unit on insulin in 2018, Canada spent $12. In some countries, the price per unit for insulin is even less.

Some of the most commonly used drugs that have been around for decades are also getting more expensive. A report from Kaiser Health News found that price increases on 313 brand-name drugs, about 80 of which has been on the market since at least 2000, added $3.2 billion to Medicaid spending in 2016. Those increases are despite the fact that Medicaid, like Veterans Affairs, is able to negotiate on drug prices. It’s likely that some of these drugs with rising prices don’t have competitors.

There is broad support in America to bring down the price of drugs. While Republicans in Congress are largely against government interfering with drug pricing, Americans in both parties are largely in favor. A Kaiser Family Foundation survey from 2019, found that 86% of Americans agree that Medicare should be able to negotiate drug prices with manufacturers. However, 66% went on to oppose the measure if it meant less development of new drugs.

The price of innovation

There are approximately 7,000 rare diseases affecting 30 million Americans that do not have treatments, according to the Food and Drug Administration (FDA). The market on its own does not necessarily drive pharmaceutical companies to develop the life-saving drugs that are needed. For example, bacteria have become resistant to older antibiotics and the world is in need of new versions. However, pharmaceutical companies have not been investing in new antibiotics, because it’s not profitable for them to do so.

Instead, these companies invest in drugs that will make them money. A recent report from the Congressional Budget Office (CBO) showed that over the last 30 years drug companies have invested significantly more in research and development. Citing data from industry trade association Pharmaceutical Research and Manufacturers of America (PhRMA), the report said research and development accounted for about a quarter of pharmaceutical industry revenues in 2018 and 2019, up from 13% in the early aughts. In total, the large companies that belong to PhRMA paid $83 billion towards research and development development in 2019. The CBO predicts that under the H.R.3 there would be eight fewer drugs introduced over the next eight years and 30 fewer drugs between 2030 and 2040.

While the pharmaceutical industry has spent an increasing amount of money on developing new drugs, not all of those dollars went towards the most innovative types of medicine. “That increase in drug approvals does not, by itself, indicate the extent to which the new drugs are particularly innovative (for instance, targeting illnesses in new ways) as opposed to improving only incrementally upon existing drugs,” writes the CBO. Drug companies often invest in research around new combinations of existing drugs or small improvements on treatments and their deliveries, the report notes.

How the pharmaceutical industry spends its R&D dollars has everything to do with market and government incentives. A 2017 report from the Government Accountability Office showed that while the U.S. approved an average of 179 to 263 drugs annually between 2005 and 2016, only 13% of those were innovative drugs that either significantly advanced existing medicine or treated a disease previously unaddressed. Thanks in part to government incentives, development of drugs for rare diseases also increased during this period.

Furthermore, much innovation is happening outside of big pharmaceutical companies. “Between 2010 and 2016, every drug approved by the FDA was in some way based on biomedical research funded by NIH (National Institutes of Health),” writes the CBO. Pharmaceutical companies pay to translate this research into products, including putting it through expensive clinical trials, but they are not originating the innovation. Smaller pharmaceutical companies are also responsible for the bulk of drugs in phase-III clinical trials, according to the CBO.

Rather than initiate innovation, sometimes big pharmaceutical companies will spend money on acquiring those small companies. An analysis from Harvard legal and medical researchers suggests that allowing the government to negotiate drug prices is more likely to bring down the “astronomical” prices large drug manufacturers pay to acquire smaller companies than it is to reduce the development of innovative medicines.

The good drugs

While it may seem like giving Health and Human Services the ability to negotiate drug prices would lead to lower prices on all drugs, Democrats in Congress and those who favor H.B.3 say that’s not the case. “We should be paying more for good, valuable drugs,” says David Mitchell, president and founder of Patients for Affordable Drugs, who testified before the Education and Labor committee on Wednesday. “Every drug that’s approved comes to market whether it’s a real improvement over existing therapies or not. I want to pay money for the really good drugs.”

Legislators in favor of the bill say rare disease medications would not likely be negatively affected, because they are needed. If anything, these legislators hope that H.R.3 would stoke innovation in rare disease research by rewarding the development of necessary drugs. Critics of H.R.3 maintain that with less revenue coming in, pharmaceutical companies will have fewer resources to put towards developing medication for rare disease.

But, revenues are not the only drivers of innovation. Laws that allow pharmaceutical companies to patent research funded with government dollars and guaranteed periods of market exclusivity will continue to push pharmaceutical companies to invest in drug innovation. The federal government also frequently works with the pharmaceutical industry to develop novel medicines. The COVID-19 vaccines are an example of this. The National Institutes of Health helped fund the basic science behind mRNA vaccine technology. Across agencies the government invested $2.5 billion into Moderna’s vaccine, according to The New York Times. While President Biden supports waiving intellectual property rights for COVID-19 vaccines for now, such a measure would not likely to be permanent and companies would be able to profit off the technology for years to come. They have already profited during the pandemic.

Senator Ron Wyden of Oregon says drug pricing reform is a top priority going forward. Democrats are pushing for the bill in big ways. The question is whether Democrats can convince Republicans to get on board.