Proposed Medicare drug change won’t aid progress

Americans are worried about drug prices.

To address these concerns, lawmakers in both chambers of Congress have introduced measures to restructure Medicare’s drug benefit.

While it’s great to see both parties working together, this approach — which would enable government officials to set drug prices — is penny-wise and pound-foolish. Their efforts ultimately threaten small and mid-size biotech firms that develop important medical innovations. And the cures of tomorrow may be put out of reach for millions of patients as a result.

Forty-five million Americans depend on Medicare’s “Part D” drug benefit. The government doesn’t provide Part D coverage directly. Instead, it allows beneficiaries to enroll in drug plans sold by private insurers. Private insurers push for competitive pricing from manufacturers, and for most cases, pass some of the savings to patients, while the rest goes to pharmacy benefit managers. The government subsidizes and regulates these plans. This allows seniors to choose the plan that best fits their medical needs while driving out inefficiencies.

Most of the plans have four phases of coverage, each featuring different levels of beneficiary cost-sharing. Patients enter the final “catastrophic phase” after spending $5,100 out-of-pocket on medicines.

Once they’re in the catastrophic phase, patients’ cost-sharing obligations drop precipitously. They’re on the hook for just 5 percent of the cost of any prescription, down from 25 percent in the previous phase. The insurance company picks up another 15 percent of the cost. Medicare itself picks up the remaining 80 percent.

Congress wants to change who pays for medicines in the catastrophic phase. Two separate bills in the House and Senate would eliminate patient cost-sharing in that final phase — which is great news. If lawmakers had stopped there, patients would have good reason to celebrate the reform.

Unfortunately, that’s not the only adjustment Congress has in mind. The House plan would require drug manufacturers to cover 30 percent of the cost of their own medicines. It’d require Medicare to pay just 20 percent of catastrophic phase expenses. Insurers would pick up the remaining 50 percent.

The Senate Finance Committee’s proposal embraces the same basic structure, albeit with different numbers. Manufacturers would pay 20 percent of catastrophic phase costs, Medicare would also pay 20 percent, and insurers would pay the remaining 60 percent.

Why does this matter to the average American? Well, the reforms essentially impose an enormous new tax on drug companies. The Senate’s proposed changes would cost biotech firms $55 billion over the next decade.

These taxes would drastically slow the pace of medical innovation, which is an expensive, risky endeavor. It costs more than $2 billion to bring a single new treatment to market. And about 9 in 10 drugs fail during clinical trials.

Small biotech firms conduct much of this research in America. They rely heavily on venture capital investors to fund their efforts.

Those investors willingly fund risky projects because a single successful drug can generate enough revenue to pay for dozens of failures and still turn a tidy profit. Between 2000 and 2017, venture capitalists invested more than $95 billion in more than 3,000 biopharmaceutical startups.

Thanks to such risk-taking, U.S. firms produce the majority of the world’s new medicines. Currently, more than 4,500 new treatments for cancer, Alzheimer’s, heart disease, and other conditions are in development in the United States. Threequarters of these treatments are potentially first-in-class.

But huge new taxes would cause this innovative ecosystem to collapse. The levies would decrease drug developers’ potential returns on investment — and thus make it far harder for upstart research firms to raise funding. Small biotech firms — and the patients who depend on them — will be out of luck.

Normally, Americans want Congress to take bipartisan action. But when it comes to this particular Medicare reform, patients and scientists would be better off if gridlock prevailed.