The key to new drug development
Sen. Pat Toomey continues to protect Pennsylvania’s seniors by standing strong for free market principles. He was one of the few members of the Senate Finance Committee to vote against a disastrous Medicare reform plan. The package contains one particularly damaging provision that, if enacted, would discourage drug companies from developing state-of-the-art medicines.
Sen. Toomey deserves praise for opposing it. The Finance Committee’s plan would restructure Medicare’s “Part D” prescription drug benefit. More than one million Pennsylvanians — mostly seniors, but also people with disabilities — rely on this program for affordable drug coverage. Part D is a rarity among entitlement programs.
Rather than providing coverage directly, the government allows private insurers to design and administer Part D plans. Insurers compete against each other to sell their plans, which are federally subsidized, to Medicare beneficiaries. This competition has tamped down spending without sacrificing quality.
In its first decade, Part D cost almost $350 billion less than originally projected. Premiums have remained stable over the years. And more than eight in 10 Part D beneficiaries are happy with their plans.
Unfortunately, the finance committee package could cripple this program. The bill would impose an “inflation penalty,” which would effectively prohibit pharmaceutical companies from raising Part D drug prices in reaction to changing market dynamics.
Here’s how it would work: Let’s say a drug costs $100 when it’s first released. But more patients and doctors than expected want the drug. So the following year, the manufacturer responds to this higher demand by raising the price to $108. Under the proposal, the manufacturer would owe the government a rebate for the difference between the new price and the original price, after adjusting for inflation. If inflation increased two percent that year, the manufacturer would owe the government $6 — $108 minus $102.
Capping drug prices might sound like a good idea. After all, Americans in both parties are fed up with expensive pharmacy bills. But the penalty would harm seniors in two big ways. First, an inflation penalty might actually increase beneficiaries’ total spending.
Right now, the insurers who sponsor Part D plans negotiate with drug manufacturers for rebates. Often, insurers receive rebates that largely cancel out the impact of any price hikes. Under the proposal, some of those rebates would go to the government, rather than insurers. That means higher net costs for insurers — and ultimately, higher premiums for beneficiaries.
Second, the inflation penalty would cripple medical research, thereby hindering the development of future treatments. On average, it costs more than $2 billion to bring a new drug to market. And most experimental drugs — 88 percent — fail to make it through clinical trials and the rigorous FDA approval process. Firms only make these risky investments because a single successful drug could recoup their development costs and — potentially — deliver a return to investors.
When governments prevent drug companies from adjusting prices based on market demand, it makes it harder for those companies to break even, fund future projects, and reward shareholders. Investors quickly stop funding medical research.
To see price controls in action, just look across the pond. Back in the 1970s, Europe invented more than half the world’s new medicines. But European nations then imposed more and more price caps. Research companies and investors increasingly flocked to America, which maintained a comparatively free market. Now, Europe produces less than a third of new medicines.
Price caps would devastate Penn’s Woods in particular. Currently, more than seven million Pennsylvanians suffer from one chronic condition. Three million have two or more. These patients need new drugs to treat or potentially cure their illnesses. They can’t afford for the drug development pipeline to run dry.
Fortunately, Sen. Toomey stood up for those patients by voting against the finance committee’s proposal. Let’s hope his colleagues come to their senses before Congress inadvertently jacks up seniors’ premiums and hampers drug research.