Will Price Controls Limit Drug Development? The Debate Heats Up

Legislative proposals for curbing outlays on prescription drugs have moved to center stage, as Congress looks hard for ways to pay for costly initiatives to repair the nation’s infrastructure, offset global warming, and expand health care programs. These developments have focused attention on a recent report from the bipartisan Congressional Budget Office (CBO) analyzing how drug pricing policies could reduce the number of new therapies coming to market. Industry has long warned of such an outcome and has ramped up efforts to preserve US market support for global biopharma R&D.

The CBO report explains why companies investing in new drug development may drop long and costly research in some medicines if Congress approves legislation that permits Medicare to limit reimbursement for certain leading drugs. The main bill in question, the Elijah E. Cummings Lower Drug Costs Now Act (HR 3), would give the Department of Health and Human Services (HHS) authority to negotiate drug prices on a certain number of high-use medicines in Medicare drug plans based on an international index of prices at several other countries. Manufacturers that fail to agree to the set prices for Part D coverage would face stiff penalties. While such a policy is estimated to save the government some $900 billion, CBO calculates that it would reduce the number of new drugs coming to market by two new therapies in the first decade, adding up to possibly 60 fewer drugs over 30 years.

The analysts explain that potential changes in company profits and in drug development costs are main factors influencing how many new drug candidates enter clinical trials at different stages. A 15–25% drop in expected returns on higher-cost drugs could reduce new drug approvals by 0.5% a year, an amount that would accumulate over time. Thus, the simulation model calculates that the proposed curb on future market prices will lead biopharma companies to abandon the development of drug candidates with less certain returns on investment, particularly in Phase I and Phase II clinical development. Those less profitable therapies, as for rare conditions or infectious diseases, may be first on the chopping block, as opposed to new medicines that address clear needs for large patient cohorts.

The larger issue for policy makers is whether such a decline in new drug development would have a serious impact on patients and health outcomes, something that here CBO does not address. Market approval of more widely used new treatments for heart disease or common cancers may actually lead to lower prices in the market, which could have wider public benefits. Or, price limits for innovative therapies with potential for large sales and profits could have a serious effect on investment in newer, smaller biotech companies. BioCentury Editor Steve Usdin explains that the CBO analysis fails to recognize the broader impact of price controls on the ability of new, highly innovative firms to gain financial support, as such developments would reduce interest among venture capital investors in the biotech market and in portfolios of investigational programs.

Other commentaries recognize the complexities of drug pricing proposals, as seen a recent report on the impact of enacting HR 3 by Paul Ginsburg and Steven Lieberman, issued by the Brookings/USC Schaeffer Initiative for Health Policy. It outlines a broad range of impacts from legislation authorizing government controls on what manufacturers can charge for their drugs, noting that effects would vary, depending on the process used to set prices, what penalties fall on those firms that don’t comply, what types of drugs are affected, the prevalence of competitor products, whether payers could negotiate lower prices, if pricing curbs apply only to Medicare or to all US patients, and how such a program would go about setting the price.

Manufacturers, meanwhile, continue to raise concerns about the potential harm on the prescription drug market from such proposed pricing policies. The Biotechnology Innovation Organization (BIO) predicts that halting development of even only a few new therapies could have serious consequences for people living with rare diseases and for patients needing new antibiotics or antivirals to treat future life-threatening illnesses. BIO and its members also are examining the impact of price controls in states with active biopharmaceutical R&D operations, as seen in a recent “Good Day BIO” posting. The Pharmaceutical Research & Manufacturers of America (PhRMA) and its members have ramped up lobbying on these issues, emphasizing that a cap on out-of-pocket drug costs for Medicare patients is preferable for reducing consumer health care costs than price controls.

Another response to concerns about reduced new drug development is to offset any drop in industry R&D with increased government support for the National Institutes of Health—perhaps using some of the savings from proposed legislation for this purpose. And while the public generally supports drug price controls, especially if linked to reduced outlays on specific medicines, that enthusiasm wanes notably when seen to reduce R&D for new treatments.

About the author

Jill Wechsler is Pharmaceutical Technology's Washington editor.