By Glenn G. Lammi, Chief Counsel, Washington Legal Foundation’s Legal Studies Division, and Corbin K. Barthold, WLF Litigation Division, Litigation Counsel.
Overpriced. Excessive. Escalating. Gouging. Politicians and talking heads of every political stripe utter such words about the cost of prescription drugs with alarming regularity. Something must be done, they proclaim. But the purported problem is being considered, as so many are in Washington, in a vacuum, with little understanding of a profoundly complex pharmaceutical marketplace. Poorly informed and in a rush to act, regulators and elected officials are proposing cures that not only flout legal and constitutional requirements and protections, but also imperil biomedical progress and the Americans who benefit from it.
For instance, as discussed previously on this blog, the Center for Medicare and Medicaid Services (CMS) has proposed a rule requiring prescription drug ads on TV to state the product’s “list price.” As Washington Legal Foundation argued in public comments, CMS lacks statutory authority to impose such disclosure, and the speech mandate would violate the First Amendment. If the regulation successfully chills drug advertising, moreover, consumers will be less informed about medical conditions and treatments, which could lead to increases in healthcare costs.
Another CMS initiative, released in preliminary form last fall, aims directly at drug prices. The Center for Medicare and Medicaid Innovation (CMMI) has crafted a “model” program, the International Pricing Index Model (IPI Model), that would change the statutorily mandated pricing methodology for drugs covered under Medicare Part B. Part B drugs are administered by physicians at hospitals and doctors’ offices—a treatment approach common for conditions like cancer, multiple sclerosis, and epilepsy.
Instead of basing the reimbursement amount on a drug’s “average sales price” in the U.S. market—the current method—the IPI Model would calculate the price based on the average price paid for a Part B drug in 14 other countries (Canada, Czech Republic, France, Greece, and the United Kingdom are among those considered).
CMMI draws its authority to devise new Medicare drug-reimbursement models from § 1115A of the Social Security Act. The law requires that models be developed in two phases. First-phase tests must be supported by evidence that a defined population is experiencing deficits in care. During first-phase limited testing, CMS can waive the Medicare statutes. Although first-phase tests are not subject to administrative or judicial review, CMS can order compliance with them within the geographic area experiencing the care deficit.
The IPI Model violates § 1115A. In the invitation for comment CMS published for the IPI Model, the agency offered no evidence that Medicare Part B patients are experiencing deficits in care. That’s not surprising, since the IPI Model is laser-focused on cost, not care. What’s more, CMS wants to apply the model to a geographic area that encompasses 50% of Medicare Part B drug patients—far from the “defined” population Congress had in mind for a Phase I CMMI test. The model essentially rewrites the federal Medicare statute, something CMS’s Administrator has all but acknowledged: “[T]he IPI Model is a significant change; an overhaul of Medicare Part B drug pricing.”
The model also raises serious separation-of-powers concerns. It waives the Medicare statute’s Part B drug-payment mechanism for half of the law’s beneficiaries, and institutes a new pricing and payment method. The Constitution dictates that only the Legislative Branch can amend federal law. An executive agency may not nullify federal law at will. The Supreme Court said as much when it invalidated the Line Item Veto Act over 20 years ago. And even if CMS were permitted to use § 1115A to suspend the Medicare law and impose price controls, this would create another constitutional problem: overdelegation. Congress may not simply hand its lawmaking power to the executive.
Last, and by no means least, the IPI Model’s use of foreign nations’ drug prices essentially endorses those nations’ extreme price controls, compulsory licensing, and international reference pricing. U.S. government officials have long argued that such policies violate international trade law and chill American pharmaceutical innovation. Through the IPI Model, CMS wants to import the very same policies into U.S. law.
CMS is not alone, unfortunately, in wanting to use artificially suppressed foreign drug prices as a basis for setting prices here. Some members of Congress have taken the idea of adopting foreign prices well beyond Medicare reimbursement. The Transparent Drug Pricing Act, for instance, would require that the retail list price of all FDA-approved drugs and biologics not exceed “the lowest retail list price for the drug among Canada, France, the United Kingdom, Japan, or Germany.”
Other bad ideas from Capitol Hill target prescription drugmakers’ patents and the resolution of patent disputes. One proposal, the Medicare Negotiation and Competitive Licensing Act, already has over 100 co-sponsors. The act authorizes the Secretary of Health and Human Services to negotiate an “appropriate price” with drug manufacturers for products furnished under Part D of Medicare. If an agreement can’t be reached, the Secretary can “authoriz[e] the use of any patent” by another drug maker. It would be more accurate to call the bill the “Medicare Shakedown and Compulsory Licensing Act.”
In exchange for handing over all its patents, exclusivity rights, and clinical data, the patent holder receives “reasonable compensation.” Whatever the government deems to be “reasonable” can’t possibly compensate pharmaceutical manufacturers for the hundreds of millions of dollars they invest in research, development, and approval for successful drugs and the millions more they spend on failures. Even those drugs that make it through the clinical trial and approval processes have just a 20% chance of being profitable. Without the exclusivity of patent protection, no company in its right mind will take those risks. Less financial risk-taking equals lost hope for many current and future patients.
Another proposal, the Protecting Consumer Access to Generic Drugs Act, creates needless complications for both innovator and generic manufacturers by fighting a battle that the government has already won. The targeted “problem” is patent-litigation settlements where the generic manufacturer receives something of value in return for the innovator’s retention of its patent protection for a limited time. Some, including the Federal Trade Commission, have viewed these settlements as anticompetitive, even though the settlements often allow the generic to enter the market well before the patent would have expired, and relieve both generics and innovators from having to spend millions litigating to the death.
In 2013, the Supreme Court held in FTC v. Actavis that an innovator’s “large and unjustified” monetary payment to a generic for post-settlement market exclusivity is subject to “rule of reason” scrutiny under the antitrust laws. Since Actavis, such “pay for delay” settlement deals have largely disappeared, a fact confirmed by FTC, which closely monitors the settlements. The proposed reform would presume that drug patent settlements are suspect without “clear and convincing evidence” to the contrary. Even worse, the proposal would call the legality of every settlement entered into since 2013 into question. Would this require the patents in question to be relitigated in federal court? Would the generic or the branded product be removed from the market? The proposal is silent on this and other questions raised by its retroactive application.
The drug-development and manufacturing process is costly and fraught with risk. Manufacturers must have a fair opportunity to recoup those costs, and obtain a return for bearing those risks. Public officials need to better understand those costs, as well as other factors that affect a drug’s “list price,” before they can so boldly proclaim a drug’s price to be excessive and propose potentially harmful ways to artificially lower it. Americans’ lives, and livelihoods, are at stake.
So we have a simple request for regulators and legislators when contemplating action on drug prices: primum non nocere.
First, do no harm.
Also published by Forbes.com on WLF’s contributor page.