David Beier Op-Ed: A New Drug Pricing Social Contract: The Great American Drug Deal

By Alex Karnal & David Beier

Article from Medium

In The Great American Drug Deal, biotech investor Peter Kolchinsky outlines a vision for the future of the pharmaceutical industry. It’s a future in which the interests of society align both with the firms developing new medicines and the patients who depend on new treatments and cures.

Now that might sound far-fetched when you consider no industry stands in lower regard among Americans than the pharmaceutical sector, according to Gallup’s latest data. That’s exactly why Kolchinksy’s contributions are timely. In compulsively readable prose, he is proposing a new social contract between biopharmaceutical companies and American patients. In its substance, the contract includes incentives for innovation, avoids counterproductive price controls, opens treatment access by reducing what patients pay out of pocket, and intensifies government intervention in emerging therapies like gene and cell therapies.

Kolchinsky’s cutting-edge ideas should generate a broad discussion on the principles we should adopt to ensure any new policies balance the competing interests of a web of stakeholders; from scientists to patients, insurance, government, hospitals and doctors, to name just a few. The discussion should revolve around a simple question: does the new paradigm improve the current system?

We propose the following elements to sort through the varied policy issues:

Economic certainty

We all know that meaningful scientific advance doesn’t happen overnight. It’s a process in which pharmaceutical investors make a 10- to 15-year commitment with the understanding that it can take at least that long for a breakthrough therapy to move from discovery to market approval.[i] Putting it simply, if you want innovation, then you need economic certainty. Innovators need to know the rules of the road and that those rules won’t be changed on them mid-process.

Fair competition between different health care interventions

Competition more than transparency about prices benefit medical care consumers.

Let’s compare the degree of competition in markets for hospitals, doctors and drugs. The degree of competition in the hospital market is very low in most metropolitan markets. When large hospital systems dominate a market, their prices escalate, and insurance premiums go up.

When — as is often the case in these markets — physicians in practice groups are owned by hospitals, their fees rise up.

In contrast, looking at the prescription drug market, there is substantially less market control by the largest firms. Importantly for consumers there is competition with off-patent, generic drugs. Those products are often available at an 80 to 90% discount from the original products of which they are copies.

Kolchinsky focuses on an array of future products in cell and gene therapy where competition — in the future — may be delayed even after patents on these breakthroughs have expired. It is only here that Kolchinsky suggests government price intervention. But he does so by rewarding innovation through competitive, market pricing until the innovators’ patents expire.

Mandating price transparency might sound good, but various experts, including the Congressional Budget Office, have found that full disclosure of discounts is very likely to discourage lower prices. Thus, transparency might actually increase net prices.

Free market-based reward for investors in new medicines

Nine out of every 10 medicines that enter the human testing phase fail to make it to market. Still, private investors are willing to fund a portfolio of startup firms because that one in 10 offers the possibility of generating a significant return. Does Kolchinsky’s social contract put this behavior at risk? No. But he proposes measures to assure better access to medicines and more new medicine.

Intellectual property protection

Inventors must be protected against free riding from copiers who accept less risk but hope to capture the benefits of a scientific improvement. The period of protection against copying must be long enough to sustain investments, but not too long to thwart competition. One of the most effective aspects of our current approach a well-understood intellectual property regime that both rewards innovation and creates a mountain of cheap generics over time. Focus on that model is essential. Modifications — not radical change — are necessary to keep that bargain.

Insurance structure and rules

No patient should ever be denied care due to costs imposed by insurance companies. In the future, insurance costs to patients should not be biased towards doctors and hospital services and against drugs.

Escalating costs

Prices charged by health care players — drug makers and providers alike — should not routinely increase at a rate that exceeds the rate inflation, except in rare situations where the target population is dramatically smaller than expected. Congress should consider how and when sanctions — a fee or tax — should be levied on those who engage in such conduct.

Not only can these points inform a discussion of Kolchinksy’s Biotech Social Compact, they can be used to help assess current reform ideas and legislation. H.R. 3, House Speaker Nancy Pelosi’s pricing bill, is a needed step in the right direction for patient out of pocket costs but falls short across many of the key elements discussed above. Other ideas, such as bills to rein in patent abuse, speed access to generic medicines by making reference product available, and co-pay caps in Medicare, align more favorably with these principles.

But those reforms are piecemeal, addressing fragments of the health care system while ignoring the 85 percent of spending that is not linked to medicines. This is what makes Kolchinsky’s ideas so provocative. His work takes on the entire healthcare system and is singular in its imaginative spirit.

For the Kolchinsky agenda to succeed, much work remains to be done on the coalition-building side of the equation. We hope he keeps up the insightful work and takes the practical steps needed to convert ideas into actions.

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