How to Lower Drug Prices Without Killing Research and Development | Opinion

The race for treatments and vaccines for COVID-19 has again raised questions about how much drugs are worth and how to price them fairly.

For instance, Gilead recently announced that Remdesivir, a drug originally developed for hepatitis C that has been shown to be effective in speeding up the recovery time for COVID-19, will be priced at $3,120. In explaining its pricing, Gilead pointed out that given the cost of extended hospitalization (estimates for COVID-19 patients are around $12,000 per day), the price is justified based on the value it provides.

But many critics of the pharmaceutical industry do not think manufacturers should be able to set prices based on such value calculations. They argue that given the preciousness of life, doing so allows drug companies to charge whatever they want. Instead, these critics want the U.S. government to set drug prices the way other countries do.

Democrats have introduced a bill to allow the government to set prices not just in Medicare, but also for private health plans. The Democrats call it "negotiating" with drug manufacturers, but since refusal to accept the government's price would result in a retroactive, 95 percent tax on the gross sales of the drug, it is really just the government dictating the price. Even the Trump administration is flirting with the idea of government price setting. Some in the administration are considering basing payments in Medicare Part B (which covers drugs administered by doctors in outpatient facilities, such as cancer treatments) on what other countries with socialist health care systems pay.

These proposals would have devastating consequences for our nation's health and economy. As the White House Counsel of Economic Advisors has pointed out, U.S. cancer patients survive longer than those in all other European Union countries because our citizens have more access to the newest treatments. The Wall Street Journal provides an example of this increased access in an editorial against the administration's reference pricing plan: "Of 74 cancer drugs launched between 2011 and 2018, 70 (95 percent) are available in the United States. Compare that to 74 percent in the U.K., 49 percent in Japan, and 8 percent in Greece."

The White House Council has also estimated that the Pelosi drug bill would lead to as many as 100 fewer new drugs being available to Americans over the next decade—and a $1 trillion loss to the economy. When European countries began imposing price controls on drugs in the 1980s, it resulted in an immediate flight of capital, research and development from Europe to the United States. Today, European companies invest about one-fourth per capita on research and development as do U.S. companies. If the U.S. copies Europe and starts letting the government dictate prices, the capital and investment will have nowhere to flee. It will simply dry up.

Still, it is indisputable that American patients are paying too much for prescription drugs. Here are three strategies for lowering drug prices that don't resort to research and development-killing government price setting.

The first is to make more drugs and treatments available to patients, not fewer. Manufacturers justify their drug prices based, in part, on how they perform relative to other appropriate and available treatments. That means the more options patients have for appropriate care, the less they will pay. The urgency of the pandemic forced our government officials to look carefully at the drug approval process and eliminate all that was not strictly necessary. The result so far has been an astonishingly rapid progression of vaccines and treatments through clinical trials. We should adopt this same approach to other diseases and conditions to get new drugs to market faster.

Man filling prescription in Utah
Man filling prescription in Utah GEORGE FREY/AFP via Getty Images

We should also act to ensure robust generic competition once a drug's period of market exclusivity runs out. Research shows that you need at least three generic competitors to a brand-name drug to create significant price reductions. There are currently too many ways for manufacturers to extend exclusivity periods and make it profitable for generic manufacturers to choose not to provide competition.

The second strategy is to find ways to lower the sky-high prices of general medical care. Drug manufacturers don't just set their prices relative to other drugs for the same treatment—they also benchmark the cost of medical care for that condition if it goes untreated. Gilead's justification of its price for Remdesivir relative to the cost of hospitalization is a good example of this. The Trump administration's price transparency rule is a potentially revolutionary change that will finally inject real competition between health care providers beginning next year, but the hospital association is suing to stop it. This week, Newt signed a letter with several free market economists and business leaders advocating for codifying the administration's rule into law in the next COVID-19 package in order to end the threat of the lawsuit.

The third strategy is key to making the first two work. We need to fix the middleman problem in our drug supply chain. The current system of drug manufacturers paying rebates to pharmacy benefit managers (PBMs) to gain priority placement on drug formularies creates a perverse incentive to raise prices to offer bigger rebates, so manufacturers can increase sales. It also means that introducing competing brand-name therapies to the marketplace won't lower prices, because the formularies prioritize those whose manufacturers pay bigger rebates. This is the opposite of how a market is supposed to work. We can start fixing this problem by requiring all rebates to pass through to the patient at the pharmacy counter, delivering savings to patients instead of the PBM and health plan.

These three strategies lean into the principle of letting the real value of a drug determine its price rather than running away from it. They wouldn't just lower prices—they would also increase investment in new drugs and treatments by requiring manufactures to compete more aggressively by offering new and better options for patients than their rivals.

Former Speaker of the U.S. House of Representatives Newt Gingrich is the host of the "Newt's World" podcast and author of The New York Times bestseller Trump and the American Future. More of his commentary can be found at www.Gingrich360.com.

Joe DeSantis is chief strategy officer at Gingrich 360 and leads the organization's health care strategic initiatives and consulting. Gingrich 360 advises various companies and organizations in the health care industry.

The views expressed in this article are the writers' own.