Connecticut price controls will stifle biopharma innovation
A year ago it became clear the novel coronavirus and the disease it causes, COVID-19, would spread rapidly, far and wide, become a pandemic, and affect us much like a huge natural disaster or world war —millions of lost jobs, an economy derailed, resources redirected.
The question became: how do we get out of this?
Federal, state, and local governments did what they could to alleviate economic symptoms, from cash payments to moratoriums on rent payments to loosening rules on outdoor dining. But it was equally clear that resolution, a return to normalcy, would come about only with new medicines to combat COVID-19.
We witnessed firsthand how important and effective the biopharma industry is.
Companies marshaled their innovation prowess, focused their research and development infrastructures, and in less than a year came to deeply understand the coronavirus, develop a safe and effective vaccine to prevent COVID-19 (in addition to effective antibody treatments), and manufacture and distribute 148 million vaccine doses in the U.S. to date.
Indeed, biopharma companies —unprecedentedly and at great financial risk— began manufacturing COVID vaccines while clinical trials were still underway in order to hasten their availability if and when the shots won approval from the U.S. Food and Drug Administration.
The quality and quantity of COVID vaccine scientific and manufacturing advances made in such rapid succession was a remarkable feat —a 2021 version of the industrial mobilization for World War II.
One would think that this performance —what biopharma delivered— would translate into heightened appreciation of the industry. Not necessarily appreciation in the sense of praise for its accomplishments, but appreciation for the value and efficacy of the biopharma business model.
The biopharma business model is unique. It takes, on average, $2.7 billion and 10-13 years to bring a new medicine from lab concept to FDA approval. Most lab concepts fail, with the few that succeed underwriting the huge research and development spend of the industry.
Private sector biopharma R&D that doesn’t appear to pay off often becomes the basis for later research projects that do. For example, the mRNA technology used in the Pfizer and Moderna COVID-19 vaccines has been under development since the 1990s for a variety of diseases, including Ebola.
Unfortunately, it appears Connecticut policymakers either do not understand or choose to ignore what drives biopharma R&D and the value of its contributions to healthcare. The governor’s healthcare bill, HB 6447, sets its sights on drug prices.
Based on legislation put forth by Massachusetts Gov. Charlie Baker that twice failed to win the support of the Massachusetts legislature, HB 6447 limits annual drug price increases to no more than inflation plus 2%. If a drug price goes higher than that, a company pays a penalty equal to 80% of the excess cost.
The proposal is ill-conceived and counterproductive on at least four fronts.
First, when the price of a good is arbitrarily limited, we all get less of the good. Rent control seems like a good idea but it results in fewer apartments and landlords who are incentivized to perform less maintenance. Flour, gas, medicines, you name it — you fix the price and you’ll get less of it. In countries that artificially set prices, shortages occur frequently, fewer drugs are available, and the newest medicines are slow to come on the market.
Second, HB 6447 and its price controls will stifle innovation. Approximately only one in 1,000 research projects result in an FDA approved drug. Of projects that reach clinical testing in actual human patients, only 12% are shown to be safe and effective —and win FDA approval. The cost of valuable but ultimately unsuccessful research projects is borne by the few drugs that do make it to pharmacy shelves. To take on risks of such magnitude, companies must have confidence they can price their products in such a way that they are able to recoup and profit from their investments.
If a better return on investment can be had by tweaking cough drops or marketing “cosmeceuticals,” R&D dollars will flow in that direction. Authentic innovation will suffer greatly, cures and treatments will be postponed or left undiscovered, but politicians will be able to say drug prices are under control.
Third, HB 6447 is mistakenly premised on dogma that drug prices are the prime driver of healthcare cost inflation. There are many factors that drive rising healthcare costs and make drug prices appear to loom larger in the healthcare equation than they in fact are, including government taxes, fees, insurance, mandates, and assessments.
Drug prices are not a significant driver of those costs. Study upon study has shown that drug prices, as a proportion of healthcare costs, remained remarkably stable for 75 years—consistently at about 10%-15% of each dollar spent on healthcare. Consider that 85% to 90% of healthcare is something other than drugs, including hospital stays, surgery, doctors’ visits, insurance, and administration.
If drug prices were fixed at their level today, healthcare inflation would continue to rage on, driven by all the other cost drivers in the healthcare equation.
Finally, HB 6447 makes little economic development sense.
Since companies will be limited in their ability to adjust their prices, the bill could have the ironic effect of increasing drug prices, as well as potentially making prices in Connecticut higher than in other states.
Artificial limits on price increases will incentivize companies to price medicines higher—and higher in Connecticut—from the start. Connecticut has wisely invested in biopharma —a sector with high paying jobs not easily sent offshore and that needs our highly skilled and highly educated workforce.
It will be hugely counterproductive to enact legislation like HB 6447 that fundamentally ignores, or just doesn’t get, the very core of what fuels biopharma innovation.
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