As the Biden administration assumes leadership in Washington and former President Donald Trump’s most-favored nation ruling has been halted by a federal judge, drug price controls don’t feel imminent.
Though this should provide some relief to the R&D-based biopharmaceutical industry, the relief may be short-lived.
President Biden has outlined a health care agenda that includes Medicare authorization to negotiate drug prices as a mechanism to address high drug prices. Given the narrow Democratic majority in the Senate, the Biden administration has the choice to either pursue drug price controls as outlined in its plan or to seek compromise on perhaps the only U.S. political issue that unites Democrats and Republicans: the need to address high drug prices. A bipartisan agreement on drug pricing may be feasible, but would depend on the willingness of both parties to work together in a heavily polarized and often vitriolic Congress.
Three price control scenarios
While Republicans and Democrats have widely different agendas on health care, their views on drug price controls are similar. Here are three options for drug price controls that may be on the table:
Most-favored nation pricing. Given the general level of support from Democrats for the most-favored nation interim final ruling based on Trump’s executive order, some form of this price control mechanism may still come into play. In the interim final ruling, prices were limited to the lowest per-capita GDP-corrected price among countries that are part of the Organization for Economic Co-operation and Development (OECD) and have a GDP that’s at least 60% of the U.S. per-capita GDP.
South Korea’s GDP, for example, is 66% of the U.S.’s. If a drug is priced at $10 per dose in the United States, any price in South Korea lower than $6.60 would result in a U.S. price decrease. A South Korean price of $3.30 would cut the US price in half to $5 per dose. U.S. pricing would be determined by applying this mechanism for all countries in the qualifying OECD basket. The impact of fluctuations in the exchange rate or the impact of a single pricing outlier can slash U.S. market revenues.
Blended German model. Before the election in November, the Biden team was reportedly looking closely at the German health care system for ways to control drug prices. Unlike the most-favored nation approach, the German system uses an independent value assessment and international prices as a basis for negotiations. As with any system, there are some steep challenges in establishing an independent agency to establish value and ways of determining value for a drug. The format of negotiations, rather than a strict algorithm-driven price determination, allows for more flexibility in addressing individual drug cases.
H.R. 3. Perhaps the most extreme proposal is the Elijah E. Cummings Lower Drug Costs Now Act of 2019 (H.R. 3). Maximum fair prices would be negotiated for the top 250 branded drugs with an upper limit of 120% of the average prices in Australia, Canada, France, Germany, Japan, and the United Kingdom for each of the drugs. The negotiated prices would apply to all Medicare and commercial markets. In addition, there would be caps on price increases and caps on out-of-pocket spending for seniors.
Potential impact of drug price controls on companies
In the short term, drug companies often can’t do more than make tactical and headcount-related decisions to shift commercial activities and cut personnel to try to offset some of the revenue losses that result from price controls.
In steep contrast to the political rhetoric, international price reference laws, like the most-favored nation approach, rarely offer realistic options for companies to withdraw a drug from lower-priced foreign markets, leaving them with little choice but to lower drug prices. Since the impact of price referencing laws on U.S. drug prices can’t be avoided for drugs that are already on the market, withdrawing products from international markets would most likely result in steeper financial losses than just accepting the price decrease.
In that scenario, patients may not experience any immediate medical harm. Since the cost of research and development wouldn’t outweigh the ability to commercialize worldwide at sufficiently attractive prices, many new drug candidates may never leave the lab, creating a more severe health care impact for patients in the long-term.
In the long term, go/no go decisions about Phase 3 trials would need to include a detailed assessment of a drug’s return on investment under various scenarios:
The MFN scenario applies only to Medicare Part B drugs and so mainly affects drugs that are focused on older populations and on physician-administered drugs. This would likely cause a developmental shift toward drugs that benefit younger patient populations (under 65 years of age) and oral drugs.
The German model relies heavily on some form of value assessment, either through a benefits evaluation, as is done in France and Germany, or through a U.K.-style incremental cost-effectiveness ratio. Each of these value assessment methods, and their shortcomings when realistically measuring the value of a drug for patients, have been heavily debated by international payers.
H.R. 3 has a limited basket of countries. Australia, Canada, France, Germany, and the United Kingdom comprise only about 29% of the U.S. market, and Japan about 24% of the U.S. market. Not launching a new drug in some or all these markets would enhance U.S. prices and return on investment for pharma companies. Pharma companies will have to make the difficult decision whether they want to help patients in Europe, Canada and Australia at government-mandated low prices, realizing that in many cases this will have a dramatic impact on U.S. prices.
Pharma is facing tough trade-offs
Faced with price controls in the U.S. and given the pricing and reimbursement restrictions in most other countries, pharmaceutical companies would have a few choices: forego developing an asset, accept lower-than-anticipated U.S. prices, or commercialize the drug in fewer high-priced countries.
Given that Europe and Canada represent less than half the market size of the U.S., launching in both the U.S. and Japan, or only in the U.S., could lead to a higher return on investment than accepting the devastating cuts the most-favored nations model could have delivered to many drugs. Some initial modeling my colleagues and I have done shows that either not launching or launching only in the United States with a higher price may be the only feasible option. It then stands to reason that price controls through MFN rules may lead to U.S. drug price increases rather than decreases.
It’s certainly worth asking when — or if — drug price controls will be imposed in the United States. But as it appears more likely than ever, here’s the more important question: How will the industry consider this in its strategic planning?
Given the impact of drug pricing controls on the future global pharmaceutical landscape, biopharmaceutical companies need to engage in robust scenario analysis to inform their milestone drug development decisions, such as the Phase 3 go/no go decisions and associated clinical trial plans.
And even if 2021 doesn’t bring U.S. drug pricing controls, biopharma companies should look beyond the short term and prepare themselves for such changes in the future.
Ed Schoonveld is a managing partner and founder of the value and access practice at ZS Associates, a global professional services firm, and the author of “The Price of Global Health” (Routledge 2020).