To bring down the high prices of drugs in the United States, Congress should not just focus on regulating prices themselves; it should reform the whole system that governs competition and innovation. Specifically, it should link innovation-friendly policies to price concessions, revamp how long and how thoroughly new drugs enjoy monopoly protection, and remove obstacles to competition from generics.
The high prices Americans pay for drugs has emerged as a major health policy concern. A majority of voters in both the Democratic and Republican parties want the government to take action to lower prices, and lawmakers in both houses of Congress have introduced bills aimed at doing so. Drug companies, meanwhile, argue (as they long have) that negotiating or regulating prices would cripple research budgets, stifle innovation, and lead to fewer treatments in the future.
In a new article in the New England Journal of Medicine, we describe the three-stage journey that every successful drug makes during its life cycle and how adjusting the incentives during each period and tying them to price concessions could achieve the best of both worlds: stimulate innovation and lower prices.
First comes the “innovation period,” during which new products are developed, tested, and prepared to be submitted to the Food and Drug Administration for its approval. If they win FDA approval (most don’t), drugs enter a “monopoly period” and are protected from competition through patents and by the FDA. When these protections end, the “competitive period” starts: Other companies can now make and sell copies of the brand-name drug.
Policies — laws passed by Congress and regulations enforced by presidential administrations — strongly influence how long these periods last and how much profit or loss companies experience in each. The ability to charge high prices is only one part of the risk-reward calculus for drug manufacturers. Conceptualizing the market as a whole opens up other avenues for reform.
To help patients, lawmakers should take three actions.
Link innovation-friendly policies to price concessions.
The process of drug development is uncertain and expensive, but there are many ways to reduce both the risk of failure and the cost of innovation that don’t require allowing drug companies to charge exorbitant prices. In 1981, for example, Congress created tax credits to offset research costs, and in 2000, Medicare began covering medical expenses for patients in clinical trials. More recently, regulations have been introduced to speed drugs through the FDA’s review process, which can save companies hundreds of millions of dollars. These innovation-friendly policies have never been linked to explicit price concessions from drug companies, but in the future, they should be.
Revamp how long and how thoroughly new drugs enjoy monopoly protection.
New drugs enjoy two types of monopoly protection: one through patents, the other through market exclusivity granted by the FDA. The FDA generally gives companies five to 12 years of exclusive rights to sell a new drug after approval, but patent protections can last decades because manufacturers often patent not just the original molecule but also minor changes to the drug like its coating or how it can be given. Enbrel, which is used to treat inflammatory conditions like rheumatoid arthritis, was developed in the 1990s, but it’s thicket of patents runs more than 100 deep and doesn’t run out until 2029. Meanwhile, the drug costs nearly $70,000 a year.
Reducing the number and types of patents available to drug manufacturers would limit how long patients and taxpayers are exposed to those price tags. Absent action that limits the duration of drug monopolies, money that should be encouraging the development of new drugs will continue to flow to companies that are best at blocking competitors to older drugs.
In addition to guaranteed monopolies, policymakers often hamstring insurers from using their market muscle to obtain price concessions. For example, not only is Medicare prohibited from negotiating drug prices, it is also required to cover every FDA-approved drug across six “protected” classes — regardless of how effective a drug is. Allowing Medicare and other payers to exclude some drugs from their formularies would improve their bargaining leverage and could lower prices. Both the Obama and Trump administrations considered this approach, but their efforts eventually stalled.
Remove obstacles to competition from generics.
Competition is a sacred American ideal — and a central mechanism through which drug prices ultimately fall — but policymakers have been slow to remove the barriers generic drugs face when trying to enter the market. Most people are familiar with “pay-for-delay” tactics through which companies pay would-be competitors not to bring generics to market, but they also use other tricks to smother competition before it begins. By citing safety concerns, for example, some companies refuse to provide the samples that generic manufacturers need to prove that their products are equivalent to branded drugs. The CREATES Act, which was signed into law in December, could put an end to some of these shenanigans, but other competitive challenges remain.
Some pharmaceutical companies use a technique known as “evergreening” or “product hopping” to extend monopoly prices and prevent the use of generic drugs. A company product hops when shortly before the expiration of monopoly protection, it introduces minor changes to a branded drug — tablet to film administration, for example, or twice-daily to once-a-day dosing — and removes the original product from the market, thereby delaying generic drug approvals and substitutions. The Federal Trade Commission could more aggressively enforce antitrust laws against such tactics, and the FDA should not grant cosmetically different products market exclusivity immediately before branded products are set to lose monopoly protection. In some drug classes like biologic drugs, where competitors are simply hard to make, lawmakers may ultimately have to regulate prices if they can’t make the market work.
Today, the United States has a system that has allowed the prices for drugs to skyrocket, often outstripping the value they offer patients. But by reforming the whole system and not just focusing on prices alone, lawmakers can bring down the cost of drugs and stimulate the development of new therapies.