The folly of Baker’s drug price control plan
Governor ignores fundamentals of economics
WHEN THE Biotechnology Industry Organization (BIO) selected Charlie Baker as Governor of the Year in 2018, the group may have misjudged Baker’s understanding of the industry. Baker recently offered legislation that would slap price controls on drugs—not just on the Commonwealth’s drug purchases, but also on those sold in commercial markets.
Even a college economics major knows that government price controls upset the balance between supply and demand, creating shortages. It seems ironic that the governor of a state that is the world’s engine for producing new drugs would want to create shortages of them.
The Baker bill would limit price increases for drug therapies to the Consumer Price Index (CPI) plus 2 percent per year. This type of government price controls is likely unconstitutional. It is also terrible policy.
Imagine we were to discover that an inexpensive arthritis drug is put back in clinical trials and found to cure a terrible cancer. Would the manufacturer need to keep its price increase below 2 percent? If we are limiting drug therapies to 2 percent price increases, why stop there? Why not similarly limit health insurance premium increases? Why not gasoline and food? In fact, why not compel all Massachusetts companies to limit annual price increases to 2 percent above the CPI? That would bring great benefit to consumers.
This flatlining of overall drug costs is the result of an increasing number of patent expirations, which cause drug prices to plummet. Is this the economic sector that calls out for imposition of government price controls?
The Commonwealth’s own data tell us that health insurance premiums rose 5.6 percent during 2018. Since the CPI rose 1.9 percent in 2018, if the Baker plan for drugs were applied to health insurance premiums, insurers would need to reduce premiums by 1.7 percent in order to comply with the law. One wonders why the governor did not propose price controls on health premiums.
Amazingly, Baker’s bill targets biotech companies based in Massachusetts. The legislation requires the Health Policy Commission (HPC) to give harsh pricing scrutiny to any therapies costing more than $50,000 per year. Such a pricing threshold puts a bull’s eye on the backs of Massachusetts’s gene and cell therapy companies.
Rare disease therapies are a particular specialty of our biotechnology industry and, by definition, therapies for diseases with small patient populations are going to be more expensive. Under Baker’s bill, hometown makers of these wonder drugs are going to be dragged before a star chamber to justify their pricing decisions. This is the political equivalent of the governor of Iowa attacking farmers for corn prices.
Companies that draw the attention of the HPC will be required to provide voluminous information to make certain that their prices are not “excessive” or “unreasonable.” Companies would be expected to provide information on their R&D costs, their costs to construct facilities, and “any other information” requested by the HPC.
This section of the bill should be labeled the “Provision to Increase Drug Costs” because company staffs will need to spend a huge number of hours to assemble these filings and some, especially smaller companies, may even need to retain outside counsel to make sure the information they provide complies with the law. In short, this provision will raise administrative costs for the companies, costs that will be passed on to consumers.
It is also a violation of property rights of these private companies and a surefire way to cool the development of cures in Massachusetts.
Despite their profitability, biopharmaceutical companies must still compete for capital and talent with other profitable economic sectors such as energy and finance. If the Baker price controls were adopted by other key states, this would instigate capital flight away from the biotech sector, which would translate to layoffs in Massachusetts. Democrats in the US House have introduced a drug price control bill that is not too dissimilar from the Baker approach, and a group of venture capitalists warned Speaker Nancy Pelosi that, if enacted, “our robust biotech investment ecosystem will become unsustainable.”With drug costs flattening, the Baker bill is a poor solution in search of a problem.
William Smith, PhD, is visiting fellow in life sciences at the Pioneer Institute in Boston.