Sudders takes wrong tack on drug costs  

Regulating pharmaceutical prices would kill innovation

MARYLOU SUDDERS, the Baker administration’s secretary of health and human services, is a model public servant. Honest, smart, and an advocate for vulnerable people, the Commonwealth is lucky to have her.

That said, her recent op-ed advocating government “rate setting” for drug prices in the MassHealth program displays an alarming misunderstanding of the business model of one of the Commonwealth’s most important industries: biopharmaceuticals.

Secretary Sudders’ primary complaint is that MassHealth finds itself paying for many new costly drugs that “face no competition.” She mentions a lack of “competition” six times in her piece. In a sense, her complaint is not with drug manufacturers but with Article 1, Section 8 of the US Constitution that “for a limited period” grants to “authors and inventors the exclusive right to their writings and discoveries.”

The engine that fires innovation for the biopharmaceutical industry in Massachusetts – and everywhere – is the prospect of inventing a new drug that had never been invented before and then the ability to sell it exclusively “for a limited period.” That is the dream of every inventor: finding something so new and so useful that it faces limited competition while the inventor holds the patent, making the inventor rich and providing a social benefit. James Madison understood that without giving inventors the exclusive right to sell their inventions, you would have no innovation. The dynamism of the biopharmaceutical industry, and the explosion in the number of new drugs for rare diseases, is an affirmation of Madison’s sagacity. To any administration interested in economic development, resent patents at your peril.

Second, the secretary implies throughout her piece that a number of drugs reimbursed by MassHealth are overpriced and ineffective, deserving of “potential formulary exclusion.”  She may be right about this, but she fails to name a single drug that fits in this alleged ignominious category. For the sake of those trying to form an opinion about this issue, especially physicians and patients, she should publicly name the top ten drugs that she believes are overpriced, ineffective and deserving of formulary exclusion. Then, we can have an informed debate about what she is really proposing, rather than depend on vague appeals to fiscal rectitude.

Third, she asserts that manufacturers who sell drugs that face no competition have “no incentive” to negotiate value-based payments. Again, this may be true, but one must ask: Has MassHealth tried to negotiate such contracts and been rejected? Or have manufacturers been invited to propose value-based arrangements, i.e. payments based upon the real world effectiveness of the drug in the MassHealth population? My close observation of the industry suggests that the answer to that question is “no.” Given the importance of the industry to the Massachusetts economy, one must ask: Why not?

The fact is that vulnerable populations depend upon new drug discoveries as much as the wealthy do. So it is incumbent upon policymakers to experiment with new approaches that meet the needs of patients and the industry, such as value-based pricing. Harvard Pilgrim, one of the most innovative health plans, has successfully negotiated numerous value-based contracts, making it more affordable for them to provide their patients with, in some case, life-saving medicines.

Finally, even as Secretary Sudders’s op-ed piece claims her goal is greater “market competition,” her true policy objective slips out in her last sentence: government “rate setting.” That is a nice way of saying government price controls.

Government rate setting for important commodities, such as electricity, is certainly a tradition one can find in American politics. Politicians began advocating for rate setting of electricity prices not long after Thomas Edison started the first electric company in the late 19th century. But if one thinks back to those grainy black and white photos from the early 20th century where the Model T Ford is driving down the dusty street, one notices something familiar: unsightly wooden utility poles strung with electric wires. Those unsightly poles still line our streets in 2018 because, while government rate setting may have made electricity cheaper, it also slowed innovation in the electric industry to a crawl.

Meet the Author

William Smith

Visiting Fellow, Pioneer Institute
If you think we have invented all the medicines that need inventing, government rate setting might be a sound policy. If the administration wants new cures for unmet medical needs for all Massachusetts residents, not just the wealthy, they may wish to reconsider.

 William Smith, PhD, is a visiting fellow in life sciences at the Pioneer Institute.