DC spending bill bad news for Mass. pharmaceutical sector and patients

Democrats' $3.5 trillion budget bill would stifle innovation with price controls

ON SEPTEMBER 15, the House Ways & Means Committee, chaired by Massachusetts Rep. Richard Neal, endorsed prescription drug price controls as one way to pay for the massive $3.5 trillion reconciliation bill. Given its size, congressional Democrats are searching frantically for revenue to fund the new spending.  One way of partially paying for the reconciliation bill was to adopt Speaker Nancy Pelosi’s prescription drug price control bill, H.R. 3, which Neal’s committee did on a party line vote.

According to the Congressional Budget Office, H.R. 3 would take $456 billion in revenue from biopharmaceutical companies. Price caps would not simply apply to drugs purchased by federal programs but would also cascade into private markets. This law, CBO concluded, would reduce global revenue from new drugs by 19 percent. Two University of Chicago economists argue that the CBO’s analysis wildly underestimates the effect of H.R. 3 upon the industry; their analysis points to a 44.6 percent reduction in biopharmaceutical R&D spending and 254 fewer drug approvals between 2021 and 2039.

From an economic perspective, the bill will have harmful consequences for Massachusetts. The Boston area boasts more than 1,000 biopharmaceutical companies ranging from startups to large companies. In recent years, Massachusetts biotechnology firms made up nearly half of all US initial public offerings in the biotech sector. Moreover, Massachusetts biotechnology companies tend to focus on research and development, creating many high paying jobs. Job losses in this sector would create disproportionate revenue losses for the state.

Finally, one of the least well-understood consequences of price controls is that they dampen private equity and venture capital investment in startup biotechnology firms. In recent years, early investments in biotech ideas were not made by large pharmaceutical companies but by private investors. Inevitably, federal price controls on prescription drugs that reduce biopharmaceutical revenue by $45 billion annually would make the biotech sector less attractive to private investors.

While the economic consequences of price controls will certainly be problematic, the harm that will be done to Massachusetts patients, especially seniors, is more troubling.

It is true that Americans pay the highest prices for prescription drugs in the world. There is also no doubt that many countries “freeload” off of American R&D by failing to pay market prices for drugs. This drug price freeloading by foreign nations should not have been tolerated by administrations of both parties for many decades.

That said, what many fail to understand is that, while US prices are high, Americans also receive more and faster access to new drugs than any other nation.

H.R. 3 proposes to benchmark US prices to those in six other developed countries: Australia, Canada, France, Germany, Japan, and the United Kingdom. All these countries employ “cost-effectiveness” bureaucracies that attempt to rate the value of drugs coming to market. These cost-effectiveness studies inevitably take time, delaying access to new drugs for patients. And because these cost-effectiveness bureaucracies work for the government itself, they tend to rate new drugs as “not cost effective” in order to lessen their budgetary impact. When drugs are rated as not cost effective, governments often refuse to pay for them, and patients never get them.

How long are the delays and how much access is denied to new drugs in these six countries? On average, patients wait 11 months for access to newly approved drugs and they are ultimately given access to only 51 percent of them. In Australia, for example, patients gain access to only 39 percent of new drugs and wait 20 months for them. In short, foreign prices may be lower but patients wait a long time for access to new drugs, and they are denied access to many new drugs.

In the US, by contrast, patients have access to 87 percent of new drugs within three months of their approval. Inevitably, H.R. 3 will not simply import foreign drug prices, it will lead to delays and access restrictions.

Meet the Author

William Smith

Visiting Fellow, Pioneer Institute
Massachusetts’s politicians may see their popularity rise when they shout that they are going to lower the drug prices of “greedy” pharmaceutical companies.  They are more reluctant to tell you that their plans will reduce your ability to obtain the best new medicines in a timely way.

William Smith, PhD, is visiting fellow in life sciences at the Pioneer Institute, a Boston-based think tank.