This post concludes our week-long symposium on President Biden’s Executive Order on Promoting Competition in the American Economy. Read the other posts here.
The July 2021 Biden Executive Order on “Promoting Competition in the American Economy” covers a great deal of ground. It aims to take a “whole-of-government” approach to competition, and accomplishes some genuinely important things, as other posts in this series have stressed. But it is surprisingly tame when it comes to the pharmaceutical industry. Perhaps that is because, in July, it seemed that the big reforms would come through legislation. This is a good week to return to the EO, though, because we now know that any pricing bill that will pass will have only a modest impact. This week, the Administration should start work on an EO that goes much further to confront the industry’s monopoly power.
High drug prices continue to be a major concern for Americans today. Three in ten Americans report that they did not take their medicines as prescribed in the past year because of the cost of the medication, and very large majorities want government to take serious steps to bring these costs down. They have good reason. The US pays almost 2.5 times more for prescription drugs as other OECD countries. The average new cancer drug in the US today costs more than $175,000, and its price does not in any logical way track benefits or R&D costs. The core reason for these excessively high prices is the undisciplined monopoly power that government grants to the pharmaceutical industry.
New drugs in the United States commonly enjoy three kinds of government-granted exclusivity: patents, which allow companies to prevent others from making, using, or selling covered knowledge; trade secrets, which protect confidential data and information; and regulatory exclusivities, which prevent generics from entering the market for a certain number of years. These protections from competition allow the industry to set monopoly prices (and keep their safety and efficacy data secret). In response to demands from patients, the US government has also increasingly imposed mandates on insurers to cover medicines. The result is a predictable upward spiral of prices.
We do see some innovation in exchange for these high prices, but current prices are established on the basis of market power, not R&D costs – and there is reason to think we can do better on innovation than the status quo. The industry spends more on marketing than on R&D, and the R&D it undertakes aims not at public benefit but at profit-maximization. If companies can maximize profits by making nearly identical “me too” drugs (rather than investing in riskier breakthrough research), refusing to study lower doses of toxic cancer drugs (because lower doses command lower prices), or shutting down promising research that might cannibalize their existing market (through “killer acquisitions”), drug companies will take these actions, which transparently stand in the way of innovation. We could plausibly do better in innovation terms if we set drug prices that better reflected real therapeutic value, and if we invested a portion of the savings in the government-funded research that we know disproportionately leads to breakthroughs.
We know a lot, in fact, about how we can start to bring drug prices down in a way that sustains or improves innovation. One way is through regulation. The Pelosi Bill, which was the basis of the initial “Build Back Better” reconciliation bill, took this approach. It would have created a regulatory body that could curb the impact of monopolies on prices, by setting a fair price based on factors like the therapeutic value of the medicine and R&D investment. It wasn’t perfect, but it was a good start, especially for a country that has never had anything like this. Unfortunately, it hit the buzz saw of pharma’s lobbying power and was stripped from the reconciliation bill.
In a dramatic turn last week, progressives managed to eke out a deal that would impose some much more limited constraints on pharma’s pricing power. The details are still in flux, but if it passes, the proposal will curb price increases above inflation, and allow government to negotiate Medicare prices for a very small set of products many years after they enter the market. Between Republicans, who have long been in the pocket of the industry, and the machinations of Sinemanchin and a few other Dems rolling in pharma cash, pharma will still enjoy a vast amount of pricing power for new drugs.
Which brings us back to the Biden EO, and the broader possibility of executive action. With such a modest first step toward legislative reform, a “whole-of-government” approach to pharma’s monopoly power forces us to return to what the executive can do to tackle industry power.
Quite a lot, it turns out. For example, it can engage in “government patent use,” threatening to buy patent-protected drugs from a generic company unless an originator accepts fair prices. This right is used regularly in the defense sector, where it enables any government procurement officer to accept a bid from any supplier, leaving disputes about patents to the federal courts, and often yielding royalty rates of just a few percent of the cost of the competitor’s goods. This right, in fact, was used in the pharmaceutical context in the 1960s and 1970s. And it could be used today to bring down prices of any approved drug, probably immensely, since compared to the monopoly rents charged by companies, the actual cost of production is relatively minor. (There are some details about finding suppliers and addressing marketing exclusivities discussed here, for the curious.) The government also has so-called “march-in” rights on any drug developed with government funding, under the Bayh Dole Act. These rights prevent companies from using patents to preclude generic entry – government has the right to use them, for its own use or by “marching in” to license them to others. No administration has ever used this right, but it could be used to bring down the prices of government funded drugs, particularly in conjunction with government patent use (which would be needed if, as is often the case, the company also holds some of its own patents that could independently allow them to block generics).
Unfortunately, Biden’s competition EO did not signal that the administration was actively exploring either option. The order lists a range of worthy actions, such as efforts to optimize current regulatory systems to speed approvals of generic and biosimilars, and efforts to address misleading marketing or collusive “pay for delay” settlements. Even taken together, however, these actions would have a fairly marginal impact on the bigger picture when it comes to drug prices. Indeed, one problematic feature of the frame of “competition” that the EO invokes is that this frame tends to naturalize the legal rights operating in the background, such as the market power that government allocates through patents. Drug pricing discussions about competition often to take this form, tinkering around the edges by focusing not on patents themselves but only on certain abusive uses of them, for example.
There were two glimmers of something larger in the EO – a sense that the Biden administration gets that pharma’s power is in the basic coordination rights that it is granted. One was a suggestion that agencies do more to allow importation of medicines from Canada. While that practice is already allowed under existing law, it’s unclear how high a priority it is for the administration or how much it could achieve, in part because the approach is already tangled up in lawsuits.
The second was a request to the National Institute of Standards and Technology to consider abandoning a process the Trump Administration started in an attempt to fatally undermine Bayh Dole march-in rights. That’s a hopeful sign, because it suggests that the Administration knows that Bayh-Dole is an important tool in its arsenal.
Now that we know that we will see only small legislative reforms, it’s essential that the Biden Administration explore more serious steps to confront pharma’s monopoly power, like Bayh Dole rights and government patent use. It would be an excellent moment for a new EO, signaling that Biden is willing to take serious executive action to bring prices down. Biden could, for example, instruct HHS to begin to develop frameworks to describe when the government will use government patent use and Bayh Dole rights to address high prices, asking how they might draw from or improve on any Medicare framework for fair pricing that emerges from Congress. He could order the agency to make a list of the 50 most overpriced drugs, and to consider how much it might be possible to save if generics were purchased. He could mandate a study of generic supply chains and drug regulatory issues if such provisions are used. All of these would have an immediate impact on the industry – we know it moderates prices in response to political pressure – and answer the demand from voters that something serious be done to make medicines more affordable.