Prescription Drug Market Needs Thoughtful Reform For Taxpayer Interests

May 21, 2024

The Honorable Dick Durbin, Chair
The Honorable Lindsey Graham, Ranking Member
Committee on the Judiciary, United States Senate
224 Dirksen Senate Office Building
Washington, DC 20510

Dear Chair Durbin, Ranking Member Graham, and Members of the Committee:

On behalf of National Taxpayers Union (NTU), America’s oldest national taxpayer advocacy organization, I write to offer comments on today’s full Committee hearing entitled, “Ensuring Affordable & Accessible Medications: Examining Competition in the Prescription Drug Market.”

Introduction

Taxpayers have a deep and direct interest in the topics to be explored at today’s hearing. Innovations in prescription drugs hold immense potential for long-run savings in taxpayer-funded healthcare programs ranging from Medicaid to Medicare, from government employee insurance to veterans’ benefits, by reducing the need for costly surgeries, hospital stays, and other interventions. Likewise, the development of generics as well as biosimilars not only increases patient access to cures, but also encourages market-based competition.

No bigger challenge exists to the federal government’s financial stability, and for that matter most states’ financial stability, than getting ahead of the health care cost spiral. Prescription drug policy choices from the federal level on down can help – or hinder – this vital task. As NTU has expressed in many contexts, no other nation in the world can boast of a policy environment that both encourages discoveries to reach patients (nearly 90 percent of newly launched drugs worldwide are available here) and controls costs (over 90 percent of prescriptions written in the U.S. are for generics).^[1]

Policy Challenges

Unfortunately, this balanced, uniquely American approach is under threat. In an extensive paper from 2023, we wrote that “policymakers – some of whom mean well in attempting to support the one in roughly six Americans who report having at least some difficulty affording drugs – seek sweeping, nationwide changes [even though] nearly half of those taking prescription drugs say it’s ‘very easy’ to afford their

medicine and another 30 percent say it’s ‘somewhat easy.’ Remarkably, while prescription drug spending as a percentage of Gross Domestic Product has more than tripled since 1970, the proportion of total national health expenditures attributable to prescription has hovered below or near 10 percent for decades.^[2]

Nonetheless, since prescription drugs are one of the few “retail” health care transactions that consumers see at the cash register (as opposed to often indecipherable insurance claims for tests and doctor visits), this one area of health spending comes under scrutiny like few others. And as a result, several ill-advised policy proposals have sprung forth. The following are, from NTU’s perspective, some of the most alarming examples.

Inflation Reduction Act “Negotiation” Provisions for Medicare. This portion of the Inflation Reduction Act (IRA), already well underway, makes the classic errors associated with price controls on most any commodity, while adding a coercive new enforcement weapon to the government’s arsenal: a 95 percent excise tax on the Medicare sales of companies that do not accede to Washington’s pricing demands.

Last month, NTU led an open letter to the Biden Administration and Congress, from dozens of economists and health policy experts opposing this tax, defined in Section 5000D of the Internal Revenue Code. They wrote:

 [I]t is axiomatic that taxing a product or service at exorbitant rates tends to reduce its availability.   The very existence of a 95 percent excise tax could therefore lead to shortages in the prescription  drugs that patients need, as well as less innovation toward future cures as manufacturers are   deterred from engaging in R&D that could carry a new 95 percent   premium. Taxpayers could no longer count on as many future drug breakthroughs to bend the cost curve of more expensive treatments such as surgeries and hospital stays in government healthcare programs. …

 Whether characterized as a massive tax with little precedent in U.S. experience, or a punitive   artifice crafted to achieve price controls on prescription drugs, Section 5000D risks further damaging the integrity of the U.S. tax system. Policymakers would be wise to change course now, and jettison this ill-conceived law.^[3] 

Proposed Changes to “March-In.” One of the most prominent successes in federal policy toward innovation has been the Bayh-Dole law of 1980. As NTU’s Nicholas Johns explained in a commentary earlier this year:

The Bayh-Dole Act … [allowed] universities, small businesses, and nonprofits that receive  federal funding to retain ownership and seek patents for their inventions. The act also encouraged them to license their inventions to the private sector for further development and commercialization. The act  aimed to stimulate innovation, promote collaboration between the public and private sectors, and enhance the public’s return on investment in R&D.

Prior to this enactment, tens of thousands of patents were going unused, symbolizing significant waste of taxpayer funds.^[4]

The Administration’s proposal to broaden the government’s “march-in” authority to grant licenses, with the purported aim of reducing drug prices, is a misreading of the law’s intent and a disservice to taxpayers who are counting on longer-term savings from future drug discoveries.

But as NTU’s Johns recounted, the proposal has other drawbacks for taxpayers:

• Discouraging private sector partners from collaborating with federal agencies and researchers, or from licensing and developing federally funded inventions, if they fear that their patents could be seized by the government at any time;
• Reducing the revenues and royalties that universities, small businesses, and nonprofits receive from their patents, which they use to support further research and education (and for businesses, continuing to pay taxes);
• Undermining U.S. leadership and competitiveness in the global innovation economy, and invite retaliation from other countries that could seize U.S. patents or violate U.S. intellectual property rights (which could incite tariff wars), and  the private sector to again shun using taxpayer-funded research, thereby slowing progress on cures like the COVID vaccines or forcing duplication of effort and wasting federal R&D funds.^[5]

It is therefore little wonder that a bipartisan letter from 28 Members of Congress recently warned that “The increased risk of losing control over critical patents also threatens to deter the private investment necessary to commercialize products incorporating federally funded research, preventing the public from benefiting from that research.”^[6]

International Price Indices. Looking overseas for a method to control drug prices is a concept with acolytes in both political parties – and they are mistaken. A typical embodiment of the concept is the “Most Favored Nation (MFN) Index,” which would require U.S. prescription drug prices to mirror the lowest price paid by Canada, France, Germany, and other industrialized countries.

The problems associated with this approach are legion. In December 2018, NTU organized more than 150 economists in a letter to HHS Secretary Alex Azar, which warned of the significant drawbacks to an “International Pricing Index” proposed through the Executive Branch. They wrote:

In general, setting price controls at below-market rates leads to shortages, squeezes the cost bubble toward some other portion of the economy, and imposes a deadweight cost on society. In this case, price controls can lead to a reduction in patient access to certain drugs, less investment in the research and development of new drugs, and cost-shifting that raises the prices of other therapeutics. Ultimately, patients will suffer as cures are delayed or entirely undeveloped, while taxpayers will be denied potential savings from drugs that could obviate more expensive treatments in government healthcare programs, and the investment of capital in development of new medicines.^[7]

Wrong Signals on Generics and Biosimilars. Much in the way the Bayh-Dole Act has encouraged health care innovation to flourish, the Hatch-Waxman Act of 1984 has made salutary contributions to the competitive elements of the U.S. prescription drug architecture. Providing generics and biosimilars with the policy space to develop yields proven dividends to taxpayers. The FDA has charted how the presence of generic competitors lowers prices by as much as 95 percent, depending on the number of participants in the manufacturing market.

Yet, the IRA mentioned earlier would choke off the pipeline of innovator drugs from which generics and biosimilars can evolve. The companies that could be participating in this space, along with their investors, will be deterred from ever considering doing so.

Equally troubling, however, have been recent “trial balloons” from Congress to involve agencies such as the Federal Trade Commission (FTC) in private negotiations between brand and generic manufacturers over the Abbreviated New Drug Application (ANDA) settlement process. A 2019 NTU paper warned that legislation unleashing the FTC into this area would be highly detrimental to taxpayers:

This proverbial license to fish from Congress would also give the regulatory agency a much deeper  pond in which to drop its hooks. The legislation stipulates that “an agreement shall be  presumed to have anticompetitive effects and shall be a violation” of the new act if the settlement  involves anything of value being given to the generic firm (the ANDA filer) or any concession to  delay the market entry process for the generic drug, with a few limited exceptions. Potentially, and quite ironically, even regulatory waivers to permit generic entry into a market could be considered a  thing of value.^[8]

More recently, the FTC targeted 10 companies to “dispute the accuracy or relevance of more than 300 Orange Book patent listings across 20 different brand name products” – a sign that the agency is aggressively asserting its powers against both brands and generics.^[9]

Policy Opportunities

Despite all the cautions expressed above, Congress does have policy options for expanding America’s leadership around prescription drug innovation, access, and competition. The following recommendations have been culled from several NTU sources:^[10]

Act on Tax Policy. In 2022, the tax treatment of R&D expenses changed from immediate expensing – in other words, allowing companies to fully and immediately deduct R&D costs from their income, thereby reducing their tax obligations on that R&D – to five-amortization, requiring companies to spread their R&D costs out over five years on their tax bills. Before this change, companies were able to fully and immediately expense R&D costs for decades. In short, the change to five-year amortization increases companies’ costs for investing in R&D, which may prevent some companies from making more robust R&D investments in years to come and others from making R&D investments at all. The bipartisan Tax Relief for American Families and Workers Act, which passed the House with 359 votes in January, awaits Senate action.

Revisit Out of Pocket Caps. NTU has supported Part D redesign proposals that would have included the first ever out-of-pocket cap for seniors in Part D but still would have reduced deficits by shifting cost burdens away from taxpayers and towards insurers. A version of this Part D redesign was included in the Inflation Reduction Act, but unfortunately was accompanied by 1) harmful prescription drug price controls and 2) increased taxpayer funding for Part D premium subsidies, both of which made the policy a net loser for taxpayers. Congress should move forward with caps while avoiding IRA’s punitive offsets.

Move Thoughtfully on PBM Transparency. Government policy towards Pharmacy Benefit Managers is extraordinarily complex, and public officials should be mindful of tradeoffs with reforms aimed at this sector. In 2023, NTU recommended the following steps:

• Enhanced transparency on PBM spread pricing;
• Additional reporting from PBMs on the use of specialty pharmacies;
• Efforts to strengthen public-private negotiations over PBM contracts;
• Hearings and consultations with PBM industry disruptors;
• Exploring the reverse auction model for PBM contracts that has successfully worked to reduce costs for several states; and
• Requiring PBMs to address potential conflicts of interest in their Pharmacy and Therapeutics (P&T) committees.

Other, more aggressive paths proposed by some progressive lawmakers – especially encouraging the Federal Trade Commission (FTC) to penalize or ‘break up’ larger PBMs – will do more harm to the market (and taxpayers) than good.

Update the 340B Program. After more than 30 years of operation, the 340B discount drug program has grown beyond its original intent of providing medicines to indigent patients. NTU and its colleague organizations have made numerous suggestions for ensuring that 340B fulfills its mission without harming taxpayers, among them: codifying a clear definition of a 340B patient” into law, which “must include that the patient is uninsured and has a low income; instituting “an audit or tracking system for how 340B hospitals utilize their pharmaceutical savings and make sure it is in line with the law’s intent;” and re-evaluating whether disproportionate share hospitals (DSH) should be automatically eligible for the 340B program.

Remove Distortions That Incentivize High List Prices. NTU has noted before that the extreme rebates in the Medicaid program – which made up more than half of spending on outpatient prescription drugs in the joint state-federal program in FY 2017, or nearly $35 billion – could actually incentivize high list prices as manufacturers seek to recoup losses from that program.

Expedite FDA Review and Medicare Reimbursement Decisions. The FDA must constantly balance the need for competition in the drug market with the need for safe and effective drugs. Keeping that balance in mind, the agency itself has noted it can improve and streamline its review and approval process for biosimilars and other products. For instance, given the mounting evidence behind the effectiveness of anti-obesity medications, timely drug approvals not only for the entire market but also for use in specific government health programs, could save tax dollars as well as lives.

Conclusion

As has been amply demonstrated, prescription drugs have tremendous promise to bend the cost curve in taxpayer-funded health programs:

• A 2019 study in Health Affairs examining Medicare expenditures over the period of 1999-2012 determined that more than half of the “reduction in cardiovascular disease events” (a major driver of the spending growth slowdown in Medicare) to “increased medication use for hypertension, high cholesterol, and diabetes” – an $824 per capita slowdown in spending.^[11]
• A 2019 Journal of Medical Economics (JME) paper reported that “expanding coverage of antiobesity interventions to eligible individuals could generate $20–$23 billion budgetary savings to Medicare over 10 years,” or $6,842 over 10 years for “treated participant” (offset by $1,798 in intervention costs) and $308 over 10 years for each beneficiary (treated or untreated).” More recently a multi-year SELECT trial of one popular AOM (Wegovy) for more than 17,000 patients across 41 countries provides a more comprehensive view. First publicized in August of 2023, the study reported that the drug’s regular use “was associated with a 20% reduction in major adverse cardiac events during a mean exposure.”^[12]
• The Alzheimer’s Association estimates that “Total annual payments for health care, long-term care and hospice care for people with Alzheimer’s or other dementias are projected to increase from $321 billion in 2022 to just under $1 trillion in 2050.” Introduction of a treatment delaying the onset of the disease by five years in patients could save Medicare and Medicaid $534 billion between 2026 and 2035.
• Generic medications saved Medicare some $130 billion in 2023.^[13]

Potential triumphs for patients and taxpayers such as these could very well depend on the choices public officials make now and in the near future. Allowing the introduction of new medicines into government health systems (e.g., through the Treat and Reduce Obesity Act), versus utilizing initially high drug costs to justify price controls (e.g., via recent complaints about anti-obesity medication prices), represent two distinct policy paths. In NTU’s opinion, the former has promise, while the latter portends failure.

We hope these comments will prove helpful in your deliberations. Should you or your staff have any questions, we are at your service.

Sincerely,

Pete Sepp
President
National Taxpayers Union

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