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1. Considering Returns on Federal Investment in the Negotiated “Maximum Fair Price” of Drugs Under the Inflation Reduction Act: an Analysis

Author:
Edward W. Zhou, Paula G. da Silva, Debbie Quijada, and Fred D. Ledley
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Inflation Reduction Act (IRA) of 2022 contained landmark provisions authorizing government to negotiate a “maximum fair price” for selected Medicare Part D drugs considering the manufacturer’s research and development costs, federal support for discovery and development, the extent to which the drugs address unmet medical needs, and other factors. This working paper describes federal investment in the discovery and development of the ten drugs selected for price negotiation in the first year of the IRA as well as the health value created through Medicare Part D spending on these drugs. We identified $11.7 billion in NIH funding for basic or applied research leading to approval of these drugs with median investment costs of $895.4 million/drug. This early public investment provided a median cost savings to industry of $1,485 million/drug, comparable to reported levels of investment by industry. From 2017-2021, Medicare Part D spent $126.4 billion (median $10.7 billion) for these products before rebates. Excluding two products for diabetes, Medicare Part D spending was $97.4 billion and the total health value created was 650,940 QALYs or $67.7 billion (WTP/QALY=$104K) representing a negative residual health value of -$29.7 billion (before rebates). We argue that a negotiated fair price should provide returns on both private and public investments in these products commensurate with the scale and risk of these investments, with the principal return on public sector investments being the residual health value (net price) accruing to those using the product. These empirical data provide a cost basis for negotiating a fair price that rewards early government investments in innovation and provides social value for the public.
Topic:
Economics, Health, Public Health, Pharmaceuticals, and Public Investment
Political Geography:
North America and United States of America

2. Setting Pharmaceutical Drug Prices: What the Medicare Negotiators Need to Know About Innovation and Financialization

Author:
Öner Tulum and William Lazonick
Publication Date:
09-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Mandated by the Inflation Reduction Act of 2022, the U.S. government through the Centers for Medicare and Medicaid Services (CMS) is negotiating with pharmaceutical companies over the “maximum fair price” of ten drugs in wide use by Medicare patients. Over the next few years, the number of drugs whose prices are subject to negotiations will increase. The pharmaceutical companies contend that a “fair” price would be a “value-based price” that enables the companies’ shareholders to capture the value that the drug creates for society. Invoking the dominant “maximizing shareholder value” ideology, the argument for value-based pricing assumes that it is only a pharmaceutical company’s shareholders who make the risky investments that fund drug innovation. Pharmaceutical executives and their lobbyists warn that a lowering of drug prices will reduce investments in new drugs. The purpose of this paper is to enable CMS negotiators to respond to these arguments by showing a) why drug-price regulation is required, given the relation between scale economies in supplying drugs and price inelasticity of drug demand; b) how the pharmaceutical companies with which they are negotiating prices are, in general, not using their profits from unregulated drug prices to fund drug innovation but rather to fund distributions to shareholders in the form of cash dividends and stock buybacks; c) that publicly listed pharmaceutical companies do not typically rely upon investment by shareholders to fund drug innovation; and d) that investment in drug innovation entails “collective and cumulative learning” in foundational and translational research that is both antecedent and external to the investments in clinical research that a pharmaceutical company may make to bring a safe and effective drug to market.
Topic:
Economics, Health, Finance, Innovation, Pharmaceuticals, and Medicare
Political Geography:
North America and United States of America

3. Friend-shoring in the Indo-Pacific

Author:
Akhil Ramesh and Rob York
Publication Date:
11-2023
Content Type:
Special Report
Institution:
Pacific Forum
Abstract:
The COVID-19 pandemic and Russia’s invasion of Ukraine highlight the challenges of increased economic interconnectedness with adversarial states. The shortages in critical sectors such as pharmaceuticals, semiconductors, and other industries significant for technological advancement in the fourth industrial revolution have revealed the importance of select supply chains to the American public and the broader global community. As the strategic competition between the US and China accelerates, understanding of their importance will only grow. The Biden administration, to its credit, realized early on the importance of four critical sectors for the future of US supply chain security: pharmaceuticals, critical minerals, large-scale batteries, and semiconductors. Alarmingly, through the research presented here by Akhil Ramesh and myself, we see that the People’s Republic of China has deeply embedded itself in three of these four sectors, and still seeks to strengthen its position in the fourth (semiconductors). Also, one of the recurring problems highlighted in this research is the tendency of the administration to consider the job done once it sources a critical technology from somewhere other than China—not realizing that the PRC serves as a source for that country elsewhere in the supply chain.
Topic:
Pharmaceuticals, Supply Chains, Semiconductors, Batteries, and Critical Minerals
Political Geography:
United States of America and Indo-Pacific

4. Unreliable Data Have Infected the Policy Debates Over Drug Patents

Author:
Adam Mossoff
Publication Date:
01-2022
Content Type:
Special Report
Institution:
Hudson Institute
Abstract:
The COVID-19 pandemic has vividly brought to the public’s attention the key role of medical innovation in saving lives and increasing the quality of daily life. The pandemic has also precipitated an international debate over the role of patents and other intellectual property rights in the discovery, manufacture, and distribution of drugs and vaccines to patients. Even before COVID-19, there has been an ongoing policy debate in Washington, D.C., over drug prices and patents with congressional hearings, proposed legislation, and antitrust enforcement actions. The pandemic has thus made apparent what reliable data have already shown: poorly crafted legislation or antitrust enforcement actions could have a tremendous negative impact on the innovation economy in general and on healthcare specifically by undermining the incentives that drive the billions invested annually in the research and development of life-saving drugs and other medical treatments. Congress and regulators should engage in evidence-based policymaking on these important issues, which have far-reaching implications for economic growth and quality of life. This policy memo identifies a serious concern about the data in these discussions.
Topic:
Science and Technology, Intellectual Property/Copyright, Innovation, Data, and Pharmaceuticals
Political Geography:
North America and United States of America

5. Past Economic Decline Predicts Opioid Prescription Rates

Author:
Herb Susmann, Elias Nosrati, Michael Ash, Michael Marmot, and Lawrence King
Publication Date:
12-2022
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
America is in undergoing an epidemic of opioid related deaths. Analysts have emphasized two different (but not mutually exclusive) arguments. Supply based explanations emphasize the immoral activity of pharmaceutical companies from 1996 to aggressively market opioids. They typically use prescription rates as a measure of this variable. Demand based explanations emphasize the demand for opioids caused by economic hardship. This paper demonstrates that prescription rates are not entirely exogenous. We show that the decline of average household income from 1979 to 1989 at the county level is a significant predictor of opioid prescription rates in 2010. This is consistent with research that shows that childhood trauma predicts adult drug abuse. The policy implications of this finding are that an adequate response to the opioid epidemic must address economic dislocation and insecurity.
Topic:
Political Economy, Health Crisis, Pharmaceuticals, Opioid Crisis, and Income
Political Geography:
North America and United States of America

6. Will the Biden Administration Support Global US Leadership in the Innovative Medicines Industry?

Author:
Thomas J. Duesterberg
Publication Date:
01-2021
Content Type:
Policy Brief
Institution:
Hudson Institute
Abstract:
Given the historically unprecedented speed with which the US pharmaceutical industry has developed COVID-19 vaccines—3 of the 4 first products likely to be approved for marketing are almost certainly from US firms—it would seem appropriate for a renewed sense of confidence, support and even acclaim for the economic model that lies behind this success. Instead, the sector remains under pressure to lower prices and protections for its patented products, both in the United States and globally. It is worth noting that the entire world benefits from the new medical advances in treating the worst pandemic in at least 50 years. Instead, President Trump has continued to criticize the industry for its pricing model for newly developed drugs, while countries such as India, Pakistan, and Brazil call for breaching of the patent shield for the new vaccines (and recent treatments such as those for HIV and Hepatitis C), and developed countries in Europe, East Asia, as well as Canada, persist in questioning the medical value of the new medicines to their citizens.1 To add to the current uncertainty about US leadership, there is ever-increasing competition from China in terms of basic science and pharmaceutical products. The Chinese national goal of self-sufficiency in these two fields has resulted in a huge increase in research and development funding and purchases of leading biotechnology firms in the United States and Europe. At the same time, China’s global market share in generic drugs and active pharmaceutical ingredients (APIs) is steadily growing. Chinese government funding for research in these fields has grown by 20 percent annually since 2008. The incoming Biden administration is calling for new pricing models and the use of compulsory licensing for some new products, especially those related to the new virus pandemics. Compulsory licensing allows a government to license entities other than the patent holder to produce and sell patented products without the patent holder’s permission. If the economic and scientific model which promotes constant advances in medicines and new treatments is to survive, the current domestic ecosystem for research and development ought to be strengthened, instead of being undermined by reducing private sector incentives and weakening the protection of intellectual property (IP). Additionally, ways to address the problem with other countries enjoying a “free ride” at the expense of US consumers and public health systems, need to be considered.
Topic:
Health Care Policy, Manufacturing, Innovation, Vaccine, COVID-19, Medicine, and Pharmaceuticals
Political Geography:
North America and United States of America

7. Productivity and Adaptability: Why COVID-19 Has Not Overrun American Hospitals

Author:
Hanns Kuttner
Publication Date:
11-2020
Content Type:
Working Paper
Institution:
Hudson Institute
Abstract:
Early in the COVID-19 epidemic, many gloomy images emerged of what might be ahead. In one, hospitals would be overrun by more COVID-19 patients than they could treat. Models developed at the Institute for Health Metrics and Evaluation (IHME) provided numbers that supported the image. For the most part, overrun hospitals did not happen. Things turned out better because America’s hospitals did better than the IHME model thought they could. Hospital productivity has proved to be greater than anticipated in the IHME model. Productivity determines how many patients hospitals can serve. Productivity reflects how many beds a hospital has and how many days each patient stays in a bed. The most common pattern in hospitals, patients who are discharged alive and do not require time in an intensive care unit (ICU), provide an example. Length of stay for that group has been a third shorter than assumed in the IHME model. The data required to tell the adaptability story in detail is not yet available. Only a qualitative assessment is possible at this point. Hospitals adapted in ways not anticipated in the IHME model. For example, they delayed elective surgical procedures, freeing up beds. The story will become more detailed as data about hospital admissions and the clinical course of COVID-19 patients becomes available.
Topic:
Health, Science and Technology, Health Care Policy, COVID-19, and Pharmaceuticals
Political Geography:
North America and United States of America

8. Government as the First Investor in Biopharmaceutical Innovation: Evidence From New Drug Approvals 2010–2019

Author:
Ekaterina Cleary, Matthew J. Jackson, and Fred D. Ledley
Publication Date:
04-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The discovery and development of new medicines classically involves a linear process of basic biomedical research to uncover potential targets for drug action, followed by applied, or translational, research to identify candidate products and establish their effectiveness and safety. This Working Paper describes the public sector contribution to that process by tracing funding from the National Institutes of Health (NIH) related to published research on each of the 356 new drugs approved by the U.S. Food and Drug Administration from 2010-2019 as well as research on their 218 biological targets. Specifically, we describe the timelines of clinical development for these products and proxy measures of their importance, including designations as first-inclass or expedited approvals. We model the maturation of basic research on the biological targets for drugs to determine the initiation and established points of this research, and demonstrate that none of the 232 products modelled were approved before this enabling research passed the established point. This body of essential research comprised 2 million publications, of which 409 thousand were supported by 317 thousand Funding Years of NIH Project support totaling $156 billion. Research on the 356 drugs comprised 229 thousand publications, of which 36 thousand were supported by 42 thousand Funding Years of NIH Project support totaling $31 billion. Overall, NIH funding contributed to research associated with every new drug approved from 2010-2019, totaling $187 billion. This funding supported investigator-initiated Research Projects, Cooperative Agreements for government-led research on topics of particular importance, as well as Research Program Projects and Centers and training to support the research infrastructure. This NIH funding also produced 22 thousand patents, which provided marketing exclusivity for 27 (8.6%) of the drugs approved 2010-2019. These data demonstrate the essential role of public sector-funded basic research in drug discovery and development, as well as the scale and character of this funding. It also demonstrates the limited mechanisms available for recognizing the value created by these early investments and ensuring appropriate public returns. This analysis demonstrates the importance of sustained public investment in basic biomedical science as well as the need for policy innovations that fully realize the value of public sector investments in pharmaceutical innovation that ensure that these investments yield meaningful improvements in health.
Topic:
Science and Technology, Research, Public Policy, Innovation, State Funding, Pharmaceuticals, and Funding
Political Geography:
North America, Global Focus, and United States of America

9. US Pharma’s Financialized Business Model

Author:
William Lozonick, Matt Hopkins, Ken Jacobson, Mustafa Erdem Sakinç, and Öner Tulum
Publication Date:
07-2017
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Price gouging in the US pharmaceutical drug industry goes back more than three decades. In 1985 US Representative Henry Waxman, chair of the House Subcommittee on Health and the Environment, accused the pharmaceutical industry of “gouging the American public” with “outrageous” price increases, driven by “greed on a massive scale.” Even in the wake of the many Congressional inquiries that have taken place since the 1980s, including one inspired by the extortionate prices that Gilead Sciences has placed on its Hepatitis-C drugs Sovaldi since 2013 and Harvoni since 2014, the US government has not seen fit to regulate drug prices. UK Prescription Price Regulation Scheme data for 1996 through 2010 show that, while drug prices in other advanced nations were close to the UK’s regulated prices, those in the United States were between 74 percent and 181 percent higher. Médecins Sans Frontières (MSF) has produced abundant evidence that US drug prices are by far the highest in the world. The US pharmaceutical industry’s invariable response to demands for price regulation has been that it will kill innovation. US drug companies claim that they need higher prices than those that prevail elsewhere so that the extra profits can be used to augment R&D spending. The result, they contend, is more drug innovation that benefits the United States, and indeed the whole world. It is a compelling argument, until one looks at how major US pharmaceutical companies actually use the profits that high drug prices generate. In the name of “maximizing shareholder value” (MSV), pharmaceutical companies allocate the profits generated from high drug prices to massive repurchases, or buybacks, of their own corporate stock for the sole purpose of giving manipulative boosts to their stock prices. Incentivizing these buybacks is stock-based compensation that rewards senior executives for stock-price “performance.” Like no other sector, the pharmaceutical industry puts a spotlight on how the political economy of science is a matter of life and death. In this paper, we invoke “the theory of innovative enterprise” to explain how and why high drug prices restrict access to medicines and undermine medical innovation. An innovative enterprise seeks to develop a high-quality product that it can sell to the largest possible market at the most affordable price. In sharp contrast, the MSV-obsessed companies that dominate the US drug industry have become monopolies that restrict output and raise price. These companies need to be regulated.
Topic:
Finance, Business, Drugs, Innovation, Pharmaceuticals, and Stock Markets
Political Geography:
North America and United States of America