On December 6, John O’Brien, the senior advisor on drug pricing reform to Health and Human Services (HHS) Secretary Alex Azar, published a blog, entitled, “How the IPI Model Would Introduce New Market Competition to Medicare Drug Spending.”  The blog left a lot of fiscal conservatives and patient-centered, free-market healthcare advocates scratching their heads.  Mr. O’Brien attempts to explain that an October 25 HHS proposed regulation, which would peg Medicare Part B drug prices to European-style price-controlled drug prices or an International Pricing Index (IPI), is really about a new competitive model.  It is not.  Citizens Against Government Waste respectfully disagrees with the proposed regulation and has written in opposition to it, including submitting a comment to the Centers for Medicare and Medicaid Services (CMS), the HHS division that would implement the regulation.

In an effort to lower drug costs, the proposed regulation intends to pay for Medicare Part B drugs based on what other countries’ pay for drugs.  Medicare Part B drugs are administered in a doctor’s office or a hospital outpatient clinic.  Examples of Part B drugs are injectable cancer or osteoporosis drugs.  The statutory payment rate is the average sales price of the drug plus six percent, which covers the doctor’s handling costs.  

The regulation would establish a price for a Part B drug based on a composite of international prices from 14 countries, including nations such Canada, England, Greece, Italy, and Japan.  The countries being considered use some form of government price controls and rationing to keep drug and health costs low in their socialized health systems.  Many patients in these countries do not get access to ground-breaking drugs, such as those for cancer.  For example, England’s rationing board, the National Institute for Health and Care Excellence (ironically abbreviated NICE) just denied paying for Opdivo/Yervoy for patients with metastatic renal cell cancer.

O’Brien argued that the Part B proposal could cause countries to pay more for drugs because, if drug companies “don’t agree to prices demanded by foreign governments,” they “don’t have to do business there or can negotiate a price more in line with what Americans pay.”

That is an interesting theory, but what incentive is there for other countries to pay more for their drugs?  There is none.  More likely, they will be inspired to pay less because our own government is forcing another price control on pharmaceuticals, like what occurs in Medicaid.   Furthermore, the proposal ignores how compulsory licensing would come into play.  Compulsory licensing, as described by the World Health Organization, “is when a government allows someone else to produce a patented product or process without the consent of the patent owner or plans to use the patent-protected invention itself.  It is one of the flexibilities in the field of patent protection included in the WTO’s agreement on intellectual property — the TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement.”

WHO states that “normally the person or company applying for a license has to have tried, within a reasonable period of time, to negotiate a voluntary license with the patent holder on reasonable commercial terms.  Only if that fails can a compulsory license be issued, and - even when a compulsory license has been issued, the patent owner has to receive payment.”  Of course, the phrases “reasonable period of time” and “reasonable commercial terms” are open to interpretation and WHO admits the individual country decides what is an “adequate” amount to pay the pharmaceutical company for use of its patent.

Compulsory licensing is not unheard of.  Italy used it in February 2017 with Gilead’s Sovaldi, a cure for Hepatitis C.  Repeat that scenario often enough and there will be no investments for ground breaking drugs.

The Part B payment proposal is a 180° deviation from the great work the Trump administration is doing in healthcare.  Rules and guidelines have been issued that have broadened the use of Section 1332 innovation waivers, which is found in Obamacare, expanded the use of short-term, limited-duration healthcare plans and association health plans.  The FDA has sped up the approval of generic drugs.  These actions are playing a major role in bringing down costs by encouraging more competition and more choices.

These are the types of ideas that should be emulated to bring down drug costs, not adopting socialistic measures such as price controls.