Love it or hate it, the myopic IPI won’t lower Medicare drug prices

Guest Commentary: Why Peter Kolchinsky says Trump’s international reference scheme will increase prices

The Trump administration has proposed that the U.S. pay similar prices to what companies charge in Europe, starting with drugs covered under Medicare Part B. The administration figures that pegging U.S. prices to an International Price Index (IPI) would lower domestic drug prices.

While I would expect this kind of facile argument from politicians, I am surprised by the simplistic reactions from leaders in our industry. As previously reported in BioCentury, various executives claim that industry revenues would drop and R&D would be hurt by the IPI, tacitly or directly acknowledging that prices in the U.S. would decline (see “Azar’s IPI: Socialist or Capitalist?”).

Yet no one seemed to consider a very different outcome, one where high U.S. prices are exported to Europe as the biopharma industry protects its most important market.

“No one seemed to consider a very different outcome, one where high American prices are exported to Europe.”

Peter Kolchinsky, RA Capital

American anchor

Our industry’s survival and success depend entirely on countries that can afford to fund the engine remaining willing to do so.

The U.S. has so far been willing, though it has generated an obscene amount of consternation with a heartless insurance system that functionally denies a minority of under-insured or uninsured fellow Americans access to what most of us take for granted as our standard of care. Limiting copay would make drugs affordable for patients. Genericization is what serves as the ultimate check on societal drug costs, and we must ensure that it continues to do so as our arsenal of drugs becomes more complex without resorting to counterproductive price controls such as the IPI (see “When Drugs Can’t Go Generic”).

If IPI driving price increases sounds like a complex, unexpected outcome of competitive game theory, then you’ll understand why some in the current administration overlooked the unintended consequence of their pandering policy.

The IPI only sounds good to those who haven’t considered how it will play out. And yet, the inflationary consequences of IPI should at least be clear to those in our own industry.

Already, in board rooms of companies wondering whether to develop any particular new drug, executives and directors anchor their math and essentially make their decisions based on what price they think the U.S. will accept. If a board worries that the U.S. won’t accept the price that makes the drug worth developing, then it probably won’t develop that drug.

Projected sales in the entire rest of the world often can’t incentivize a new drug’s development. Indeed, nearly all the math underpinning the developability of a drug is grounded in the U.S.’s willingness to pay.

So why doesn’t our own industry understand how its options are constrained by competitive game theory? We shouldn’t be responding to facile policy proposals with simplistic counter-arguments.

Sure, in the near-term, the IPI would lower what Roche can charge in the U.S. for Avastin bevacizumab and Lucentis ranibizumab. If Roche and similarly affected companies were blocked from then raising the IPI price to a level where they can make up lost profit, then they would suffer a near-term hit to profitability.

But what about the longer term? Why haven’t all biotech and pharma executives pointed out to the Trump administration that the only logical response to the near-term impact of IPI is to raise prices.

If reference pricing to Europe were implemented, companies would charge the same high price in Europe as they want to charge in the U.S. They could then claim that the U.S. price is fair since it’s the same price as in Europe.

And they would attempt to negate the impact of those high prices in Europe by offering secret, country-specific rebates or giving away a certain amount of drug for free, which they already do to mitigate the impact of referenced list price regimes in Europe. But let’s assume that the intent of IPI couldn’t be circumvented so easily that it would actually peg net U.S. drug prices to net prices in other countries.

Circular argument

Three scenarios could play out.

Europeans might discover that they don’t have the heart to deny their citizens access to so many drugs, some of which, like Vertex Pharmaceuticals Inc.’s latest triple combinations for cystic fibrosis, work miracles.

Or perhaps they will simply deny access to many innovative specialty drugs, at least until they go generic, freeloading on the U.S.’s willingness to pay off the mortgage for innovation.

Or maybe more countries, especially the less wealthy ones in Europe, might opt for compulsory licensing, breaking patents to make branded drugs for their own patients and those of other countries unwilling to pay the uniform price.

The end result for companies would again be lost ex-U.S. profits, protracted disputes before international bodies, a lot of bad press, and the need to make up for lost revenue with higher prices in the U.S.

There is a good chance that countries would negotiate with the U.S. to be excluded from the IPI so that they would be free to negotiate their own prices again.

In fact, the IPI might actually offer interesting leverage in trade negotiations, allowing the U.S. to demand that countries increase the amount they pay for drugs -- shouldering their fair share of the burden -- or risk being included in the IPI and having their prices jacked up to those in the U.S.

If that were Trump’s scheme, game theorists might even be impressed.

But the IPI proposal is not smart enough to serve as leverage in trade talks. As it is, with all the ways that countries in the IPI already reference each other and even the U.S., plugging all of these into an Excel spreadsheet would yield a circular reference error.

If there is anything that the U.S. should be importing from Europe, it’s not its prices but its policies of comprehensive healthcare coverage with capped copays, which ensure patient-level affordability.

That any American can’t afford what their physician prescribes is a function of our unchecked out-of-pocket costs; society already enjoys exceptionally low costs for the vast majority of drugs: they are called generics. There are more generics every year.

Therefore, instead of the IPI, let’s urge the current administration to negotiate with Europe to recognize the value of genericizable drugs while refining regulations to make sure that all drugs go generic without undue delay.

If the U.S. wants to get other countries to shoulder a larger share of pharmaceutical innovation cost, the best option may be to inspire them with the idea that genericizable drugs are, in the long run, a cost-effective investment in healthcare for current and future generations and then, when that doesn’t work, negotiate with them through trade agreements. Trade negotiations have worked in the past; for example, the NAFTA treaty in 1992 ended Canada’s prior disregard of pharmaceutical patents.

I do not object to reforming the way Part B pays for drugs, particularly the ASP+ model based on average sales price, to better align prescribing incentives with the best interests of patients and, in the process, lowering overall costs to the system.

But international reference pricing proposals like the IPI, tempting as it may seem on the surface, will not achieve those goals. Indeed they will backfire with higher domestic drug prices.

Peter Kolchinsky is a managing partner of RA Capital Management LLC and author of the Biotech Social Contract series on Medium, where he has co-authored an article on this topic with Anthony Bower.

Guest commentaries reflect the views of the author, not necessarily those of BioCentury.

Companies and Institutions Mentioned

Roche (SIX:ROG; OTCQB:RHHBY), Basel, Switzerland

Vertex Pharmaceuticals Inc. (NASDAQ:VRTX), Boston, Mass.

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