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Is there another new approach to drug pricing reform?

March 29, 2017

“I am working on a new system where there will be competition in the Drug Industry. Pricing for the American people will come way down!” So tweeted President Trump on March 7. The reasonable assumption is that this new system involves direct negotiation between Medicare and drug companies on prices, a policy proposal he has raised several times in the past.

I am working on a new system where there will be competition in the Drug Industry. Pricing for the American people will come way down!

On this issue, he is likely to align with—and quite possibly work directly with—some House and Senate Democrats. Indeed, he recently met with Rep. Elijah Cummings (D-Md.), tweeting on March 8 that it was a “great discussion!” Cummings, for his part, says Trump told him he plans to get a Medicare negotiation proposal into an upcoming bill.

Of course Medicare negotiation, for all the support it has with the public and across the political aisle (particularly with Democrats) has its drawbacks. The Congressional Budget Office has suggested it would have a “negligible effect” on prices. Most other non-partisan (and even many partisan) assessments agree. A big part of the reason is that negotiation basically happens indirectly already, with PBMs acting as the intermediary. Unless a negotiation provisions also allows rationing—so Medicare can “walk away” if it doesn’t get the price it likes and simply not cover certain drugs—there’s no reason to think Medicare will get a better price than the private sector. (And we know, of course, that any whiff of rationing will immediately lead to talk of “death panels,” making this an almost impossible sell politically). But there is another tactic that is getting renewed attention.

In the beginning of 2016, Rep. Lloyd Doggett (D-Tex.) began urging HHS and members of Congress to take action on drug prices using a “march-in” provision.

The idea stems from a somewhat obscure and never-before-used provision of the 1980 Bayh-Dole Act. This act is the chief means by which federally funded research is licensed to private industry. Before it, government patents piled up by the tens of thousands, often without much practical application. Bayh-Dole is responsible for innumerable innovations that almost certainly would never have seen the light of day under the previous system, in which the government granted only non-exclusive licenses (or did nothing at all).

But if certain conditions are met, the government can “march in” and essentially ignore the patent it licensed. The conditions are general enough (read about them yourself at 35 U.S. Code 203) that it is feasible to claim that “excessive” pricing warrants such an action. And if that were to happen, the government could theoretically have someone else manufacture the drug in question and sell it at a low price, or purchase it abroad.

In theory, it wouldn’t take a lot of these kinds of actions to have a sobering impact on the industry. The government could undercut one drug in a given class, and competitors would probably have to drop prices to match. Even companies with unrelated drugs might lower prices to avoid being targeted.

Under the George W. Bush Administration, such action was considered and rejected. HHS’ determination was that addressing health and safety needs did not extend to pricing considerations, and that precedent was continued under the Obama Administration. But with the Trump Administration willing to be aggressive in its actions, things could potentially change.

Right now, industry isn’t taking the threat too seriously. And indeed, the tactic—if it were pursued—certainly has serious shortcomings.

Firstly, it would only apply to drugs based on government patents—and probably cases where the government holds a direct composition of matter patent, rather than some underlying discovery. While there are cases of successful drugs, like Taxol, that were literally discovered in government laboratories, these are the rare exception. More common are drugs that came out of university labs that in turn received federal funds. The Medivation (MDVN) prostate cancer drug Xtandi has such a pedigree, and it was the last drug to receive a serious push for march-in. That didn’t go anywhere.

Going whole-hog with this strategy is probably a bad idea for the exact reason that industry groups like BIO and others say: It would disrupt the university technology-transfer system, it would make drug companies hesitant to take licenses to federally-funded patents, and it would stifle innovation.

But as a shot across the bow, it might draw companies up short. If nothing else, the Trump Administration has shown itself willing to consider unconventional positions and tactics, and to undertake a good deal of legal and political risk in doing so. If this is the age of the grand political “statement,” this particular statement would be interesting. Undercutting the patent on even a single drug would make companies cautious about pricing but probably wouldn’t have a serious or immediate impact on licensing and innovation.


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