The Drug Industry Might Have Dodged A Build Back Better Bullet But Remains In Congressional Crosshairs

The Biden administration’s campaign to rehabilitate the drug price negotiation legislation contained in the stalled Build Back Better bill (BBB), appears to have been sidelined for now. Reluctant senators and Covid-19 have all but eliminated any new year’s momentum to pass it. With time running out, it’s tempting to believe that the drug industry has dodged another bullet by having these provisions go nowhere for the time being. That presumption would be short-sighted. The underlying threat has not abated, and those failing to recognize that will be in for a shock down the road. 

In many ways, the pharmaceutical industry has been its own worst enemy. It should be riding high as the party responsible for bringing to market the vaccines and therapeutics that have, even in the face of record-breaking Covid case rates, kept the death count very low relative to what it might otherwise be. And yet, much of the bipartisan support the industry once enjoyed has waned as politicians and the public continue to take their miraculous, life-saving work for granted, blame them for high prices, or challenge them for not creating cures fast enough.

With each report about unaffordable but necessary drugs, new fault lines appear. Very much like the San Andreas Fault, the pressure builds in fits and starts, always increasing until, in this case, punishing legislation advances in Congress. This time, industry critics have managed to get a foothold with reforms that, as I have highlighted in this column before, will have devastating, long-term effects for patients and drug companies alike. And worse, they were included in a bill that could actually pass via the special reconciliation process that governs federal budgeting.

Currently, the plan would allow the federal government to negotiate prices with drug companies for a small number of high-cost drugs covered under Medicare Parts D and B. The negotiation process would apply to no more than 10 to start and would grow incrementally every few years. The most costly drugs would be selected initially along with all insulin products.

This may have appeal to the public that the government is finally doing ‘something’ to rein in prices (albeit not enough). It may also give some industry insiders a sigh of relief (i.e., it could have been a lot worse). But make no mistake, despite assurances that federal negotiators will be temperate and judicious, these BBB provisions represent the camel’s nose under the tent. Consumer demand for effective medicines is without limit, and legislators, as time goes by, won’t have any choice but to provide everything they can at the industry’s expense for their constituents. There is simply no political barrier to adding more and more products to the price-controlled list indefinitely.

Under this scenario, over time, one of the crown jewels of American innovation will simply become unprofitable. Much of the drug development and expertise will drift overseas, and at home, we'll see an acceleration of large mergers and acquisitions as firms combine in an effort to maintain greater influence and reduce competition for the opportunities that remain. 

Governments interested in “making healthcare affordable” are in a target-rich environment and yet drugs only make up 15% of every dollar spent on healthcare, making drug companies suffer a disproportionate share of criticism when it comes to cost-cutting options. But coupled with tepid public support, they’ve become easy targets for rapacious legislators.

But understand, this is all avoidable and there are countless ways the industry can reform itself, quite independent of direct federal involvement in drug pricing. Economists tell us that one of the benefits of high prices is that they invite competitors to come in to capture a share of healthcare spending with new innovations of their own. It’s clear that reworking the price structure of key medicines is good for patients as well as drugmakers; it keeps competition manageable and has the extra benefit of incenting lawmakers to look elsewhere for savings. Reforms along this line would represent a wonderful down payment to restoring the respect and admiration the industry deserves.

To preserve its status as a world-leading innovator, the industry must go on the offensive, invest what good will they have, and have a serious strategic rethink about its pricing. Decisive action to change the public perception of their value proposition is long past due. If not, the worst outcomes, narrowly avoided this time, may be realized faster than they had prepared for.