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H.R.3 – Legislation That Will Suppress Innovation

While COVID-19 has engulfed our lives and demanded our almost undivided attention, we can’t ignore pending legislation that is lingering in the wings just waiting for its chance to jump back into the spotlight. I’m referring to H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act, named in honor of the late Maryland congressman who fought for price controls on prescription drug prices.

The legislation was introduced in September of 2019 and passed the House along party lines (Democrats for and Republicans against) in December of 2019. The Senate, to this point, has never brought the bill up for consideration. President Trump issued some Executive Orders toward the end of his term that resembled parts of H.R.3, but they have been suspended or faced court injunctions. My fear is that the new administration, with the Senate and House majorities of the same political party, will open the path for H.R.3 to become law.

This legislation sought to implement regulations that would control drug prices and modify some of the benefits of Medicare. It consisted of three main sections.

  • Drug Price Negotiation – A free market term that in reality was nothing more than price fixing, a control mechanism that is anything but a free market process. The government would apply their pricing regulations on a minimum of 25 drugs and a maximum of 50 single-source drugs with high spending, including all insulins and any newly introduced high priced drugs. The prices would be set somewhere between the minimum and maximum prices of 6 comparator foreign nations. I’ve talked a lot about the International Price Index (IPI) and Most Favored Nation (MFN) pricing approach which is what this pricing method emulates (you can read more about IPI here and MFN here.) If a company does not accept the set price, they would face huge fines equaling up to 95% of their gross sales. Fixing prices is a sure-fire way to limit innovation.
  • Inflation-Based Rebates – Requires manufacturers to pay a rebate to the federal government if a drug’s price increases faster than the rate of inflation. This is just another way to fix prices with no consideration to the cost of development or the value that the drug brings to the patient or the long-term health care costs.
  • Medicare Part D Benefit Restructuring – Restructures the Part D benefit by establishing a yearly spending cap on a patient’s out-of-pocket costs. This is a positive, sensible approach – one I have proposed for almost 10 years.

It is estimated that using this legislation to fix prices will extract over a trillion dollars from drug manufacturers in the first five years, a move that will severely reduce the drug innovation that has saved millions of American lives. Consider this, countries with price controls also suffer a decline in pharmaceutical research and development.

In 1986, European firms led the U.S. in spending on pharmaceutical research and development by 24%. After the imposition of price control regimes, they fell behind. By 2015, they lagged the U.S. by 40%. It just seems wrong for us to trade some short-term savings for the lifesaving drug innovations that will benefit our kids and grandkids.

There is something else that strikes me as a strange dichotomy. A little less than a year ago we began to understand how dangerous this pandemic could be. Estimates at that time for developing a vaccine for COVID-19 ranged from a low of one and half years to four years. Nine months later we had two vaccines approved and being distributed. Manufacturing numbers continue to be increased, goals of one million shots per day have been exceeded, new estimates indicate that improvements in manufacturing could support 3 million shots per day. These great accomplishments were possible because America’s regulatory environment had enabled the creation of the most efficient innovation industry in the world. Over half a million Americans have died due to COVID-19. What would have happened if a strapped and weakened pharmaceutical industry would have needed the low-end estimate of a year and a half to develop the vaccines? With the new variants invading our shores, how many more people would have died if our vaccines would have taken twice as long to be developed? With the imminent passage of another 1.9 trillion-dollar rescue and stimulant package, our government will have spent 5.3 trillion dollars this year on COVID-19. Adding this to the lost wages and company income and the financial impact is staggering. Is the loss of the innovation that brought us a vaccine in nine months really worth the 200 billion this legislation would extract each year from the pharmaceutical industry?

The bad parts of H.R.3 are really bad. They will hobble an innovation environment that is on the verge of many breakthroughs in many diseases. I will keep my eye on H.R.3 and will keep you informed on its status and the status of any moves the Administration makes toward implementing any part of H.R.3 through Presidential edict or under the guise of a nationwide “test.” This will certainly be a situation where we will need to “Speak Out” loud and clear.

Stay safe and healthy, Thair