[Editor's note: This story originally was published by Real Clear Health.]
By Merrill Matthews
Real Clear Health
House Democrats have passed their massive social spending bill. It includes a measure to empower Medicare to set drug prices, which supporters have hailed as a victory for patients.
It is anything but. Specifically, it would undermine a landmark piece of legislation that vastly expanded access to low-cost generic medicines.
Passed in 1984, the Hatch-Waxman Act created a legal framework that allows generic drug makers to manufacture and sell lower-cost versions of brand-name medicines. Any American who has ever saved money by purchasing a generic medication has the law to thank.
Hatch-Waxman granted new drugs a five-year exclusivity period, during which the company that invented the medicine has the market to itself. Generic companies can use that time to develop and test their versions of the drug. Once that time elapses, generic competitors can launch their own versions at a lower price.
The law also affords generic drug makers important legal protections, such as an exemption from patent-infringement liability in certain circumstances. And, it grants a 180-day exclusivity period for the first generic firm to release a specific drug – a strong, consumer-friendly incentive to get cheaper products to market, quickly.
The purpose of these reforms was twofold: To increase access to low-cost generic drugs while also encouraging companies that invent original drugs to continue to invest in innovation. On both counts, the law has proven wildly successful.
Whereas generics accounted for less than 20% of prescriptions filled before Hatch-Waxman, today they account for 90%. This has made it far easier for patients to afford their medicines, as generics typically cost 80% to 85% less than brand-name drugs. In fact, generics saved the American health care system about $1.7 trillion between 2006 and 2017, according to the Association for Accessible Medicines.
The Hatch-Waxman act also had a significant impact on drug innovation. In the years before the law's passage, Europe far outperformed the United States in the number of new medicines it invented. In the time since, America has emerged as the undisputed leader in new-drug development.
The bipartisan group of legislators who passed the law – led by Republican Sen. Orrin Hatch and Democratic Rep. Henry Waxman – went to great lengths to strike a proper balance between promoting innovation and affordability. Now, though, the Democrats' new drug-pricing proposal would destroy the law's system of incentives.
For there to be a thriving generic drug market, there must first be a thriving brand-name market. The United States has both, but not for long if the U.S. Senate passes the House Democrats' bill.
Democrats claim their bill allows for the government to "negotiate" prices of targeted drugs with brand-name drug companies. But companies that don't agree to the government's final price "will be assessed a Non-Compliance Fee starting at 65% of the gross sales of the drug in question and increasing by 10% every quarter the manufacturer is out of compliance, up to a maximum of 95%."
That's not 95% of the profit from the sale of the drug, but total sales revenue. Drug companies either agree to the government's price or lose nearly all revenue from the sale of a drug. Given manufacturers won't know what the government's "negotiated" price will be until the drug is developed, many new, potentially life-saving drugs will never be explored.
What's more, under Hatch-Waxman, brand-name drug makers have a strong incentive to research and develop improvements to their medications. Their best hope for remaining competitive when cheaper generics come to market is a new, better product. If the government's price controls discourage generic manufacturers from making a competing drug, brand-name makers will have little to no incentive to invest in such improvements.
For nearly four decades, Hatch-Waxman has fostered a competitive market for low-cost generic drugs, while helping medical science advance to new heights. Democrats' drug-pricing plan would undermine that success story.
Because there can be no inexpensive, generic version of a brand-name drug that's never invented.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.
[Editor's note: This story originally was published by Real Clear Health.]
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