Deep Dive Episode 155 – International Reference Pricing and Negotiation: Yes or No?

Drug prices are a pressing policy issue. On November 20, 2020, President Donald Trump announced two new rules aimed at reducing drug prices for Medicare beneficiaries. These rules use a system known as reference pricing, which ties the price the federal government pays for patented drugs and treatments to the prices other countries pay. These rules are set to take effect in January 2021. Meanwhile, legislation pending in the U.S. House of Representatives and supported by Speaker Nancy Pelosi would create an International Pricing Index.

These policies enjoy bipartisan support, but they also face bipartisan opposition. Some think the Trump rules do not go far enough, and others argue that reference pricing is bad policy regardless.

In this episode, two distinguished experts who have worked and written extensively on this issue, Prof. Adam Mossoff and Dr. Wendell Primus, join us for a discussion of reference pricing, current policy proposals, and future challenges.

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Transcript

[Music]

 

Dean Reuter:  Welcome to The Federalist Society’s practice group teleforum conference call as today, January 5, 2021, we discuss “International Reference Pricing and Negotiation: Yes or No?” I’m Dean Reuter, Vice President, General Counsel and Director of Practice Groups at The Federalist Society.

 

As always, please note that all expressions of opinion are those of the experts on today’s call. Also, this call is being recorded for use as a podcast and will likely be transcribed.

 

We’re very pleased to welcome two experts to our call today who have slightly different opinions on the matter at hand. We’ll hear first from Dr. Wendell Primus. He’s a Senior Policy Advisor on Budget and Health Issues in the Office of Speaker Nancy Pelosi and the Former Minority Staff Director on the Joint Economic Committee. We’re also joined by return guest Professor Adam Mossoff. He’s a Professor of Law at the Antonin Scalia Law School at George Mason University, also a Senior Scholar at Hudson Institute and a Visiting Fellow at the Meese Center for Legal and Judicial Studies at The Heritage Foundation.

 

We’re going to get opening remarks from each for about ten minutes or so. But as always, we’ll be looking to the audience for questions, so have those in mind for when we get to that portion of the program. With that, Dr. Primus, the floor is yours.

 

Dr. Wendell Primus:  Thank you, and thanks for the invitation to talk to this audience for a few minutes about drug prices. I had the privilege of working with the Speaker in putting together H.R. 3, which I’m going to primarily describe.

 

I think the need for lower drug prices is clear. There’s about 1 in 3 Americans reported not taking medication due to cost, and 42 percent of cancer deplete their net worth in the first two years of treatment, in part due to drug prices. And I think there’s a lot of drug price increases that go on. For example, between 2008 and 2015, prices for the most commonly used brand name drugs increased 164 percent.

 

And drug pricing is kind of unsustainable. Spending growth for prescription drugs is projected to generally accelerate between 2018 and 2027 by about 5.6 percent per year. And the brand name specialty drugs are 30 percent of net spending under Medicare Part D and Medicaid, yet just 1 percent of prescriptions in each program. And I think in the future, we’re going to see drugs coming to market that are primarily or predominantly these complex specialty drugs and gene therapies which will further escalate this crisis. Spending has increased enormously. For most of the 1960s, ‘70s, and ‘80s, it was well under $50 billion, and then it escalated very sharply during the late 1990s and 2000s. So today, we spend about $340 billion or so on prescription drug expenditures.

 

And what H.R. 3 did was basically give the authority and the mandate and the tools for the Secretary to negotiate drugs. Right now, the administration does not have the authority to do that. I actually think the things that the Trump administration put out in the last few days are illegal in some sense. They don’t have the authority to do that. And really, it’s up to Congress to give the executive branch of government the ability to negotiate prices.

 

And what we would do is — I’m going to describe the negotiation part here in a moment. There was also in H.R. 3 inflationary caps that prevent price increases above inflation. We also restructured the Part D program and imposed a $2,000 out-of-pocket cap for seniors. And then the Congressional Budget Office, not yours truly, but the Congressional Budget Office said that this negotiation and the inflationary cap would save well over $550 billion over the next ten years. And then we took those savings and made historic investments in the Medicare program, adding vision, dental, and hearing benefits, and also made investments in NIH and FDA.

 

So the drug negotiation part really provided the Secretary with the authority, the mandate, and the tools. And I would argue it’s true negotiation. It is not price setting. And we’re primarily aiming this at drugs that have no competition. They are in their patent period, if you will. And because of that, the drug manufacturers have an ability to command prices that are four times what’s available in other countries. And so the Secretary must negotiate basically a minimum of 25 drugs, and then increasing that in the outyears.

 

Again, these are all drugs that are our highest spending drugs and drugs that are without competition. And the concept would be that the Secretary would get confidential information from the drug manufacturer about the cost of developing the drug, what sales are, international sales, etc., and then would negotiate with the drug manufacturer as to what a reasonable price would be, allowing the drug manufacturer to have a reasonable rate of return on the investment.

 

And I think many of these drugs, these brand name drugs, have prevented competition coming into the market. They’re actually — one thing about the drug is that first drug costs a billion, two billion dollars to create, and then the second drug is basically dollars. It’s a very interesting cost structure. And clearly, the drug manufacturer has to recover their investments, but then the marginal cost, which we normally say price at equal marginal cost, becomes very, very inexpensive. And right now, the drug manufacturer keeps competition away, and that’s why we need the — why the Secretary should have the ability to lower these prices dramatically.

 

And the tools are if the drug manufacturers doesn’t want to cooperate, the Secretary can level what I’ll call a non-compliance fee equal to 50, 60 percent of sales, and a ceiling price on negotiations that’s equal to 1.2 times an average international price. There’s transparency. And that, in a nutshell, is the new authority that is being given to the Secretary and why the CBO says it would save $500 billion. This is very popular with voters.

 

The primary argument against the bill is that this would hurt innovation. And I would argue that’s not true. There’s clear language in the bill that says the Secretary must take into account rewarding — allowing a rate of return on investment. Even conservative economist Avik Roy said, “It is almost certain that if there were fewer drugs developed, it would be the least innovative drugs that are abandoned.” We think it would reduce incentives for investments in “me-too” drugs.

 

And I think this bill explicitly rewards innovation, allows Americans to receive much lower prices, and then to reinvest those savings back into the Medicare program. Actually, the House has passed this bill twice, once in H.R. 3 at the end of 2020 — no, at the end of 2019. And then we passed it last summer and used the savings to improve the Affordable Care Act.

 

So I will argue that this bill matched President Trump’s rhetoric and that it’s the only bill in Congress that actually reduces the prices of drugs. Trump said, “When it comes to negotiate the cost of drugs, we’re going to negotiate like crazy.” He says we could save $300 billion a year. I think that’s a little bit of an overstatement, but CBO has said this will save lots of money. And I think it is clearly something that Congress should be considering in the new term that just beginning. And I know my boss, the Speaker, definitely wants to move this bill forward. And we look forward to working with the Biden administration to help this bill become law and save Americans substantial amounts of money while rewarding innovation.

 

And with that, I’ll turn it over to Adam.

 

Prof. Adam Mossoff:  Thank you. It’s a real pleasure to be discussing this issue with Dr. Wendell Primus, and I’m really honored to have been invited to participate in this discussion of the important issue of drug prices and the patent system and how we promote and incentivize innovation for medical care.

 

It was heartening to hear Wendell say that he thought that there were aspects of the Trump regulatory actions there that are problematic, although the regulatory actions in substance that the Trump administration has undertaken in adopting what it calls most favored nation status for drug pricing is in substance essentially the same as the international reference pricing that is mandated in Speaker Pelosi’s bill, H.R. 3, and essentially is the same thing as what Senator Bernie Sanders had proposed several years ago in Senate Bill 102. And so in our topsy-turvy world these days, I’m here criticizing the Trump administration, and Wendell, you are defending the substantive action of the Trump administration. And so it’s a fun aspect of this discussion.

 

As an academic, I’d like to first — first, I’m going to do a funnel in my opening remarks, talk broadly about what our patent system achieves for us. I am actually going to focus more on the most favored nation regulations adopted by the Trump administration, but I will be talking about the substantive concerns about importing price controls for U.S. drugs as purchased by Medicare and U.S. healthcare market, and then looking forward to getting into more of the details on the substance and process with Wendell in the Q&A.

 

Let me just start by framing the issue. Wendell talked a little bit about how the purpose of the patent system, of course, is to reward innovation, and he discussed the classic point about perfect competition being marginal cost equals marginal price. And so he framed the general policy as the tradeoff between rewarding innovation and the costs of higher prices. And that is the classic framing. It’s conventional wisdom about our patent system, but it also misses and incredibly important perspective of the patent system, and that is the patent system is actually not just a tradeoff. It’s a platform of innovation and provides incredible benefits for society.

 

We have lost perspective on this, given the incredible innovations that have been inspired and made possible through the commercialization of new therapeutic treatments, vaccines, things that have made conditions that have killed people for eons, hepatitis, diabetes, now manageable, treatable day-to-day conditions. And we’ve forgotten that President Coolidge’s son, his teenage son, his 16-year-old son, died in 1924 from a blood infection after injuring his little toe playing tennis on the front lawn of the White House. That’s less than a century ago. He got a staph infection, which is a completely treatable infection today. No one would die from that in the United States today.

 

This is made possible by the reliable and effective patent rights that have been provided to the innovators and the scientists and the companies that are researching new therapeutic treatments. And this has led to both the pharmaceutical innovation and revolutions in the 20th century and, of course, the biotech revolutions today.

 

And the facts continually show that the patent system isn’t just about rewarding the initial R&D. It’s important about developing and deploying that in leading to commercialization and deployment of products and services in the healthcare market. Of course, we all know the facts of 10,000 molecules that are initially investigated by a pharmaceutical company leads ultimately to only 5 molecules that are approved for clinical trials by the FDA, which of those 5, only 1 is ultimately approved for patients.

 

And that’s behind some of the data that Wendell already mentioned that the average R&D expenditures for each therapeutic drug that makes it to market is $2.6 billion and represents over 10-12 years of very hard — tens of thousands of labor hours by scientists and researchers. In 2019, pharmaceutical companies invested privately the funds of $124 billion in R&D, and this is what’s leading to all of these incredible treatments we have today because the products, the fruits of their inventive labors of these scientists and researchers have been historically secured by reliable and effective patent rights in the United States.

 

And in fact, the response to COVID-19 demonstrates this. The response has been miraculous and unparalleled in human history. In May of 2020, there were 430 drugs and vaccines currently in development to investigate treatment of COVID-19. As of today, there are now 788 drugs and vaccines currently in development. And of course, we all know that three vaccines have already been developed and approved for use in less than a year. This is a fountainhead of R&D and new treatments that is, as I mentioned, unparalleled in human history. And it was made possible by the existing technological knowledge, commercial resources, licensing, and information sharing agreements that are all made possible through reliable and effective patent rights that have been secured to the pharmaceutical industry.

 

And this is what’s being threatened with price controls because those patent rights aren’t about just simply rewarding the initial R&D. It’s about creating the technological information, entering into licensing agreements, entering into all sorts of an innovative supply chain developments to get these products and new treatments and vaccines ultimately into the hands of the consumers in the healthcare market.

 

And this is what’s really concerning about the most favored nation regulations and the international reference pricing mandate in Speaker Pelosi’s bill. And from the perspective of the regulations, largely, this is just regulatory discretion run riot. It’s bad in legal process. It’s bad in substance. And in terms of legal process, the Trump administration hasn’t followed the Administrative Procedure Act, and it’s essentially rewriting the statute by regulatory fiat. As a preliminary matter, the statutory provision that it’s relying upon does not authorize these regulations. Of course, the statutory provision does authorize Medicare to test different pricing models. But testing different pricing models and exploring different pricing options for how Medicare may pay for drugs in not the same thing as adopting full-scale nationwide new pricing regulations.

 

As a bit of additional irony, to continue the point about my topsy-turvy world point that I started off by making, the Trump administration is actually here relying on a provision of the Obamacare act, which it’s currently seeking to void as unconstitutional to justify these regulations that it just adopted to import price controls from other countries.

 

And as I mentioned also, it’s bad as a matter of just administrative process. They have not followed the requirements of the APA. I believe this is what Wendell was referring to because they’ve adopted, essentially, regulations by executive fiat. And President Trump issued his executive order in August. Actually, he signed it in August. He didn’t actually release or issue the order until much, much later. The regulations were issued shortly before Thanksgiving with an intent to go into effect on January 1. So there was no following the standard notice of proposed rulemaking with notice and comment that’s required by all agencies for adopting massive regulations of this sort.

 

So in sum, as I mentioned, this is really regulatory discretion run riot. It’s arbitrary and capricious in both process and substance. This is rewriting a statute that was enacted by Congress by regulatory fiat.

 

And by the way, I’m not saying this merely as a law professor and IP scholar. Three courts have now issued either temporary restraining orders or preliminary injunctions against the most favored nation regulations that have been issued by the Trump administration. Initially, the District Court in Maryland on December 23 issued a TRO. But then the Northern District of California on December 28 issued a preliminary injunction, and then the Southern District in New York on December 30 issued another preliminary injunction.

 

And this is because there has been a slew of lawsuits not just from pharmaceutical companies. These are lawsuits from patient advocacy groups, from doctors, from treatment centers, from cancer research organizations and things of the sort saying that this radically upsets their ability to not just research and develop but to provide treatment, to commercialize innovations through the reliable and effective property rights system that has been created with the patents and has driven medical care and innovation in this country for almost a century now.

 

Now, I do want to point out that as a final matter that, of course, the substance of the regulation which reflects the same substance as Speaker Pelosi’s bill that Wendell was mentioning is bad as a policy matter, and it’s bad for two reasons. As I mentioned, international reference pricing or most favored nation is directly importing price controls from socialized medical care systems in other countries. Now, the prices are lower in other countries because those are nationalized healthcare systems. You have the government as the single purchaser and the single provider of all the healthcare. And so these countries impose price controls via regulatory fiat. The bureaucrats there talk about negotiation, but if you don’t accept the price the government offers, at the end of the day, you’re not allowed to sell your product in those countries.

 

Now, what ultimately results in this is a classic example of a public choice problem, what economists refer to cost shifting, of course. So pharmaceutical companies have to accept lower prices in these countries than what the market would normally support for creating radical new treatments for hepatitis, diabetes, and even COVID-19. And therefore, the pharmaceutical companies have to make up this price difference somewhere. One of the only countries left where they can freely price their drugs in a healthcare market is the United States. And so the cost shift to the U.S. patients.

 

And of course, this is why President Trump rightly complained in August when he announced his executive order that other countries are, quote, “freeloading,” unquote, off of U.S. medical innovation. He’s right. But adopting the disease of the freeloading, the price controls, is not the proper response. That violates the classic maxim “do no harm.” We should adopt the cure, not the disease.

 

Of course, price controls are not a good solution when you’re talking about concerns about prices more generally. But also beyond just the concern about price controls and the impact that this has on innovation more generally, as we well know, you’re also importing weaker patent protections from these other countries. These other countries provide less reliable and effective property rights innovation than the United States does.

 

The United States has long had the gold standard patent system recognized around the world because it’s long secured cutting edge discoveries consistently while the rest of the world balks. Historically, for instance, the United States was the first country to recognize and secure processes, so the processes by which you might discover a new therapeutic treatment or the process by which you would apply that treatment. We did this before any other country did in the world, including England.

 

Of course, in the modern era, the biotech revolution took place in the United States. We had a decade start on the rest of the world because thanks to a Supreme Court decision in 1980 called Chakrabarty, we said the patent system would protect the efforts of biotech researchers. The rest of the world balked and said no. And this is why the biotech revolution occurred in the United States. And we have benefitted from incredible treatments. Treatments now of viruses, the scourge of humanity for tens of thousands of years, are now treatable. Wendell, you and I are old enough to remember when viruses were not treatable, and that the treatment was juice and rest. But now we can take pills.

 

And the data supports this. The United States represents 5 percent of the world population. It produces 25 percent of the world economic output, and yet two-thirds of all new drugs are discovered or invented in the United States. And this is because of the fundamental principle that economists and historians have long recognized that there is a strong correlation between reliable and effective property rights and patents and growing innovation economies in flourishing societies.

 

In fact, this principle is true for all property rights, as U.S. courts have long recognized. Securing the fruits of labors of a farmer is the exact same as securing the fruits of the inventive labors of innovators in biotech research in the pharmaceutical industry. And it produces the same benefits for society in a flourishing free market and a flourishing society as represented, I think, best by the unprecedented, miraculous response to COVID-19.

 

Of course, it relies in part on many factors in society, rule of law, stable legal and political institutions, and things of this sort. But of course, a key and fundamental essential factor is reliable and effective property rights and innovation, the ability to not just obtain protection for the fruits of one’s labors but to go into the market and to receive appropriate remuneration in the market for those discoveries and what their worth is to the consumer. And this is exactly what is at risk by the price controls that are being imported by regulatory fiat by the Trump administration or would be adopted through legislation in Speaker Pelosi’s H.R. 3 bill. Thank you.

 

Dean Reuter:  Well, this is Dean. We’ve got a lot on the table. Thank you both for those opening remarks. A lot of content here, fair points of disagreement. I do want to open the floor to questions from the audience. I want to get some back-and-forth going, but we can do both at the same time. There is a lot of disagreement here and a lot of things to dig down on.

 

One thing, Dr. Primus, I want to give you a chance to respond as you’d like, but I’d also be interested in a point I think that Professor Mossoff is making, and that’s this is a — how much is this a U.S. government versus U.S. industry problem as opposed to a U.S. versus other country problem in the way other countries do business and the effects that has on reimportation prices?

 

Dr. Wendell Primus:  I think there’s a lot I agree with Adam about. I think we both agree that what the Trump administration did here was they didn’t have the authority to do what they did. But at the heart of it, H.R. 3 would give a Biden administration the ability to regulate drug prices, primarily prices where there is no competition. That’s where, again, I think the problem is situated in about 400 drugs. And we do pay, this country — Trump is right. We do pay more of the cost of development here than other countries do, and there’s no reason for that. I think if H.R. 3 became the law of the land, other countries would have to change their price setting dictums to some extent.

 

But the truth is, a lot of these drugs that we’re talking about have been on the market for a very long time where they’ve recovered all their cost of innovation, and the prices should be trending down much closer to marginal cost. And the American consumer ends up footing the bill, and I think that should come to an end.

 

Dean Reuter:  One thing I’m interested in, Professor Mossoff — let me first ask Dr. Primus about the “me too” phenomenon that you alluded to, which I hadn’t really focused on before. But I assume this means that because somebody can patent a drug that treats X, other companies are then driven to produce something that’s very close to X so they can home in on that market. And this is a bad consequence of a patent system. Is that the “me too” phenomenon you’re talking about, Dr. Primus?

 

Dr. Wendell Primus:  Yes, to a large extent. And I think innovation will still occur. Innovation isn’t solely driven by price. The vaccine development that has occurred in this country in response to COVID has been extraordinary. And they’re not assured of a given price, necessarily. And it’s a drive to save human lives, etc. But I do think H.R. 3 needs to be enacted because I do think American drug companies are taking advantage of the patent system and are charging prices that are not in line with their development costs.

 

Dean Reuter:  Professor Mossoff, do you want to address the “me too” phenomenon? I haven’t heard your thoughts on that before.

 

Prof. Adam Mossoff:  Yeah, thank you. It’s one of many criticisms that one hears leveled at the pharmaceutical industry. And there’s a sense in which, yes, it occurs because if someone has a successful therapeutic treatment, another company wants to make or offer a successful therapeutic treatment as well in competition with that. This isn’t unique to the pharmaceutical industry. There’s Coke and there’s Pepsi. There’s Ford and General Motors. One has competing products in all areas of the economy, in all sectors, and one shouldn’t be surprised to discover that there is competing products in pharmaceutical industry.

 

In fact, this is exactly what our patent system is intended to promote. This is what the patent system drives in part through disclosure. This is one of the key benefits of the patent system is that it eliminates trade secrecy, which was the only way that you could protect innovation before the modern patent systems were developed by saying you get a property right, a protectable property right that you can then go into the marketplace and obtain further venture capital financing, then turn to commercial agreements and things of the sort. But you have to disclose your invention so that other people can read it and figure out ways to build off of it, innovate further, and even compete with you.

 

And so Dr. Primus, Wendell’s account is — I’m sorry. I defer usually to people with titles, but this is a fun discussion so I’m trying to keep it on a first name basis. Wendell, we seem to be at the same time saying, well, there’s “me too” drugs, so there’s unnecessary competition, but yet, there’s not competition. Well, there’s competition, and then there is the appropriate commercial development and innovation that we would hope to have.

 

I also just want to push back a little bit on the marginal cost should equal marginal pricing. I also believe, and I’ve heard others say this as well, that it’s a mistake. It was a mistake —  classical economists refer to this model that they created, this perfect competition, as something that we aspire to because it can’t be. As many economists have pointed out, if marginal cost equals marginal price, then you have no money left over to reinvest in new products, new services. You don’t have a research and development company. You don’t have $129 billion to invest in new innovation if marginal cost equals marginal pricing.

 

And so many economists across the board have talked about how the importance of intellectual property more generally, not just in the pharmaceutical sector but in the high tech sector and in the manufacturing industry, is that it facilitates what they call innovation markets, the creation of new markets, new ways of companies to commercialize and produce new values that benefit society. This is exactly what is occurring by the pharmaceutical industry.

 

This is why we have, as I mentioned, incredible treatments of diseases that were death sentences even 10 years ago, 15 years ago, are now manageable day-to-day conditions, and why COVID-19, as bad as it is and has been, it will not be a repeat of the 1918 Spanish flu incident with tens of millions of people around the world dying because of the ability of the pharmaceutical industry who have created all of these incredible commercial mechanisms through the value chain in producing new products and services that benefit people in the healthcare markets.

 

Dean Reuter:  Let me give you a chance to respond to that, Dr. Primus. But also in doing that, you mentioned that H.R. 3, the CBO has indicated a cost savings of $550 billion. Can you say more about where that comes from? Does that come out of the bottom line of pharmaceuticals in a way that will have less money for research and development, or does that come from other countries? Where does that $550 billion come from?

 

Dr. Wendell Primus:  Well, you could go to their website and look at the long, 29-page report that CBO put out. But yes, it comes out of drug companies here, primarily in the U.S. I think there would be — once you introduce a law of this kind, there would be ramifications for other countries and the like. But this would be a great savings to American consumers and to American businesses. And it would also increase wages to some extent because health costs would decline. This is not an insignificant change.

 

And I think it also is evidence of the fact that the United States is paying and the United States consumers are paying too much for some drugs. And again, I’m not talking about all 8,000 drugs or whatever there are. This is primarily concentrated in a few brand name specialty drugs where companies have kept competition from entering their market. Again, it’s a negotiation. To some extent, it’s trying to preserve innovation for a very unique product, but where the companies are taking advantage of the patent system and other things that they’re doing to discourage other companies from creating generics when the patent runs out.

 

I think this H.R. 3 makes a lot of sense and it should become the law of the land. And I expect drug manufacturers are going to argue that it hurts innovation. That will be the primary argument against the bill. But I don’t think there’s any doubt in this country that American consumers are paying a lot more for drugs here than in other places in the world, and there’s no reason for that.

 

Dean Reuter:  Very good. We’ve got a great discussion going. We’ve got our audience queueing up. Let’s check in with our first audience member.

 

Tom Lillis:  Hi. Tom Lillis. I’m actually calling from Rotterdam in the Netherlands. It seems we all agree that the need to stop the free rider problem. But isn’t the problem of property rights and importing price control solved by just saying to the drug makers, “If you don’t want your U.S. pricing depressed, don’t sell to countries with controlled drug prices.”? That way you relieve the free rider problem and cause the countries to face the appropriate costs of their drugs. What do you think?

 

Dean Reuter:  Who wants to take a shot at that?

 

Dr. Wendell Primus:  I think that’s a pretty severe measure to deny — a drug manufacturer would have to say, “My drug does a lot of good in your country and would solve this sickness, and now I’m not going to sell to you.” I think that’s putting the drug company in an untenable situation.

 

Tom Lillis:  Isn’t it saying, “You’re not paying for the drug, so we’re not selling it to you.”?

 

Prof. Adam Mossoff:  Yeah, I would agree with Wendell on his response in two respects. One is that the pharmaceutical companies are developing these drugs to treat people. They’re providing a service to us in the same way that an automobile company provides a service by selling their cars to you, and Microsoft and Apple provide a service by selling their computer products to you.

 

And they want to provide that service. That’s why they develop it. They want to produce the values and they want to have consumers purchase their products. And so it would be a tremendous problem for them to say, “Well, we developed this product, but we’re going to let your country suffer and the people there suffer for that.” They don’t want that to happen.

 

And more fundamentally, there’s an economic point too, which is that there are two factors to property rights. Property rights serve two factors, and I was just pushing back against just to focus on the reward point because property rights in all contexts serve that. So for a farmer who spent a year husbanding crops, that’s some cost that the farmer has to recover and takes into account when he or she sells the fruits of those labors in the marketplace, which is also was facilitated by the property rights. So it incentivizes the creation, and then it facilitates the distribution of that creation through a market mechanism, which is the key to flourishing societies.

 

And so for the pharmaceutical company to receive at least some money on their investment so they can continue to pay their researchers and pay the ongoing R&D expenditures that they’re incurring for ongoing development of future development of medications and therapeutic treatments, that is still something that is valuable to them, and so they’re taking that for what they can.

 

It’s the same reason that anyone in any price controlled context will still sell some of the products and services. You just will sell a lot less, and there will be a lot fewer of them. And what ultimately replaces the market if the market is not determining the prices is things like political pull and connections and other types of political mechanisms and influences we’ve seen in all sorts of countries, from Venezuela to Russia to many other types of statist regimes.

 

Dean Reuter:  This is Dean. It seems the caller might be going in the direction of a point I think Professor Mossoff made earlier about maybe a coercive relationship between U.S. pharmaceutical companies and foreign governments and the fact that they can extract those prices because of their bargaining power. Do you see another way to adjust that bargaining power? And this might be beyond the scope of this call, so you can defer if you’d like to, but I’d be interested if our experts have any thoughts on that. Okay.

 

Shaun Callahan:  Hi, thank you. This is Shaun Callahan. My question was actually exactly what the first questioner’s question was. I’m not quite sure why Wendell disagreed with it. It seemed like the point of the question is that neither of the subject proposals is a price control because neither requires or prohibits economic activity at any price.

 

So I want to come at it a different way. Imagine that there were no socialist or command economies on the globe, so these drugs were being sold only in free markets. Now, imagine what the price would be for — and let’s limit it to the new drugs. Imagine what the price would be for the new drugs. It would be a price at which the marginal cost outweighs the marginal benefit for all the consumers. Now, compare that price with the price that would prevail under either of the subject proposals.

 

It seems to me the point of the first question was that the price would be the same because the behavior in the world as it is now of the countries with the command pricing would adjust. So that’s my question. Wouldn’t the idealized price — wouldn’t the actual prevailing price match the idealized price under both of these proposals because the behavior of the freeloading countries with command pricing would have to adjust?

 

We don’t have to sell our best drugs for 20 cents to Venezuela. Companies don’t have to do that, but if the companies have to choose between an attractive price in the U.S. market versus 20 cents in the Venezuelan market, they make a decision, Venezuela responds rationally, and the price adjusts in both markets, right?

 

Dr. Wendell Primus:  I guess I would answer the question — let’s take a drug like the SMA drug, a miracle cure that babies have this defect, and they’re gone by age two. Now, they have this drug that allows them, as I understand it, to have normal life expectancy. The price tag is $2.1 million. There’s no competition for that drug. It’s a one of a kind, and because of our patent systems, and correctly, no one can manufacture a different kind of drug for a while. And so I would imagine that they would charge the same price in every country, maybe somewhat lower in prices in less developed countries.

 

But then the question is I would argue they can take advantage of our patent system and charge prices that are outlandish relative to the development costs that that drug took. I don’t know for sure what the price should be in the United States for that drug. That’s why H.R. 3 says there should be — the Secretary collects information and has to hold that information confidential and then determine what a reasonable price is for a drug like that. Does that help answer your question?

 

Sean Callahan:  Well, sort of. This is another question I had. I don’t want to go down the rabbit hole, but what I’m trying to do is say that we have two mechanisms. One is the Trump EO, and the other is your bill. Your bill seems to contemplate a little more active inquiry into what a price ought to be. The Trump EO seems less so.

 

I’m trying to take a bigger picture approach and say — let’s assume we’re all classical Friedman-esque economists. And let’s just compare the working of the market under that regime with that assumption with what actually would prevail under either of these proposals. And if they’re the same, then that seems to be a real problem for conservatives who oppose the changes. And that’s why I mentioned earlier I wasn’t really sure why you were opposing the first questioner’s proposal because if you can clip the conservative opposition to either of these proposals, it seems like you’ve made great strides.

 

Prof. Adam Mossoff:  I’d like to interject and make a point that I think strikes at the core of the assumptions in both of the questions that have been raised, which is that there is a conflation here between governments and companies that sometimes classical economists make, that other economists make that — it fosters what we refer to as a category mistake.

 

Governments cannot act rationally like companies do. If a company fails to provide a product or service or doesn’t meet new costs and charge more than marginal cost so they can invest in new products and services like Apple has done and Microsoft and Pfizer and all these successful and innovative companies over the years, it goes out of business. Governments don’t go out of business because they’re not in the market to provide a product or service. Governments set rules backed by the coercive power of the state.

 

And so both President Trump’s most favored nation regulation and the international pricing reference import price controls, explicit price controls from other countries that are not set according to quote, “rational market conditions,” unquote, because they don’t have to be. In France, it’s the Economic Committee of Healthcare Products which sets the drug prices. In Canada, it’s the Patented Medicine Prices Review Board. And there’s no reason for those agencies to respond to anything we do any more than we should respond to anything they do as an economic matter because they have control in their countries. And it is a price control because they’re setting a price because they get to set the price because they control whether the drug is even sold in the country legally or not.

 

So this is substantively both the IPI legislation and the MFN regulation substantively function the same way. They import specific price controls that have been adopted in socialized healthcare systems in other countries. We shouldn’t cover our eyes to that fact.

 

And then to go back to Dean’s question, it just took me a little time to unmute my phone because I wanted to actually answer. I do think that there are appropriate responses that we could take, but the responses are not to import the bad laws and price controls of other countries. The response is for our government to respond as a government to other governments. Companies can’t respond to other governments in the same way that a government can respond to other governments.

 

And this becomes a matter of international law and international relations where the U.S. government should say, “Look, you are taking advantage of our citizens’ rights and the products and services that are created by our innovators. And you need to stop, or we will hold you accountable, government to government.” That’s the proper response.

 

The improper response is to say, “Hey, you’re taking advantage and exploiting our citizens and stealing the fruits of their labors and engaging in classic public choice mechanics by promoting cost shifting to other people who you’re not accountable to. And therefore, we’re going to respond to that by adopting the same things you’re doing,” which is what the MFN regulations do and what the IPI does. There’s not negotiation here. This is importing price controls, pure and simple.

 

Dean Reuter:  We still have two audience questions left. Before we go to the next one, I want to see if Dr. Primus wants to respond to that last point from Professor Mossoff about government to government versus business to government. Or should we move on, Dr. Primus?

 

Dr. Wendell Primus:  Yeah, why don’t you move on.

 

Dean Reuter:  Very good. As I mentioned, two questions left, five minutes. I’m going to ask the callers to be as concise as possible.

 

Caller 3:  I wanted to follow up with Adam and Wendell real quick about I do think the government to government relations is extremely important because of market participation, but one of the things I was wanting to clarify was the most favored nations. Are they part of the G8 or the G20 summits that the United States does international law with and international negotiations?

 

And my question is, are these countries part of the United States that will allow us to share our patent information through a drug control coalition of countries or a convention so that we could be a market participant in an international drug coalition, but we would also have our own patent protection so that we wouldn’t lose our sciences, our research, and our very important drug development here and innovation here in our country? And could we negotiate a better outcome through a better collaboration with favored nations to share innovations, price control, and market participation?

 

I agree with Wendell. My dad recently passed away last year, and he had a drug that was $600 to $800 a month for one medication that he took for AFib, and it was crippling for our family financially. Of course, we did it because we wanted to prolong his life, but in the end, it didn’t prolong his life that much longer.

 

So I think that, yes, you would see wages go up. I agree with Wendell on that. I also agree with Adam about the government to government. Governments are not like companies. They do have to have a shared coalition. And I think that the United States is in a position where we could perhaps negotiate a better collaboration there of drugs. Thank you.

 

Dean Reuter:  Do either of our experts want to respond?

 

Prof. Adam Mossoff:  I’ll just respond on the patent points, and maybe I’ll leave the details of the international pricing index to Wendell. The underlying issue here, of course, is that patent laws, like all laws, apply only domestically. And so the U.S. patent law only protects U.S. innovators within the United States. And of course, U.S. innovators obtain patents in other countries, and there’s also international treaties that allow for and try to harmonize some of the patent protections between various countries that have been facilitated through — there’s recognition that these are worldwide developments and products and services.

 

But other countries don’t have to follow us. This is the classic problem of international relations is that governments are sovereign entities. And we can ask another government, and we can say, “Look, it’s in your interest to adopt the same types of protections that we provide to our citizens.” And they can either agree with us or disagree with us. We broke from England because we disagreed with the types of protections that England was providing or not providing, more precisely. And this is kind of the story of human history more generally.

 

The United States is the first country that was founded on the moral ideal of recognizing the protection of life, liberty, and property. It was the very first country to include the right of property, intellectual property. It’s the first country to include the protection of intellectual property in its Constitution. It authorized the government to protect patents and copyrights. And this is why we took the lead. In fact, the U.S. patent system became a model for other countries in the 19th century, in some aspects of them.

 

So I mentioned the U.S. has long been the gold standard patent system, but if other countries choose to exploit or take advantage or steal the work of our innovators, then that’s a position that our government has to take to say we need now to defend our citizens. In fact, President Trump has been one of the few presidents in modern history to take very seriously the theft of the work of U.S. innovators by countries like China and other countries very seriously, which is what makes it a little odd that he is then turning around at the very end of his administration and doing the exact opposite by adopting those same policies that implement theft of due work of U.S. innovators.

 

Dr. Wendell Primus:  The only thing I would add is — and I agree with Adam. In fact, we agreed here a lot on the fact that I think the Trump administration shouldn’t be doing this by their MFN regulation.

 

But we also have an insurance system. I talked about this SMA drug that had a price tag of $2.1 million. If you had a baby born with that condition, who can afford $2.1 million? We afford that because we have an insurance system or a Medicaid system that says if you have this life-saving drug available to you, we want the 400 babies that are born with that condition all to receive that medicine or that drug. And we spread the cost out over many other individuals.

 

So I think you have to think about these drug prices in that context because when you have this unique service and this unique drug that doesn’t have competition, the drug manufacturer that can sell that product commands that price here in this country. And I think those prices are too high. And H.R. 3, I think, deals with it in a way that is just and protects innovation but also lowers prices to consumers.

 

Dean Reuter:  We’ve got about three minutes left, and I promised our experts we would wrap up by 1:00 p.m. Eastern Time, so I want to give each of you a chance to express a final thought. Let’s go in the same order that we did to open. Again, three minutes left, but Dr. Primus, final thought?

 

Dr. Wendell Primus:  Well, I enjoyed this discussion. I hope the audience did as well. And I think the question about how innovation should be held in a multi-country situation isn’t clear to me. I’m sympathetic to working some of this out internationally, but I do think H.R. 3 makes a lot of sense here in this country. I think our drug prices are too high, and until you have a generic competition, prices remain too high. And H.R. 3 is a much more careful explanation of how the price ought to be set relative to the Trump regulation. So I’ll stand by my case here that H.R. 3 is a necessary addition to our system of drug pricing, and it ought to be enacted.

 

Dean Reuter:  Professor Mossoff, a final thought?

 

Prof. Adam Mossoff:  Well, I really enjoyed this discussion with Wendell. It was a pleasure to find the points of agreement in addition to our expected point of disagreement. But I think that we really cashed out very nicely both facets of those points of contact.

 

And I just wanted to pick up on a point made by Wendell in his closing remarks, which is that all too often, the patent system becomes an easy go-to, for lack of a better turn of phrase, whipping boy for concerns about prices and things of this sort. But as was brought out by Wendell’s remarks, the patent system is nestled within a broader system of regulation of insurance companies and insurance laws and the existence of government provided medical services in this country and things of that sort. And we always have to take that into account and remember that.

 

In fact, as we’re seeing now, the distribution of the COVID-19 vaccine is being held up by various regulations and controls on who can receive the initial doses of the vaccine. And so there’s actually some concerns that some of the vials of vaccine are going to go bad now. And this is just another example similar to price controls of how government interference with markets actually undermine the ability of people to have access to the very life-saving drugs that people have been talking about. Those incredible, life-saving new products and services were unheard of and unthinkable even 10, 15, 20 years ago, let alone 100 years ago. And they’ve been made possible by reliable and effective property rights protections through intellectual property systems like our patent system.

 

And we should always remember that, and we should respect that, and not go down the path of quick and easy fixes through government controls like price controls or other types of regulations which will only undermine and destroy the ability of the innovators in the pharmaceutical industry to get these incredible treatments into the hands of consumers, as in similar ways that we’ve seen price controls and regulations undermine the ability of producers to get products and services in the hands of people in other ways, whether it be food or basic services and automobiles and things of that sort, like we saw in Venezuela in the past several years, a prosperous country that has returned back to destitution due to statist controls.

 

Thank you for this great discussion. I really appreciated it.

 

Dean Reuter:  Well, I join in thanking both of you on my own behalf and on behalf of The Federalist Society and the audience. And I want to thank the audience for dialing in and for your questions as well. A reminder to the audience, check our website, check your emails for the next scheduled teleforum conference call. But until that next call, we are adjourned. Thank you very much, everyone.

 

[Music]

Adam Mossoff

Professor of Law

Antonin Scalia Law School, George Mason University


Wendell Primus

Senior Policy Advisor, Speaker Nancy Pelosi

U.S. House of Representatives


Dean Reuter

General Counsel, Vice President, and Director, Practice Groups

The Federalist Society


Federalist Society’s Intellectual Property Practice Group

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