In a mad scramble for the midterm elections, Washington is proposing every scheme imaginable to lower the cost of prescription drugs. But how prices are lowered matters, especially when voters are not advised of the fine print. Misguided drug-pricing schemes can kill tomorrow’s cures.

The drug pricing framework embedded in former President Joe Biden’s Inflation Reduction Act holds the potential to do the most damage. Under the law — passed without one Republican vote — the Centers for Medicare and Medicaid Services must establish a Maximum Fair Price for certain medicines covered for beneficiaries. It accomplishes this by comparing a new drug to existing ones, using past prices as the starting point for negotiations, even if a new drug works better.

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Let’s say an older minivan sells for $20,000. Then a vehicle manufacturer creates a new minivan with superior safety technology that will save lives. By the logic of Maximum Fair Price, the new vehicle manufacturer would be forced to start price negotiations at $20,000, irrespective of the improvements it has made for American families.

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Under that system, no rational company would invest in designing better cars. Yet, regulators apply these rules to drug development, expecting a different result.

Based on the first two rounds of negotiation, nearly two-thirds of the drugs selected for round three are likely to use the Maximum Fair Price established for an earlier drug as a starting point. An analysis of Medicare Part B and D drug spending datasets suggests that up to a quarter of the negotiated products may be for cancer treatment.

Imagine a cancer drug called Tumora enters the market. After negotiations, private insurers settle on a price of $100. A few years later, Medicare selects Tumora for beneficiaries and sets a government Maximum Fair Price of $60. That price becomes the reference point for future negotiations.

Now imagine a cancer drug called Noventra shows better results earlier in the disease with improved safety, and private insurers settle on a price of $230 reflecting these advances. Despite Noventra’s superior clinical value, regulators could start Medicare price negotiation at $60. Even if the final negotiated price lands above $60, the discussion is anchored to a price that bears little relationship to the value of the new drug.

This is not a functional marketplace that drives innovation.

Progress in cancer treatment is cumulative. Each therapeutic advance builds on prior science, and over time, these successive breakthroughs fundamentally improve patients’ lives. New drugs take years to develop, with complex trials that enable researchers to follow patients long enough to measure survival outcomes.

Research has shown that these next-generation cancer therapies offer substantial clinical improvements by helping more patients and improving outcomes over time. If improved drugs are priced as though they offer little additional value, the incentive to develop those improvements weakens.

The law further compounds this problem by allowing Medicare price negotiations for small-molecule drugs — pills widely used in cancer treatment — four years earlier than biologic medicines. Drug manufacturers often conduct expensive follow-on studies several years after a drug’s initial approval to see whether it can work earlier in the disease, reduce side effects, or treat additional cancers. The shorter timeline before drug negotiations leaves less time for investments to pay off, weakening the incentive to fund research that can expand patient impact.

These perverse incentives impact investment. Post-approval oncology trials — the studies that expand drugs to earlier stages of disease or additional patient groups — are declining, with the steepest drop among small-molecule cancer drugs. Venture capital firms are shifting away from oncology, with government price anchoring cited as a growing concern.

There is still time to fix this problem before the next round of Medicare price negotiations is fully implemented. CMS should stop using previously negotiated Maximum Fair Prices as reference points for future medicines. Instead, it should prioritize the value the drug brings to American patients and caregivers. Methods such as the University of Southern California’s Generalized Risk Adjusted Cost Effectiveness model help translate that value into a value-based price range and would be a better place to start. 

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Where this model dictates a price range that exceeds the statutory ceiling price, the agency should make its initial offer the ceiling price. Such a model would maximize the value of innovation that it is statutorily permitted to capture. In cases where the initial offer is the ceiling price, this approach would minimize the burden on an understaffed agency and industry by obviating the need for additional meetings and continuous exchange of counteroffers. Relying on GRACE or other value-based approaches ensures the agency captures rather than dismisses the value of innovation to patients.

Affordability is a worthy goal. But a patient whose cancer just stopped responding to older treatment doesn’t need a cheaper drug. She needs a better one.

Joe Grogan is a senior visiting scholar at the University of Southern California’s Schaeffer Institute. He served as a domestic policy adviser to President Donald Trump, 2019-20. He consults for pharmaceutical and medical technology companies.

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