Drug Pricing Bill Undermines Innovation

State lawmakers are considering a lengthy, complex bill with an array of provisions that will lead to higher, not lower, healthcare costs and undermine life sciences and new medicine innovation.

SB 8 features new boards and advocacy councils, an unworkable maze of procedures and approvals to import drugs from Canada, and a mechanism to open the floodgates for distribution of manufacturer-discounted “Sec.340B” drugs far beyond the economically disadvantaged the program was designed to serve.

The legislation offers “solutions” that in practice will harm patients by ultimately limiting their access to innovative medicines and harm the Connecticut economy by undermining the biotech sector we have worked so hard to build.

SB 8 has many provisions, but essentially it has three policy prescriptions: (1) importation of drugs from Canada; (2) the establishment of a Prescription Drug Affordability Board with the power to control drug prices; and (3) removing guardrails from the “340B” prescription drug discount program.

Drug Importation Unworkable

Canadian drug importation is a policy vampire—it has no real possibility of a life beyond its empty rhetorical value, but it won’t die. It is unworkable on at least four fronts.

First, the Canadian government is opposed.

Every Canadian administration over the last decade, when queried about support for exports to Connecticut, has objected.

The Canadian government correctly has concerns about ensuring an adequate supply of medicines for its own citizens, as well as how Canadian pharmacies, laboratories, and drug suppliers and wholesalers will meet the bill’s safety and efficacy guarantees.

Canadian drug importation is a policy vampire—it has no real possibility of a life beyond its empty rhetorical value, but it won’t die.

Second, Connecticut wholesalers who import drugs from Canada must, among a host of requirements, be able to represent that an imported drug meets all U.S. Food and Drug Administration standards for safety, efficacy, and misbranding and adulteration.

Bear in mind that, under the mechanisms of this legislation, imported Canadian drugs must meet U.S. “track-and-trace” requirements.

These conditions raise liability and cost concerns and would likely discourage participation in the importation program.

That all the players in the Canadian-through-Connecticut supply chain would be willing and able to guarantee purity, dosage, potency, labeling accuracy, non-adulteration, etc.,—or identify tainted drugs passing through Canada from, say, Russia as not Canadian—is a bridge too far.

Blocks Costliest Drugs

Third, the bill does not allow importation of the costliest medicines—biological and other infused and injected drugs.

Many, if not most, of the most effective oncology and autoimmune treatments fall into these categories.

No Canadian drugs are being exported to Florida and it extremely unlikely that any ever will be.

Finally, though the federal government has allowed Florida Gov. Ron DeSantis’ application to begin the process of establishing a system to import drugs from Canada, it is only that—a beginning, with many hurdles to overcome.

Like the Connecticut proposal in SB 8, all the actors in the Florida importation scheme would, among other requirements, have to demonstrate that they would be willing and able to ensure that imported Canadian drugs comply with—and have been tested for—the FDA’s safety and efficacy requirements.

No Canadian drugs are being exported to Florida and it extremely unlikely that any ever will be.

Drug Affordability Board

The core mechanism of SB 8 is a five-member Prescription Drug Affordability Board.

The PDAB would advise the Office of Health Strategy on policies “regarding the affordability of prescription drugs.”

Among its many duties, the PDAB would identify prescription drugs that have certain price points (e.g., generic drugs that cost $100 or more for a 30-day supply) and recommend “an upper payment limit” for drugs to the OHS.

There are many flaws in this concept of a Connecticut PDAB.

A federal maximum fair price has not been set and, like Canadian drug importation, faces many hurdles.

For a body that has so many medical and economic assessments and judgements to make it is small—five members appointed by the Governor.

Though its focus is on the biopharma industry, SB 8’s PDAB makes no provision for representation from the biopharma industry.

SB 8 references the “maximum fair price” calculation described in the federal Inflation Reduction Act, but reflects no appreciation for the many intellectual and legal challenges the federal “maximum fair price” policy prescription faces.

A federal maximum fair price has not been set and, like Canadian drug importation, faces many hurdles to overcome before they will be implemented.

Price Controls Never Work

SB 8 is, essentially, the first stage of an effort to allow the government to control drug prices.

Unfortunately, price controls never work in accomplishing their stated goal—reducing or containing prices—and have counterproductive effects.

They reduce the supply of medicines and patient access to innovation. Whether for flour or rent or medicine, price controls cause shortages and delays, and fuel crime in the form of black markets.

You will be hard pressed to find an academic study from left or right on the political spectrum showing anything other than how price controls distort supply chains and cause all manner of misery.

Whenever they have been tried—the Soviet Union, Venezuela, Zimbabwe, during the Nixon administration—price controls have devastated the lives of those they are intended to help.

If a company can’t sell its medicine at a price that will allow it to make up the $2.7 billion investment, it won’t do it.

Price controls can’t repeal the laws of human nature.

For example, if an iPhone costs Apple more than $500 to design and manufacture, once its inventory of already built iPhones is depleted, it will cease investing in and manufacturing more iPhones if the “maximum fair price” it can charge is limited to $500.

It’s the same for drugs. It costs about $2.7 billion to bring a medicine from concept to FDA-approved product, researched and developed for safety and efficacy, manufactured in quantity and delivered to pharmacies.

If an inventor company can’t sell its medicine at a price that will allow it to make up the $2.7 billion investment, it won’t do it.

Drug price controls will divert R&D spending away from prescription medicines to over-the-counter products like cough lozenges and “cosmeceuticals.”

New, cutting edge, treatments and cures will be delayed or never even begun. The supply of existing medications will shrink, and shortages will become commonplace.

Depress Innovation, Fuel Healthcare Inflation

Drug price controls fuel healthcare inflation because they depress innovation.

New medicines might seem expensive, but they are, in fact, a powerful solution to healthcare inflation.

Cardiovascular medications, for example, which treat high blood pressure and high cholesterol now cost pennies a day, but even when they were new, on patent, they brought healthcare costs down dramatically.

They reduce the incidence of heart attack and stroke, and thereby diminish the need for a vast number of surgeries, hospitalizations and long-term care.

Or, consider Hepatitis C medications. Today, a course of treatment costs about $25,000. The medicines cure Hepatitis C, a devastating, ultimately fatal, liver disease.

Only about one in a thousand new medicine projects result in an FDA approved drug.

Before they were invented, the only potential cure was a liver transplant. There aren’t enough donor livers to fill all the needs of all the patients on the liver transplant lists.

If you were lucky enough to qualify for a liver transplant, the cost of the surgery, hospitalization and aftercare—you would need blood monitoring and to be on life-shortening immunosuppressant drugs for the rest of your life—is approximately $878,400.

If inventors can’t recoup their investment and aren’t rewarded for the huge risks they take, they will put their time, talent and money elsewhere.

It’s important to bear in mind that it takes about a dozen years to research and develop a new drug and that most new medicine research doesn’t pan out.

Only about one in a thousand new medicine projects result in an FDA approved drug. The few successes pay for all the “good tries” that don’t pan out.

Healthcare Cost Drivers

SB 8 ignores the most consequential drivers of healthcare cost inflation.

The arcane discounted pricing system that’s evolved among drug manufacturers, middlemen, and insurers, and in insurance plan design has far more to do with the prices patients pay than manufacturer list price.

Biopharma companies do not sell their medicines directly to pharmacies. Instead, their medicines move from biopharma manufacturing site to warehouses and on to pharmacies through a system more or less controlled by pharmacy benefit managers.

SB 8 ignores the most consequential drivers of healthcare cost inflation.

PBMs are the middlemen who have contractual relationships with the biopharma manufacturers, insurers, and pharmacies.

In practice, the amount of the biopharma manufacturer’s discount or rebate that is passed on to the insurance plan and patient varies, to say the least.

PBMs are compensated either by taking a percentage of the rebate before passing on the balance to insurers, or by remitting the entire rebate to insurers and then billing the insurer a fee.

In any event, after rebates and discounts and fees taken by middlemen in the drug supply chain, biopharma companies receive only about half of what is spent on brand name drugs.

340B Discount Drug Program

The 340B program is a product of federal law that was meant to significantly lower the cost of medications prescribed for uninsured low-income patients.

Unfortunately, many of the “covered entities” allowed to buy discounted drugs under the 340B program have gamed the system to increase their profits at the expense of patients and taxpayers.

Revised language coming out of the legislature’s Human Services Committee adds provisions to SB 8 that make the 340B discount drug program even more problematic than it already is.

Revised language adds provisions that make the 340B discount drug program even more problematic than it already is.

Once a hospital, clinic, or pharmacy is designated a 340B “covered entity,” drug companies must sell their medicines to them at a 20%-30% discount.

But the covered entities can seek and often receive reimbursement from insurance companies and other payers at the medications’ full price.

Worse, this loophole gives covered entities an incentive to purchase the most expensive drugs for any given condition.

‘Wrong Direction’

To the extent it’s possible to see through all the complexity and understand the purpose of the system set up under 340B, it appears the concept was that covered entities would use their robust 340B “profits” to provide charity care to low income, uninsured, and underserved patients.

In fact, while the program has seen tremendous growth, it hasn’t always translated to an increase in charity care.

Most experts agree the 340B program needs revision to bring it back to its intended use—for underserved, uninsured and low-income patients.

340B is the product of the U.S. Congress. It can be revised at the federal level only, not by individual states.

But 340B is the product of the U.S. Congress. It can be revised at the federal level only, not by individual states. Nevertheless, SB 8 attempts to expand the 340B program in the wrong direction.

SB 8 bars drug manufacturers from restricting supply of discounted drugs to any entity technically able to receive drugs under the 340B program, even if the drugs were not being prescribed to 340B’s intended beneficiaries (underserved, uninsured, and low income patients).

In an astounding provision, SB 8 actually blocks medicine manufacturers from seeking utilization data to confirm that discounted drugs are in fact being dispersed to the underserved, uninsured, and low income patient for which it was intended.

SB 8’s goal to reduce healthcare costs is laudable. Unfortunately, if enacted it would have the effect of making healthcare delivery more cumbersome and inefficient, and thereby add cost and inefficiency to the system.

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Paul Pescatello is the executive director of CBIA’s Bioscience Growth Council and chair of We Work for Health Connecticut. Follow him on X @CTBio.