December 31, 2018

International Pricing Index Model for Medicare Part B Drugs (CMS-5528-ANPRM)

Don't Import Foreign Price Controls; Break Them

Comments of American Commitment*

By Phil Kerpen, President

Americans are angry that we pay the highest prescription drugs prices in the world – anger President
Trump tapped into on the campaign trail. The disparity exists because other rich countries use a variety
of government price control schemes, forcing American consumers to provide the returns on capital
that justify the enormous research and development costs associated with bringing new cures to
market. The rest of the world free-rides on our innovation.

The good news is that the Trump administration has been aggressive on the trade front in efforts to
break foreign price control regimes; the bad news is that the Trump administration is also proposing,
schizophrenically, to actually import foreign price control regimes into the Medicare program by
adopting a payment formula that is pegged to foreign prices.

The proposal from Health and Human Services Secretary Alex Azar, called international price indexing,
would set reimbursements for drugs in the Medicare Part B program, which are doctor-administered
drugs, with a formula pegged to prices in foreign countries that use price controls. This scheme would
replace the current pricing system which usesn a market-based measure called the Average Sales Price.

It would be a nose under the tent for adopting price controls domestically despite the recent scathing
findings of the White House Council of Economic Advisers (CEA). In its recent report "The Opportunity
Costs of Socialism," CEA argued against the Democrats' single-payer proposals.1

CEA looked at "the impact on medical innovation of the U.S. adopting European-style price controls" and
found: "If M4A would entail the same experience with below-market prices as other countries with
socialized medicine, it would reduce the world market size and thereby medical innovation, and
ultimately mean that future patients would forgo the health gains that would have come from these
forgone innovations."2

It is remarkable that the same administration that published that report would, just days later, propose
pegging Medicare prices to foreign price controls.

Doing so would not only undermine the incentive for developing new cures and therefore result in lower
life expectancies and worse health outcomes, but it also directly undercuts the efforts of the U.S. Trade

*
American Commitment is a national free-market organization that engages in critical public policy fights over the
size and intrusiveness of government through direct advocacy, strategic policy analysis, and grassroots mobilization.
www.AmericanCommitment.org
Representative (USTR) to combat foreign price controls – a heavy focus in USTR's most recent Special
301 report on intellectual property rights.

"Pricing and reimbursement systems in foreign markets that are not market-based, or that do not
otherwise appropriately recognize the value of innovative medicines and medical devices, present
significant concerns. Such systems undermine incentives for innovation in the health care sector. It is
important that trading partners contribute fairly to research and development for innovative treatments
and cures," the USTR report notes.3

A recent study by the Committee to Unleash Prosperity found that eliminating price controls in OECD
countries would result in eight to 13 more drugs coming to market every year by 2030 and raise life
expectancy in the United States by 1.1 to 1.6 years.4

"Economists and policymakers have long recognized that research and development activity suffers
from a severe free-rider problem," Kevin Hassett, now president Trump's top economist, wrote in 2004.
"Accordingly, the free riding of foreign nations likely carries significant external costs. Research is
diminished, and the discovery of new treatments is slowed, harming the U.S. economy and consumers."5

The U.S. Commerce Department has found that easing foreign price control regimes could, by increasing
research and development of new drugs, in the long-term result in more competition and lower prices in
the domestic U.S. market.6

Most ominously for our current moment was Hassett's conclusion: "In the past, the U.S. market has
been large enough relative to the rest of the world that it has been able to support research despite
these intrusions. The evidence reviewed here suggests that there could be devastating effects should
our policy environment change."7

The great Milton Friedman joined 100 economists to explain it clearly: "Drug price controls are more
difficult to remove than other price controls. Controls on oil and other products often tend to be limited
or short-lived, as voters eventually object to the resulting shortages and distortions. The effects of drug
price controls, however, are far more difficult to observe because they mainly affect medicines that
haven’t been invented yet."8

Adopting foreign price controls in the United States would not solve the free rider problem – because
there would be no place left on Earth where capital would flow into the expensive and precarious
activity of developing new treatments and cures. Diplomatic efforts to break foreign price controls
would crumble, both because they would lack credibility and because the politics would flip, as higher
prices abroad would now translate directly into higher prices at home through the price index.

There would be no moving vehicle on which anybody could get a free ride.

The average cost of bringing a new drug to market is about $2.6 billion, according to a widely cited Tufts
University estimate that is now a few years old and therefore probably a lowball figure. Part of that cost
is associated with the arduous regulatory approval process, but most of it is because of the very high
failure rate in pharmaceutical research.

While capital has flowed freely into research and development, we cannot take for granted that it will
continue to do so. Returns on capital in the pharmaceutical sector have fallen to about average in
recent years and with the Federal Reserve pursing normalization competition for scarce capital will only
intensify.

As Bill Gates explained when asked about the U.S. drug pricing system: “I think the current system is
better than most other systems one can imagine... I mean curing hepatitis C. This is a phenomenal thing
and now you have multiple drug companies competing in terms of the quality and the price of that
offering. The drug companies are turning out miracles and we need their R&D budgets to stay strong.
They need to see that opportunity."9

President Trump is absolutely right to spotlight the unfairness of other rich countries free-riding on the
U.S. market for pharmaceutical innovation. But the if-you-can't-beat-them-join-them approach of Azar's
proposal to import foreign price controls would actually undermine the only real solution of breaking
foreign price control regimes in trade negotiations.

The HHS proposal should be withdrawn.

1
White House Council of Economic Advisers, "The Opportunity Costs of Socialism," October 2018.
https://www.whitehouse.gov/wp-content/uploads/2018/10/The-Opportunity-Costs-of-Socialism.pdf
2
Ibid.
3
Office of the United States Trade Representative, "2018 Special 301 Report,"
https://ustr.gov/sites/default/files/files/Press/Reports/2018%20Special%20301.pdf
4
Stephen Moore and Steve Forbes, "Foreign Price Controls Jeopardize Global Health and Raise Drug Costs for
Americans," Committee to Unleash Prosperity," July 2018.
https://ustr.gov/sites/default/files/files/Press/Reports/2018%20Special%20301.pdf
5
Kevin Hassett, "Pharmaceutical Price Controls in OECD Countries," American Enterprise Institute, August 3,
2004. http://www.aei.org/publication/pharmaceutical-price-controls-in-oecd-countries/
6
Grant D. Aldonas, Under Secretary for International Trade, "Pharmaceutical Price Controls in OECD Countries,
Implications for American Consumers, Pricing, Research and Development, and Innovation," February 17, 2005.
https://www.help.senate.gov/imo/media/doc/Aldonas-SenHELP-Rx-2-17-05.pdf
7
Hassett 2004
8
Milton Friedman, et. al., "Economists Warn of Dangers of Drug Importation, Price Controls," February 1, 2004.
https://www.heartland.org/news-opinion/news/economists-warn-of-dangers-of-drug-importation-price-controls
9
Caroline Chen and Erik Schatzker, "Bill Gates Calls U.S. Drug Pricing System 'Better Than Most,'" Bloomberg
News, June 30, 2016. https://www.bloomberg.com/news/articles/2016-06-30/bill-gates-calls-u-s-drug-pricing-
system-better-than-most