Congress is about to debate legislation—the Lower Drug Costs Now Act (H.R.3)—that would give Medicare the power to negotiate for lower drug prices. The bill focuses on lowering prices of drugs that treat a wide range of diseases including asthma, arthritis, and diabetes. But less well appreciated is the power of the proposal applied to cancer drugs. The prices of cancer drugs are now exceptionally high, harming patients and payers.
The Congressional Budget Office estimates the legislation will save patients about $150 billion overall over 10 years by capping their out-of-pocket drug costs, while saving taxpayers about $450 billion over 10 years by lowering overall prices and slowing future price increases of drugs. These savings can be used to improve Medicare benefits, reduce premiums, or expand insurance coverage for seniors or others.
The drug industry is already arguing that the bill will end innovation and stop the development of needed cures, particularly in the cancer arena. That is wrong. We can have both innovative treatments and affordable prices.
The current financing of cancer treatment is unsustainable
According a report released by the National Academy of Medicine, Medicare pays for three-quarters of drug-based cancer treatment for seniors, and many cancer drugs have prices that are rising far faster than the cost of drugs and medical care in general. What this means in practice is that when spending on cancer drugs goes up, there is less money for other publicly funded medical services and societal needs.
The remainder of spending on cancer drugs is borne by patients and by commercial health plans, funded by the contributions of employers and the wages of insured employees. As costs have mounted, these plans have looked for ways to manage their spending on cancer drugs, imposing restrictions on coverage and pushing more costs onto patients. Insurance would then fail to do its job of providing access to needed care and financial protection to patients when facing dread disease.
But aren’t the benefits worth the costs? Alas, no. While some recent FDA-approved new therapies embody treatment approaches that offer important new clinical benefits, many offer few, if any, benefits. Moreover, costs associated with cancer drug treatment can and do add up quickly, with multiple infusions required each year, additional visits, hospital stays, imaging, tests, and treatments with other expensive drugs.
What accounts for extraordinarily high cancer drug prices?
Pharmaceutical companies commonly cite the high-risk, high-cost enterprise of drug innovation and significant gains to mortality and reductions in morbidity to justify high cancer drug prices.
However, the evidence does not support these claims. To be sure, drug development is risky, costly, and takes time. However, publicly reported accounting data analyzed by researchers from the West Health Policy Center and Johns Hopkins Bloomberg School of Public Health shows that returns on assets for pharmaceutical companies exceed those of the most profitable industries by several percentage points. For many cancer drugs, prices also continue to increase after launch without demonstrated increases in benefit.
So what is to stop companies from charging a million dollars or more for a cancer drug? In our current system, not much. Most cancer drugs have no direct competitors, due in part to the fact that new drugs offer benefits, however small, over existing drugs. Patients can’t use the cheaper alternative because there isn’t one.
Efforts to improve the transparency of cancer drug prices have done little to tame the launch prices of new drugs, nor helped payers shop smarter.
How H.R.3 will resolve these challenges
H.R.3 would grant the Secretary of Health and Human Services the authority to negotiate drug prices. It will improve affordability for cancer patients and their families and also provide much needed spending relief to payers, employers, wage earners, and taxpayers.
Under the provisions of the bill, negotiations would be guided by the effectiveness of the drugs in question (supported by evidence that is largely generated by the drug companies themselves). The negotiations would also be patient-centric, guided by the outcomes that matter to cancer patients and their families.
For these reasons, the legislation has garnered widespread support among patients, insurers, employers, and innovators.
A false choice from critics
Nevertheless, the pharmaceutical industry, led by PhRMA, its lead trade association, is lobbying hard against giving Medicare the power to negotiate for lower drug prices. The top 15 drug companies and trade associations spent over $45 million in just the first three months of 2021 on lobbying, arguing in part that restrictions on the high prices charged for existing drugs would blunt incentives for future innovation.
This is a false choice for several reasons.
First, what matters is not the total number of new cancer drugs, but the health benefits created by new drugs. Despite the hype, most currently available cancer drugs are not cures, and many provide very limited gains to patients’ quantity or quality of life.
Second, many potential advances in cancer prevention and treatment remain underinvested in because various members of the U.S. system do not view such investments as worth the costs. Savings from this legislation are expected to be used to expand the depth and breadth of coverage that will among other impacts reduce the financial toxicity of cancer treatment.
Third, what matters to innovators when planning future investments is their overall profitability. By design, H.R.3 will support more widespread use and premium pricing for cancer drugs that provide significant value, ensuring company profits from valuable cancer drugs while reducing spending on drugs whose benefits are modest or negligible. Savings from this legislation will be used to support the next generation of innovative cancer drugs.
H.R.3 will help our system better arrive at a fair, value based price for innovators’ efforts.
This legislation does not aim to undermine the ability of pharmaceutical companies to invest in innovation.
Rather, we expect these negotiations, if allowed to work over time, will create a virtuous circle and increase the availability of new drugs that offer significant health benefits to current and future patients.
Rena Conti is associate professor in the Department of Markets, Public Policy and Law at Questrom School of Business, Boston University. Richard Frank is the Margaret T. Morris Professor of Health Economics at Harvard Medical School. Leslie Dach is the chair of Protect Our Care and a former senior counselor to the Secretary of Health and Human Services.
