Policymakers across the political spectrum agree that the U.S. pharmaceutical pricing system is deeply flawed. One problem is that drug companies can game the system to extract extra profits without adding value for patients. As detailed in recent front-page New York Times articles, firms have improperly listed patents with the FDA to block generic competitors, patented trivial tweaks to “evergreen” their most profitable products, and yanked products with expiring patents to transition patients to patented alternatives with little added clinical value. The lure of profits causes firms to aggressively market products without regard for potential social harms, as most dramatically illustrated by Purdue Pharma’s role in the ongoing opioid epidemic. Profit-expanding tactics can also harm patient health by increasing out-of-pocket costs for necessary medicines: A recent survey found that 3 in 10 U.S. adults have not taken a drug as prescribed due to the cost.

At the same time, the United States faces a more invisible drug pricing and access problem: slow innovation in critical areas. In other words, we’re not just paying exorbitant prices for existing drugs—we’re also “missing” drugs that would exist under a more rational system. Consider vaccines. The lightning-fast development of
COVID-19 vaccines illustrated the pharmaceutical sector’s capabilities when given sufficient resources. But other efforts to develop vaccines against common infectious diseases like norovirus and chlamydia have struggled to attract financial support. Similar pathologies affect the stagnant drug pipelines for heart disease and early-stage cancers, even though these remain the top two causes of death in the United States. The current system also skews R&D efforts away from non-pharmaceutical interventions that may have larger health benefits, ranging from medical devices to public health improvements.

As I have argued in research co-authored with Daniel Hemel [Professor at NYU Law], high prices and slow innovation in critical areas are two sides of the same coin: a system that fails to reward biomedical innovations based on how much they improve health and save lives. Instead, the United States rewards pharmaceutical manufacturers by combining intellectual property protections with over $250 billion in Medicare and Medicaid subsidies that depend on how much firms charge in the private sector. The consequences are perverse. Rewarding firms based on the profits they can extract over a fixed period of exclusivity causes them to overinvest in patent-extending efforts with little health benefit and to underinvest in more valuable products such as drugs that require longer clinical trials, which have less patent term left by the time they get to market. Firms are also incentivized to raise prices for nongovernment payers so they can extract larger sums from Medicare and Medicaid, placing drugs out of reach for some patients not covered by these programs. The end result is that the United States pays high prices for drugs with limited efficacy, and those high prices fail to spur the development of more effective drugs in critical areas.

To reform this broken system, policymakers should be guided by two goals. First, the rewards for innovation should be better aligned with the demonstrated social value of those innovations compared with the existing standard of care, focusing R&D efforts on the projects most likely to improve patient health. And second, policymakers should provide broad access to those innovations—including for those living beyond U.S. borders. The case for universal access to health technologies is compelling, and the United States can afford to do more to address domestic and international disparities in health outcomes.

Many proposals for drug pricing reform have focused on preventing abuses of the patent system and encouraging generic competition. But if policymakers want firms to produce drugs that do the most to save lives and improve health, they should look beyond patents. For example, direct funding for biomedical innovation through the National Institutes of Health and other agencies should be more targeted to correcting problems with the current system, including for late-stage drug development and production.

In addition, rather than linking Medicare and Medicaid reimbursements to private-sector prices, these programs should set reimbursements based on a drug’s added value for patients. Workable frameworks for value-based pricing have already been adopted in many other countries and by the U.S. nonprofit Institute for Clinical and Economic Review. Congress recently took a small step in this direction by allowing Medicare to “negotiate” a handful of drug prices based on factors including a drug’s comparative effectiveness. But this approach can only address drugs for which the price is currently too high—government payers should also be permitted to offer higher reimbursements for highly effective drugs and vaccines in areas where prices are currently too low to spur development.

Importantly, powerful incentives for the most valuable drugs need not and should not come at the expense of patient access. Access-to-medicine strategies have focused mainly on removing patent barriers and promoting generic competition, but this strategy can be ineffective; consider, for example, the hundreds of off-patent drugs with no generic competitors and the fact that there’s no such thing as a “generic” vaccine. Again, policymakers should look outside the patent toolbox. For example, the COVID-19 vaccine experience in the United States illustrates that high rewards to developers can be coupled with free access for patients. The vaccine rollout was far from ideal—including inadequate U.S. efforts to address inequitable global distribution—but it shows how high-powered incentives can be combined with widespread access to save over a million lives in the United States and millions more around the world.

The COVID-19 experience presents a challenge to U.S. policymakers: Can we structure a pluralistic system of subsidies and rewards that produces more innovations like the highly effective COVID-19 vaccines, fewer wasteful innovations, and lower out-of-pocket costs for patients? To be sure, any significant reform is a political long shot. But given the number of lives that could be saved, even incremental steps toward a more rational system of biomedical innovation incentives and access would be well worth the effort.  SL

Portions of this essay are excerpted from the Stanford Law Review article by Daniel J. Hemel and Lisa Larrimore Ouellette, Deane F. Johnson Professor of Law and senior fellow at the Stanford Institute for Economic Policy Research, “Valuing Medical Innovation,” 75 Stan. L. Rev. 517 (2023).