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The Case for a Reaganesque Approach to Big Pharma

With healthcare reform winding its way slowly through the Senate, and Senate Majority Leader Mitch McConnell vowing to get it to passage, expect some very tired talking points to get trotted out. Liberals will complain that the GOP’s version of healthcare reform should not leave the poor vulnerable to a disproportionately expensive system, and conservatives will reply that America should return to having the best healthcare system in the world unhampered by socialized medicine.

The irony is that both are, in their own way, right. Conservatives are correct that America has the best healthcare system in the world. Liberals, meanwhile, are correct that America spends more on the same healthcare than other parts of the world do, and that this is something to be concerned about. Further, liberals are right that expensive care and superlative care do not have to go together, while conservatives are right that Europeanization of our healthcare system would produce neither expensive care nor superlative care.

What both miss is that there is a simple fix to this, and it is to tailor regulations on the pharmaceutical industry with a simple, Reaganesque approach: Trust, but verify.

Today, in contrast, our regulatory regime toward pharma assumes good faith on the industry’s part. To assume this with any industry is problematic, but doubly so in this case. Two specific areas of law suffice as examples: the regulations concerning so-called orphan drugs, and the treatment of generic drugs.

The term “orphan drugs” refers to drugs designed to treat rare diseases—diseases whose rarity would make them otherwise less-than-profitable to treat. Theofficial government standard for what counts as an “orphan” drug is that the drug has to treat a disease affecting less than 200,000 people nationwide, which comes out to less than 0.1 percent of America’s population, or that affect more but would still be unprofitable to create without financial assistance. Drugs that meet this standard are given substantial government-sponsored financial incentives and are protected from competition and many healthcare regulations,as a means to encourage their development.

In theory, this is a perfectly defensible and public-spirited idea. The problem is that the classification of “orphan drug” has become abused in recent years by pharmaceutical companies. AsKaiser Health News reported in January, the number of orphan drugs has ballooned in recent years, and is often used to shield mass market drugs on the flimsy grounds that they also happen to treat rare diseases, effectively granting subsidies and monopolistic protection to drugs that should never have been subject to them in the first place. The practice of trying to pretend that mass market drugs are also orphans has become so pervasive, in fact, that there’s even a charmingly derogatory term for it: “salami slicing.”

Moreover, because orphan drugs are so disproportionately profitable now, pharmaceutical companies are incentivized to try to upsell the drugs regardless of their appropriateness. Bloomberg Newsrecently reported on the case of Alexion Pharmaceuticals, Inc, a New Haven based company which literally tried to badger doctors into using their products over the phone. Coincidentally, the product they were pushing—the orphan drug Soliris—just happens to be one of the most expensive drugs in the world, priced from $500,000 to $700,000 per year. Given that orphan drugs are generally supposed to be unprofitable, one can see where skepticism would be warranted in a case like this.

Obviously, this was not the kind of thing that the creators of orphan drug benefits intended to happen, and with a few reforms, it could probably be fixed. For one thing, the FDA should be given greater reason to deny orphan classifications. For another, orphan classification should cease to be treated as a get-out-of-jail free card for regulations the pharmaceutical industry finds inconvenient, such as the 340B drug pricing program, which expands access to expensive drugs for poor or rural hospitals. In short, when pharmaceutical companies try to claim a product is an orphan drug, the answer needs to be simply “trust, but verify.”

The same thing is also true in the realm of generic manufacturing. As the orphan example shows, pharma will employ creative interpretations of the law that are often vastly contrary to its spirit (and possibly its letter) to avoid facing competition. This is particularly true when a drug’s patent expires, and generic manufacturers begin to seek the opportunity to develop generic versions of it. In the status quo, pharmaceutical companies can deny their generic competitors the ability to purchase samples of off-patent drugs, even if the FDA has approved the generic competitors’ plans to develop their own versions, citing safety concerns. There is very little in the way of independent verification to prevent this.

Here, not only is reform necessary, but a version of it has already been introduced: The Creating and Restoring Equal Access to Equivalent Samples (CREATES) Act of 2017, which introduces new mechanism by which generic manufacturers can hold pharma’s feet to the fire for anticompetitive practices once they’ve gained FDA approval. In other words, when it comes to pharmaceutical companies claiming that there are “safety concerns” with a competitor, the response should be again rejiggered to “trust, but verify.”

There is no reason why a principled free marketer and a good government liberal should disagree over this idea as a governing principle for healthcare reform. Which is all the more reason why one only hopes that it will become the foundation not just for whatever the Senate cooks up in the coming weeks, but for most healthcare policy in America going forward.

Mytheos Holt is the Senior Fellow in Freedom to Innovate at the Institute for Liberty, and a former speechwriter for US Senator John Barrasso (R-WY).

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