WASHINGTON— During a Senate Health, Education, Labor and Pensions Committee hearing today, U.S. Senator Bill Cassidy, M.D. (R-LA) discussed the potential effects government-dictated drug pricing could have on the development of cures for diseases like Alzheimer’s.
A transcript of Cassidy’s questioning is below.
CASSIDY: Obviously a challenge facing our society is finding a cure, treatment, something for Alzheimer’s. If such is developed the federal government will be probably the sole purchaser thereof. There’ll be a few on private insurance, somebody at 60, but let’s just assume 95 percent.
Now the issue of course is whether monopsony purchasing power on behalf of the government would give a return less than sufficient to incentivize development.
We have some examples of that. In the Medicaid program, just about every Medicaid program in the nation except maybe Wyoming and Alaska pays their providers below cost because they can. And it is a way to give a benefit without necessarily the expense of actually paying for.
So, what if there was a future government that said, “Listen, we got to take care of all these Alzheimer’s patients but we don’t want to pay the, you pick the number, $100,000 a year that the drug company wants. We’re going to pay you $10,000 and if you don’t like it, lump it, because we’re the only person that purchases.”
That would have a chilling effect on the drug company, but would it have a chilling effect on the venture capital required at the outset in order to develop the new therapy?
Now I pose this, kind of long-winded, I apologize, just to get your thoughts on that, then I’ll go to you, Doug, Mr. Holtz-Eakin.
NORM AUGUSTINE: With regard to Alzheimer’s, you point to a critical issue. As the population ages the baby boomers become eligible for Medicare and the likes. The average person over 65 spends three times what a person under 65 does, so it is a critical issue. The question you raise about the impact on development, if the government or any supplier comes in and says, “This is all we’ll pay.” If that pay is not rationally, if that charge is not rationally set, it will indeed cause firms to not invest in research and it will cause a venture capitalist to not support the funding that the firms need. So that’s one reason why I think it’s so much better to let market forces operate here, to the extent they can, rather than to have the government step in and just set prices.
CASSIDY: But if we allowed all the federal agencies to combine to purchase, and if federal agencies would be end up paying for—maybe Medicaid as a portion—95 percent of that drug, that truly would give monopsony power. They would really be able to dictate a price.
AUGUSTINE: Well if I’m not mistaken, private insurers provide like half of the insurance in the country so there’s a private insurance market that will be stabilizing.
CASSIDY: Now the reason I say that though for Alzheimer’s disproportionately affects those 65 and above.
AUGUSTINE: And it would affect retirees that were in private insurance plans. But without question that the costs have to be set at a reasonable level. I come from an industrial world where our biggest customer was the government. It was basically a monopsony, and there is still a stabilizing factor, that is that the government wants to be able to get treatments for these diseases just as the firm selling the treatments wants to be able to sell them. So I would not be that concerned about the particular issue you raised.
DR. DOUGLAS HOLTZ-EAKIN: So imagine that it’s essentially coming through the Part D program. What we’d like to see happen is the drug gets developed, it gets put on the market, that gets provided to Alzheimer’s patients. And it’s initially a monopoly, and it costs too much and people scream and yell, and there’s not much the prescription drug plan can do about that. So competitors recognize that there’s a lot of money to be made here, and they enter with the competitor drug.
CASSIDY: Under status quo.
HOLTZ-EAKIN: Under status quo.
And if in fact we start doing value-based purchasing, they want to make that drug better and might keep people in remission longer and might improve the quality of lives better and that’d be a much better product. And now you’d have a beneficial competition and that first drug wouldn’t be able to exploit everybody.
If you have a monopsony buying, setting a fixed price, based on no information about the actual efficacy or market conditions, you run the risk of not only of not getting the first drug, you don’t get the second one or any subsequent drugs, and that’s the danger.