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Obama Agenda Undermines Medical Innovation

Written By : Phil Kerpen
May 11, 2013

Alzheimer’s Disease costs the U.S. economy over $200 billion per year, about $140 billion of which is a direct federal budgetary cost to Medicare and Medicaid. On our present course, this cost will quintuple to $1 trillion by 2050. It is the major driver up the steeply rising health care cost curve. Given this context, the most important question for health policy is not the green eyeshade question of who-pays-how-much that has come to dominate questions of health care policy in Washington, but rather: How do we maximize the incentives for medical innovation to cure diseases that would otherwise be prohibitively expensive to manage, foremost among them Alzheimer’s?

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Phil Kerpen1

That cost curve is actually more likely to have its slope sharply altered by a major breakthrough cure than to be subtly bent by tinkering with the rules of federal programs. Merck, Pfizer, Eli Lilly, Johnson & Johnson, and others are investing heavily in Alzheimer’s research. These projects are major long-term investments, and they depend on the potential for an appropriately enormous pay-off if they succeed.

Unfortunately, while President Obama’s budget includes a much-touted $100 million proposal for brain research, it also undermines far more significant incentives for private sector medical innovation.

America’s pharmaceutical sector spends more than $50 billion in research and development. The total cost of bringing a new drug to market is now $1.2 billion according to the Tufts Center for the Study of Drug Development, in part due to regulatory compliance and litigation expenses. Given the inherent challenges presented by Alzheimer’s, the cost of a new miracle cure could well run many billions of dollars.

The policies advocated in President Obama’s 2014 budget fail the test of encouraging and rewarding such enormously expensive and risky investment. In fact, the budget includes several huge steps backwards.

To start, the Obama budget would install mandatory price “rebates” for drugs sold to low-income enrollees on the Medicare Part D prescription drug program.

Part D currently employs a market-based structure in which private insurers compete for beneficiary dollars. Unique among entitlement programs, competition has brought the program in under projected cost estimates by 45 percent according to the Congressional Budget Office (CBO). And over 90 percent of seniors are satisfied with their coverage.

These “rebates” — which will redirect money from pharmaceutical companies to the federal Treasury — will effectively impose price controls on a sizeable portion of the Part D benefit. Because they would significantly reduce the industry capital available to finance new research, the chances of a new cure that would sharply alter the cost curve would be significantly diminished. Patients would see fewer breakthrough drugs and therefore a lower quality of life.

The White House also wants to scale back “data exclusivity” protections for advanced biologic medicines. These provisions allow the innovator companies that develop new medical research to exclude competitors from using that research to apply for approval of competing drugs for a specified period of time.

A broad body of research indicates that drug firms need at minimum 12 years of data exclusivity, which is what the law presently provides, for adequate assurance that if a new cure is developed there will be an opportunity to earn a market-return that justifies the investment. President Obama wants to scale back that period to just seven years to allow low-cost copycat drugs to enter the market even sooner, a huge disincentive to innovation.

The final piece of the president’s misguided drug policy platform would limit the ability of drug companies to craft out-of-court settlements in order to settle patent disputes. Settlements are an essential legal tool for the drug industry. They allow firms to avoid the often costly and extensive litigation process. Restricting the ability of drug firms to reach settlements would force them to redirect scarce resources from research to litigation.

Stopping the coming tsunami of health care costs depends on new cures, especially for Alzheimer’s Disease, that will come not from any federal agency but from private sector pharmaceutical research. It is imperative that government policy at least do no harm to that research, which sadly is a test President Obama’s agenda fails.

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