Christopher J. Morten and Amy Kapczynski
Introduction to post on the Health Affairs blog (Full post)
Congress is currently debating proposals to reform drug pricing. One prominent strategy would empower the federal government to negotiate prices for prescription drugs purchased through Medicare’s pharmacy benefit (Part D). This strategy faces a key design question: What happens if the drug manufacturer and the government cannot agree on a fair price? Where there are patents or other barriers to competition—as is typical for expensive medicines—companies can threaten to withhold the product until they achieve their preferred price. While this strategy risks harm to the company, and so cannot be expected to happen often, it does occur overseas. The government’s leverage to ensure fair pricing can be undermined by the exclusive rights that the government has granted to inventors and patient access pitted against fair pricing.
Leading drug pricing bills in Congress tackle the problem of leverage with two distinct solutions to improve the government’s bargaining position: a tax on drug manufacturers that refuse to agree on a fair price and “competitive licensing,” under which the government accelerates market entry of competitors when a deal cannot be reached. House Speaker Nancy Pelosi (D-CA) has endorsed the first approach, recently announcing a bill that would impose a tax on drug manufacturers when they fail to reach an agreement with the government on price under Medicare Part D. Rena Conti and Paul Kleutghen recently argued in a Health Affairs blog post that the second approach—competitive licensing—is impractical because of purported manufacturing, regulatory, and legal hurdles faced by drug companies licensed under the competitive licensing scheme.
We argue that Conti and Kleutghen overstate the challenges and understate the benefits of competitive licensing, a workable solution to ensure that the government has real leverage in Medicare Part D pricing negotiations. Competitive licensing has unique benefits that will render drug pricing legislation more effective, and it can be combined with other solutions—including a tax on manufacturers that refuse to agree on a fair price—to achieve effective reform of drug pricing.
