The Centers for Medicare & Medicaid Services just announced the next 15 brand-name medicines selected for Medicare’s drug price negotiation program, which mandates price reductions of at least 25 percent. Most Americans naturally assume that medicines will become more affordable as a result.
Because two of the chronic-disease medicines selected — Orencia and Xolair — already had cheaper biosimilar alternatives on the verge of entering the market, there’s a risk that CMS’s selections could make drugs more, not less, expensive.
That’s because the pharmaceutical market is highly complex, and price cuts on brand-name medicines can deter biotech firms from developing and launching even cheaper generic and biosimilar versions of those drugs.
Once a medicine’s patent protections and exclusivity periods expire, any rival biotech company can make a generic or biosimilar version of a brand-name drug and sell it at a much lower price to gain market share. Once six or more generic versions of a brand-name medicine become available, prices fall by 95 percent, on average. Biosimilars can push down prices by more than 80 percent.
Developing and securing FDA approval for generics or biosimilars, which are nearly exact copies of “biologic” medicines grown from living cells, requires a significant investment of time and money. Biosimilars, in particular, can take hundreds of millions of dollars and nearly a decade to develop.
Generic and biosimilar developers can recoup those costs and earn a return only if they can price their competing products at a big enough discount to win significant market share — a process that often takes years since doctors and patients typically don’t immediately switch away from brand-name treatments, especially for savings that are comparatively marginal.
If the government short-circuits this natural competitive process and sets a lower price on a brand-name drug that biotech companies were already developing generic or biosimilar versions of, it could make it impossible for those developers to recoup their investments.
That’s the problem that the developers of the biosimilar versions of Orencia and Xolair face. Now that the government has made it clear that it is willing to cross that line, other companies will likely hesitate to invest in generics and biosimilars.
If that happens, it will mean fewer lower-cost options for patients. Taxpayers and Medicare patients might wind up with just 25 percent or 35 percent savings, rather than the 80 percent and 95 percent savings that would have resulted from letting free-market forces play out.
Employers and half of Americans with employer-sponsored health insurance will be worse off. They already don’t receive the government-negotiated Medicare prices. However, they will miss out on the cheaper generics and biosimilars that are never developed.
Especially for patients trying to treat chronic conditions that can only be managed, not entirely cured, losing out on more affordable generics and biosimilars could easily cost them tens of thousands of dollars over their lifetimes.
That’s the opposite of what President Trump says he wants. The president has often spoken about his goals to promote generic and biosimilar development and to help these medicines reach the market faster. Unfortunately, by undercutting market incentives for competition, CMS’s misstep will make those goals harder to achieve.