‘March-in’ is a cure worse than the disease

Recently, HHS Secretary Sylvia Burwell responded to Democratic lawmakers’ calls for action on “the soaring cost of pharmaceuticals.” She stated that her department is considering issuing guidelines on “march-in rights,” which would allow federal agencies to essentially break patents on high-cost medicines to lower prices.

Politicizing drug development—allowing bureaucrats to pick drug classes or diseases where government will break patents to lower prices—will only hurt patients. A better strategy is to address the high cost of co-pays and co-insurance and streamline drug development to encourage more market competition based on price and value. 

{mosads}First, a quick primer. March-in rights are a little-known feature of the Bayh-Dole Act of 1980. Bayh-Dole sought to stimulate innovation by allowing universities (as well as small businesses and non-profits) to patent, and then license, discoveries with commercial applications that emerged from government-funded research. The act was a tremendous success, increasing the number of university patents from 380 in 1980 to 3,088 in 2009, contributing, some estimate, $47-187 billion to GDP, incenting the development of drugs like warfarin and Remicade, and stimulating additional, critical funding for medical research. 

But the law also allows federal agencies that fund research to compel patent-holders to grant licenses to third-party manufacturers for specific public purposes, such as alleviating public health or safety needs not achieved by the contractor.

Over 50 House Democrats view the current cost of prescription drugs in the United States as just such a public health emergency, despite the fact that total spending on prescription medicines in the U.S. is just 10 percent of overall health expenditures, the same as it was in 1960. (Adding in hospital administered medicines raises this somewhat to 14-15 percent.)

The other 85-90 percent of U.S. healthcare spending doesn’t attract anywhere near as much acrimony.

Why? The backlash is based largely on how we pay for drugs compared to other kinds of health services. As unified insurance deductibles, closed formularies, and high-deductible plans proliferate, patients find themselves much less insured against drug costs than against hospital admissions. 

Rather than fixing the underlying problem, with the invocation of march-in rights we’re railing against companies bringing important new medicines to patients.      

This isn’t the first time compulsory licensing has been demanded as a response to perceived drug price inflation. Since the mid-1990s, activists argued that government should break patents to lower the cost of buying HIV medicines. While the G8 made efforts to increase access to HIV treatments in the developing world, in the U.S., domestic march-in requests have been rejected, as the NIH found that the market met the access criteria of Bayh-Dole. The drugs themselves are highly cost effective, and deliver far greater gains to society than are captured by companies in the form of profits.        

Not once has the federal government “marched in” under the Bayh-Dole banner; wiser heads have (at least until now) prevailed.

If Secretary Burwell makes good on her threat, however, it would only serve to forewarn investors and companies that the diseases or drug classes she targets are bad financial bets.  Pushing down drug prices might seem attractive in the short term, but it would simply encourage investors to park their money in other, less politically vulnerable products. That means fewer life-saving medicines in the long run. 

And while the co-pays for some drugs may be high today, the cost of a treatment that doesn’t exist is infinite: it can’t be bought at any price.

There are three better policy prescriptions for improving patient access.   

First, policymakers could work to reduce co-pays for low- and middle income patients – research from the RAND Corporation suggests that this “stimulates increases in revenues and ultimately in innovation, which generates substantial long-run benefits.” Second, we should develop credit markets that would allow patients to amortize the up-front costs of expensive, but life-saving medicines over many years, as they do with home mortgages. Finally, reforms designed to lower the costs and time required to bring new drug competitors to market would help ensure multiple products competing against each other in a given therapeutic class. Insurers could then offer larger market share in return for lower drug prices, or rebates tied to better health outcomes. 

For example, discounts for Hepatitis C medicines like Solvaldi are around 50 percent, and are apt to rise even higher after Merck received FDA approval for another competitor late last month.

Breaking patents—or even routinely threatening to break them—is one case where the cure is worse than the disease. 

Howard is a senior fellow and director of health policy at the Manhattan Institute.