For more than a decade, biotech and generic drug manufacturers have been battling over how to allow the federal government to permit cheaper, generic versions of biologic drugs. Now the issue has emerged as a flash point in the debate in overhauling the U.S. health system. Health insurers, large employers and the AARP stand with the generic manufacturers in pushing for patients to have quicker access to low-cost alternatives. The pharmaceutical industry has pushed for a longer patent exclusivity period saying it needs the time to recoup the research and development investment. On Monday, the drug industry won the latest skirmish as the Senate Health, Education, Labor and Pensions Committee passed an amendment to its reform bill granting 12 years of market protection to biologic drugs before generic versions can compete. The generic manufacturers and the AARP – backed by the Obama administration — were pushing for a seven-year exclusivity period.
To get a better understanding of the issue, KHN talked to Patricia Danzon, the Celia Moh Professor at the Wharton School, University of Pennsylvania. She is an expert in the fields of health care, pharmaceuticals, insurance, and liability systems.
Q: How big a role do biologic drugs play in the health system?
A: Pharmaceuticals account for 10 percent to 12 percent of total health spending and about 20 percent of that is biologics. But it is very important because looking forward, the total share of health spending going to biologics is expected to rise as many of the drugs in the pipeline are biologics and an increasing fraction of the drugs that come to market are biologics.
Q: Why are biologic drugs so expensive compared to traditional chemical drugs?
A: There’s no question they are more expensive to produce than chemical drugs. The other issue is that with biologics each is more unique and faces less brand name competition than, say, compared to statin drugs where there are several drugs in the same class. As a result, the biologics are not subject to pharmacy benefit managers negotiating prices. Another factor is that because most biologics are dispensed in doctors’ offices because they are given intravenously, they are covered under an insurer’s medical benefit or the Medicare Part B physician benefit rather than a drug benefit. Under Medicare Part B, the government pays drug manufacturers the average manufacturers’ selling price plus 6 percent to cover the doctor’s costs. It is a cost-based reimbursement the way we used to pay hospitals until 1983.
Q: Are these drugs really much harder to make than traditional chemical-based medicines?
A: It really depends on the product. Some are quite simple and some are tremendously complex. That’s why the bills leave to the discretion of the FDA to determine what will be required to demonstrate equivalence.
Q: If Congress creates a system to approve generic forms of biologics, will that result in much lower prices?
A: It is not that simple. Doctors may still have an incentive to want to prescribe the more expensive “pioneer” drug because the fee they are paid to administer the drug may be a percentage of the cost of the medicine. That could put the doctor and the patient and Medicare program at odds.
Q: Are there higher research and development costs for biologics compared to traditional drugs?
A: The one study that has been done at Tufts University showed there was not much difference.
Q: So what explains biologics’ higher prices?
A: Until recently biologics were developed to have lower volume sales so manufacturers needed to set higher unit prices to recover costs. But that is changing as more biologics have indications to treat a wider population such as people with rheumatoid arthritis.
Q: What would be the impact of having a longer patent exclusivity for biologics compared to chemical-based drugs?
A: Having five years of exclusivity for chemical drugs and 12 years for “follow-on” (or generic) biologics would be very different. We may be creating a situation where the return on investment is lower for developing chemical drugs compared to biologics and that would be a big mistake. That’s because chemical drugs are easier to produce and easier to take because they are usually pills you take by mouth instead of through infusion.
We should be creating a level playing field with the economics so what drives development is the science.