Last week, with Americans focused on the festivities of freedom, an important health-care story in the Washington Post slipped by unnoticed. No, not Obamacare and Republicans’ repeal and replace efforts. Something much more consequential: Louisiana’s threat to ask the federal government to bust Gilead’s patent on its pricey hepatitis C drugs—Sovaldi, Harvoni, and Epclusa.
On July 3, the Post’s Carolyn Johnson detailed a suggestion from Rebekah Gee, Louisiana’s health secretary, to address the high cost of Gilead’s blockbuster drugs. According to the Post, Gee is considering “ask[ing] the secretary of health and human services to invoke a century-old law that allows the government to use patents at a reasonable cost, possibly for as little as a $1,000 per patient.”
That law provides that if the United States infringes on a patent, the patent holder’s sole remedy is “reasonable and entire compensation.” While courts have yet to explore the meaning of that phrase, Gee and others maintain it will be a sum far lower than Gilead’s asking price of as much as $94,500 for a 12-week course of treatment for hepatitis C. Of course, the pharmaceutical companies would counter that “entire compensation” means lost profits based on their prices.
I Know, We’ll Just Seize the Drugs We Want
Until recently, Section 1498 reposed in obscurity, with the few instances of its use related to national defense or security. But with the high price of drugs dominating media coverage of late, a variety of individuals simultaneously seemed to rediscover Section 1498, all suggesting it was an elixir for the problem.
In pushing that tactic, the authors of “A Prescription for Excessive Drug Pricing” (a must-read) noted that the only recent use of Section 1498 in the pharmaceutical sector came in 2001, when, following 9/11, the government sought to prepare for a potential anthrax attack by stockpiling large quantities of the antibiotic ciprofloxacin. When negotiations with the patent-holder, Bayer, stalled, Secretary of Health and Human Services Tommy Thompson suggested importing generic versions of the drug under the authority of Section 1498. The threat to bust Bayer’s patent worked, and the pharmaceutical giant cut its prices in half.
Gee now says she wants current HHS Secretary Tom Price to follow Thompson’s lead and extract steep price concessions from Gilead or, if unsuccessful in negotiating what the government perceives to be a fair price, to “march in” and buy unlicensed generics. It is unclear whether Gee is merely attempting to wrangle further discounts from Gilead or will turn her public posturing into an official request. It is also unclear how Price would respond, or be directed by President Trump to respond.
Signals are mixed. Trump fashions himself a tough negotiator and may float expropriating Gilead’s patents to secure price concessions. Given his “getting away with murder” campaign rhetoric about the pharmaceutical industry, Trump may well decide to exercise the government’s rights under Section 1498 if the tactic fails. But more recent events hint at Trump softening to the economic realities of the pharmaceutical industry.
Further, a leaked copy of the president’s promised executive order on drug prices included a proposal to reduce prices here by aggressively protecting American patent rights abroad. Although hypocrisy rarely constrains politicians, in this case it might dissuade the Trump administration from subverting patent rights in the United States while pushing to strengthen them extraterritorially.
Why This Is a Terrible Idea that Will Hurt Sick People
While it is unclear how Gee’s proposal will play out, two things are certain: Expropriating patents under Section 1498 is a horrible idea, and government-run health care is a worse one.
Absent victory in subsequent litigation, the federal government’s threat to use Section 1498 to bust drug patents will wreak havoc on the pharmaceutical industry. Researching and developing new drugs is a costly and risky proposition. Patent rights provide the necessary incentive to encourage investment. But if the government can infringe on those rights and then only pay patent holders an arbitrary amount determined after the fact by a judge, it will destroy the incentive and certainty needed for continued investment in the industry. While the public hold little sympathy for Big Pharma, when the drug industry suffers, people suffer. And when Big Pharma wins, people win.
Ironically, the same hepatitis C drugs Gee and others seek to expropriate proves the case. Hepatitis C is a deadly disease. Until 2011, treatment options were limited, ineffective, and poorly tolerated. Then in 2011, the Food and Drug Administration approved Incivek, a drug discovered by Vertex Pharmaceuticals which, when added to the current treatment regimen, improved cure rates substantially. For those new to treatment, Incivek improved cure rates from 46 percent to 79 percent and for those previously treated who later relapsed, the cure rate jumped from 22 percent to 86 percent.
This miracle of modern medicine led Vertex to achieve the fastest drug launch in history with Incivek. Revenues from Incivek also thrust Vertex into the black for the first time in its 20-year existence. But a mere three years later, Vertex withdrew Incivek from the market and abandoned its hepatitis C research because it could no longer compete with the all-oral regimen offered by Gilead. Since then further competitors have reached the market, improving both the cure rate and the tolerability of the drugs.
In a matter of six years, then, pharmaceutical companies transformed hepatitis C from an often-incurable disease to one cured in 99 percent of the cases with an easy once-a-day oral regimen. Not only has this saved the lives of countless individuals, it also offers a potential net monetary savings: The $90,000-plus list price is less than half the cost of a liver transplant, not to mention the $50,000 annual cost incurred after transplants. In fact, as the Los Angeles Times reported, the Institute for Clinical and Economic Review, a nonprofit research organization, concluded in a studied published in JAMA Internal Medicine that the newer hepatitis drugs are “priced reasonably in terms of their cost per added year of life and good health for almost all patients.”
Yet critics argue that to treat everyone infected with hepatitis C at the list price would cost more than $100 billion. It is true that with high-cost transformative pharmaceuticals new options must be considered, such as “innovative financing solutions,” as Louisiana’s Sen. Bill Cassidy put it. But destroying the incentive to invest in drug development and eliminating the certainty fixed patents provide will, in the long term, result in fewer treatments, fewer cures, and more human suffering.
Trying to Make Money Is What Fuels the Research
Further, as Cassidy observed, “Once you march in once, it lowers the threshold to march-in on another” drug. So it would be naïve to think the government would limit patent busting to hepatitis C drugs.
Conversely, the promise of a high rate of return incentivizes more investment, more treatments and cures, and more competition—which in turn pushes prices lower. Again, the case of hepatitis C proves the point: “Competition from AbbVie’s product has allowed some payers to negotiate discounts of over 40 percent” of Gilead’s list price. However, “[d]espite receiving rebates to ameliorate the high list prices, the state says it can afford to pay for treatment for only the patients with significant liver damage, at high risk of progressing to cirrhosis and organ failure. Last year, that meant only 324 of the state’s estimated 35,000 Medicaid or uninsured patients who are infected.”
Other states likewise ration access to the expensive—but effective—hepatitis C drugs. And Louisiana’s decision to opt-in to Obamacare’s Medicaid expansion has only exacerbated the problem: Louisiana must now fund medical care for more than 400,000 additional Medicaid beneficiaries, including some previously covered by private insurance. It’s yet another illustration of the harm the Medicaid expansion unwittingly wrought on prior beneficiaries.
Here, then, is the second lesson to glean: Government-run health care doesn’t work well. And more government involvement—in the form of government expropriation and price fixing—won’t work, either. In the long run it only hurts everyone.
Disclosures: As the mother of a young son with cystic fibrosis, Cleveland has a vested interest in the continued development of drugs to treat and eventually cure this disease. Her family’s 401(k) and retirement savings include diverse holdings, including mutual funds in both the health care and pharmaceutical sectors; it also includes immaterial investments in Vertex and several individual biotech stocks.