Lower Drug Prices Without Harming Innovation

The urgent need to lower drug prices s has become a rare consensus issue in Washington.

But how to achieve this goal is another story.

Now, Congress has an opportunity to make a smart fix to something it inadvertently broke. 

Like medications themselves, policy initiatives can remedy real problems. But they always come with the risk of harmful unintended side effects. So policy-makers, like doctors, should always be weighing potential benefits and risks.

The use of generic drugs, copies of innovative pharmaceuticals, are a prime example. By introducing competition they can drive down the price patients and other payers shell out for medicines.

But generics don’t come to market immediately. New drugs are granted a limited period of market exclusivity — for good reason. Much like patents for other products, these protections encourage innovation by allowing the inventor to recoup costs and earn a profit. When it comes to pharmaceuticals, patent protection is especially critical given the high cost of bringing a drug to market.  

To lower drug prices without stifling innovation, policymakers have prescribed approaches which increase the availability of generics without undermining protections which drive the development of new drugs. 

At the heart of this approach is maintaining the careful balance achieved by the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act. 

Hatch-Waxman is widely credited with increasing competition by creating an appealing pathway for generics to come to market, while still offering market exclusivity to innovators.

More recently, the FDA has prioritized fostering the entry of generics through a variety of initiatives. Indeed, in 2011, and again in fiscal 2018, the FDA set records for the most generic approvals in a single year. And because they did so within the Hatch-Waxman framework, pharmaceutical companies are still churning out miraculous new medicines.  

But not everything is rosy.

One type of insidious side effect from drugs relates to adverse interactions. When a patient is taking one drug and then is prescribed an additional drug, perhaps for a different ailment, bad things can happen. The new medicine may increase or decrease the effect of the original drug, making matters worse. Doctors and pharmacists are trained to watch for this. But Congress, when prescribing policy, isn’t always so careful.

In 2011, when Congress sought to protect technology innovators besieged by patent trolls, it changed the way patent disputes are resolved by enacting a process called inter partes review (IPR), where patents could be challenged by the Patent Trial and Appeal Board. This “medicine” likely stymied patent trolls, but it had the unintended side-effect of undermining the delicate balance of the 1984 Hatch-Waxman Act for pharmaceutical patent disputes.

Now, those seeking to invalidate pharmaceutical patents can challenge a patent in federal court under Hatch-Waxman and also try their luck at the Patent Trial and Appeal Board using IPR.

Because IPR has different legal standards, pharmaceutical companies must now protect their intellectual property under two sometimes contradictory sets of laws. The Hatch-Waxman standards carefully drafted to set a balance between innovation and generics still exist, but they are functionally moot, given the very different standards set out for IPR.  

Certainly, this is something never envisioned by Hatch-Waxman, and not contemplated when Congress considered the 2011 technology patent law. For instance, as part of the trade-off, Hatch-Waxman created a fast-track for generics. But now, generic challengers are exploiting the glitch created by the 2011 law, bypassing the market exclusivity requirements of Hatch-Waxman, but still taking advantage of the fast-track. 

By throwing the balance off-kilter against innovation, the 2011 law is likely already increasing the price consumers pay for new drugs. By injecting additional uncertainty into how long a new drug has market exclusivity, branded drug manufacturers would be prudent to charge more for their medicines, given the potentially shorter window of exclusivity. Further, the needless cost of defending patents in two forums rather than one, surely increases the costs they’ll need to recoup. 

So Senator Thom Tillis (R-NC) and Representative Bill Flores (R-TX) have introduced legislation which would repair the system by restoring the balance which served innovators, generics and patients so well. The Hatch-Waxman Integrity Act would incentivize generic manufacturers to participate within the Hatch-Waxman framework only, by affording them its fast-track advantages only if they challenge patents within that system. Generics could still challenge patents in IPR, but would no longer be able to take advantage of the fast-track approvals which were granted as part of the original grand deal. 

The landmark Hatch-Waxman Act had the right formula to offer benefits to generic manufacturers in exchange for market exclusivity for innovators. Generics play an important role in lowering the prices patients pay for drugs. But if Congress fails to maintain that balance, we’ll all pay the price.

Jeff Stier is a Senior Fellow at the Consumer Choice Center.