Don't Take the Blue Pill: A Law and Political Economy (LPE) Critique of the Pharmaceutical Industry

• Author: Daniel Whittam
• Position: Georgetown University Law Center, J.D. 2023; Editor, The Georgetown Law Journal, Volume 111; Williams College, B.A. 2015
• Pages: 1211-1250

NOTE

Don’t Take the Blue Pill: A Law and Political

Economy (LPE) Critique of the Pharmaceutical

Industry

DANIEL WHITTAM*

TABLE OF CONTENTS

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1212

I. MAINSTREAM JUSTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1214

II. THE PHARMACEUTICAL SUPPLY CHAIN & “PRICE”. . . . . . . . . . . . . . . . . . 1217

A. SUPPLY CHAINS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1217

B. PRICE WITHIN SUPPLY CHAINS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1220

C. PRICE AS PERCEIVED BY PATIENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1222

D. TOWARD A POSITIVE THEORY OF DRUG PRICING . . . . . . . . . . . . . . . . 1226

III. LPE CRITIQUES OF THE PHARMACEUTICAL INDUSTRY . . . . . . . . . . . . . . . . 1228

A. THE SHIFT FROM MANUFACTURING TO SERVICES AND IP . . . . . . . . . . 1228

B. THE DOUBLE MOVEMENT AND PART D . . . . . . . . . . . . . . . . . . . . . . . . 1235

C. INVESTIGATING NEOLIBERAL ASSUMPTIONS. . . . . . . . . . . . . . . . . . . . 1238

IV. POLICIES FOR REFORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1243

A. REDUCE PATIENT OOP RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . 1244

B. MEDICARE NEGOTIATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1246

C. CREATIVE USES OF GOVERNMENT-HELD IP. . . . . . . . . . . . . . . . . . . . . 1248

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1249

* Georgetown University Law Center, J.D. 2023; Editor, The Georgetown Law Journal, Volume

111; Williams College, B.A. 2015. © 2023, Daniel Whittam. Thanks to Professor Brishen Rogers and

the rest of the LPE Seminar class for initial feedback and thought-provoking political–economic

analysis. Thanks to the entire staff of GLJ for their uncompensated labor, which improved the piece.

Thanks to my mom, the health law professors at Georgetown, and all the brilliant colleagues I’ve

worked with over the years for fostering my knowledge of how the American healthcare system works.

And most of all thanks to my life partner, Giuliana, who inspires me every day.

1211

INTRODUCTION

In February 2019, the Senate Committee on Finance summoned top executives

from seven large pharmaceutical corporations for a hearing on drug pricing in

America.

1

The hearing, one of several conducted on similar subjects by Congress

in the past decade,

2

reflected widespread, even bipartisan, frustration with rising

government spending on pharmaceutical products. The CEOs were predictably

on message in their responses to questioning, reminding the Committee that phar-

maceutical spending makes up a small share of all healthcare spending, shifting

blame to insurance companies and pharmacy benefit managers (PBMs), and argu-

ing that innovation in medicine requires robust incentives in the form of patent-

protected monopoly periods.

3

See Christopher Rowland, Drug Executives Grilled in Senate Over High Prices, WASH. POST (Feb. 26,

2019, 4:49 PM), https://www.washingtonpost.com/business/economy/drug-executi ves-grilled-in-senate-over-

high-prices/2019/02/25/abc89c04-393f-11e9-aaae-69364b2ed137_story.html; Drug Pricing in America: A

Prescription for Change, supra note 1, at 533.

As they put it, pharmaceutical corporations need

the promise of massive profits to continue investing in innovative new drugs that

require hundreds of millions of dollars to develop, because many development

efforts fail during trials and research and development (R&D) requires capital

expenditures.

4

See Analysis: CEOs From Pfizer, Merck, AbbVie and Others Face Senate on Drug Prices, WALL

ST. J. (Feb. 26, 2019, 4:30 PM), https://www.wsj.com/articles/live-analysis-drug-company-ceos-take-

the-hot-seat-before-congress-11551191988; Drug Pricing in America: A Prescription for Change, supra

note 1, at 492, 495, 497.

Discounting these arguments, the House of Representatives in

November 2021 passed a sprawling reconciliation bill that included provisions to

radically alter how the federal government pays for pharmaceuticals.

5

After ini-

tially failing to pass the Senate, renewed negotiations over the summer resulted

in the passage of the rebranded Inflation Reduction Act (IRA) on August 16,

2022.

6

Inflation Reduction Act, Pub. L. No. 117-169, 136 Stat. 1818 (2022). The IRA passed on entirely

partisan lines, with all fifty Senate Democrats voting for the bill, all fifty Senate Republicans voting no,

and Vice President Kamala Harris breaking the tie in favor of passing the bill. Melissa Quinn, Senate

Passes Democrats’ Sweeping Climate, Health and Tax Bill, Delivering Win for Biden, CBS NEWS (Aug. 8,

2022, 7:16 PM), https://www.cbsnews.com/news/inflation-reduction-act-senate-pass-climate-healthcare-tax-

bill/ [https://perma.cc/CXU2-NV9G]; see also Budget Reconciliation: The Basics, HOUSE COMM. ON

BUDGET (Aug. 11, 2021), https://democrats-budget.house.gov/sites/democrats.budget.house.gov/

files/documents/Budget%20Reconciliation%20The%20Basics%20-%20Final%202021.pdf [https://perma.cc/

VR6G-98DN] (“Instead of needing 60 votes, a reconciliation bill only needs a simple majority in the Senate.”).

The bill includes the most sweeping revisions in drug pricing policy since

at least the Affordable Care Act in 2009 and arguably since the creation of the

Part D program in 2003.

7

1. Drug Pricing in America: A Prescription for Change, Part II: Hearing Before the S. Comm. on

Fin., 116th Cong. (2019).

2. See, e.g., A Prescription for Change: Cracking Down on Anticompetitive Conduct in Prescription

Drug Markets: Hearing Before the Subcomm. on Competition Pol’y, Antitrust & Consumer Rts. of the S.

Comm. on the Judiciary, 117th Cong. (2021); Unsustainable Drug Prices: Testimony from the CEOs

(Part I): Hearing Before the H. Comm. on Oversight & Reform, 116th Cong. (2020).

3.

4.

5. H.R. 5376, 117th Cong. §§ 27001–27002 (as passed by House, Nov. 19, 2021); infra note 7.

6.

7. See Inflation Reduction Act secs. 11001–11408. Among other changes, the law allows the

Secretary of Health and Human Services (HHS) to directly negotiate with pharmaceutical companies for

some drugs purchased by the Medicare program, requires manufacturers to pay Medicare a rebate if the

1212 THE GEORGETOWN LAW JOURNAL [Vol. 111:1211

These events, the first significant legislative fight lost by the pharmaceutical

industry in a generation, represent a burgeoning reckoning with the consensus

viewpoint on pharmaceutical development and spending, spurred by headlines of

corporate rapaciousness,

8

See, e.g., Rebecca Robbins & Cecilia Kang, Martin Shkreli Is Barred from the Drug Industry and

Ordered to Repay $64.6 Million, N.Y. TIMES (Jan. 14, 2022), https://www.nytimes.com/2022/01/14/

business/martin-shkreli-barred.html.

soaring profits,

9

See Fred D. Ledley, Sarah Shonka McCoy, Gregory Vaughan & Ekaterina Galkina Cleary,

Profitability of Large Pharmaceutical Companies Compared with Other Large Public Companies, 323

JAMA 834, 837 (2020) (finding that pharmaceutical companies “had significantly higher annual profit

margins than S&P 500 companies”); see also Julia Kollewe, Pfizer Accused of Pandemic Profiteering as

Profits Double, GUARDIAN (Feb. 8, 2022, 12:26 PM), https://www.theguardian.com/business/2022/feb/

08/pfizer-covid-vaccine-pill-profits-sales [https://perma.cc/PS32-7LER].

and set-your-watch-to-it yearly price

hikes.

10

Patients report rationing insulin, occasionally resulting in death,

11

See Drew Pendergrass, How Insulin Became Unaffordable, HARV. POL. REV. (Jan. 22, 2018),

https://harvardpolitics.com/how-insulin-became-unaffordable [https://perma.cc/584X-MRG4]; see also

Jean Fuglesten Biniek & William Johnson, Out-of-Pocket Spending on Insulin Is Highest at the

Beginning of the Year, HEALTH CARE COST INST. (Sept. 10, 2019), https://healthcostinstitute.org/

diabetes-and-insulin/out-of-pocket-spending-on-insulin-is-highest-at-the-beginning-of-the-year [https://

perma.cc/9F57-CW4B] (detailing the high out-of-pocket costs of insulin).

and

more than forty percent of people diagnosed with cancer exhaust their life savings

within two years of diagnosis.

12

It is well known that America pays, on average,

more than twice what other Organisation for Economic Co-operation and

Development (OECD) countries pay for the exact same pharmaceutical prod-

ucts.

13

See ANDREW W. MULCAHY, CHRISTOPHER M. WHALEY, MAHLET GIZAW, DANIEL SCHWAM,

NATHANIEL EDENFIELD & ALEJANDRO URIEL BECERRA-ORNELAS, RAND CORP., U.S. PRESCRIPTION

DRUG PRICES ARE 2.5 TIMES THOSE IN OTHER OECD COUNTRIES (2021), https://www.rand.org/pubs/

research_briefs/RBA1296-1.html [https://perma.cc/D6NG-CDR6].

Public support for drug pricing reform polls higher than nearly any other

policy.

14

See Amanda Michelle Gomez, The Public Backs Medicare Rx Price Negotiation Even After

Hearing Both Sides’ Views, KAISER HEALTH NEWS (Oct. 12, 2021), https://khn.org/news/article/poll-

prescription-drug-price-negotiation-medicare-public-support [https://perma.cc/2G6N-38JX].

The passage of the IRA addresses some of these concerns for senior citi-

zens enrolled in Medicare, albeit in a limited way. But the pharmaceutical indus-

try continues to protest the bill, framing the legislation as a disaster for the

industry and justifying its arguments with appeals to efficiency, innovation, and

competition—the languages of neoliberalism.

15

See, e.g., Jake Johnson, Big Pharma Bemoans ‘Tragic Loss’ as Democrats Take Modest Action to Curb

Drug Prices, COMMON DREAMS (Aug. 8, 2022), https://www.commondreams.org/news/2022/08/08/big-

pharma-bemoans-tragic-loss-democrats-take-modest-action-curb-drug-prices [https://perma.cc/TVN6-W824];

Press Release, Pharm. Rsch. & Mfrs. of Am., PhRMA Statement on House Passage of Reconciliation

Spending Bill (Aug. 12, 2022), https://phrma.org/resource-center/Topics/Economic-Impact/PhRMA-

Statement-on-House-Passage-of-Reconciliation-Spending-Bill [https://perma.cc/Q5SC-J8CY]; Press

Release, Michelle McMurry-Heath, President & CEO, Biotech. Innovation Org., New Drug Pricing

price of a drug rises faster than the rate of inflation, and restructures the Part D benefit design. See id.

secs. 11001, 11101, 11201; see also infra Part IV (discussing the drug pricing provisions of the IRA).

8.

9.

10. See generally STAFF OF H. COMM. ON OVERSIGHT & REFORM, 117TH CONG., DRUG PRICING

INVESTIGATION: MAJORITY STAFF REPORT (2021) (describing frequent and significant price increases).

11.

12. Adrienne M. Gilligan, David S. Alberts, Denise J. Roe & Grant H. Skrepnek, Death or Debt?

National Estimates of Financial Toxicity in Persons with Newly-Diagnosed Cancer, 131 AM. J. MED.

1187, 1189 (2018).

13.

14.

15.

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