Podcast

Steve (00:01.073)
Welcome to our latest edition of On Background, our podcast series where we focus on late breaking health policy topics, interviewing folks that have had great official positions in previous government agencies, but not in them anymore so they can speak candidly in their space. We are honored today to have with us Tomas Phillipson, esteemed professor at the University of Chicago.

Also former acting chair of the Council of Economic Advisors and also member of the Council of Economic Advisors. I actually had a privilege of serving with him back in the Trump administration back in the day. Tomas, we are thrilled to have you with us and then joining us here in our virtual studio aquatic boat room is Tom Gunderson. Tom is a long-term, as many of know, financial analyst formerly from Piper.

Sandler, guess, or Piper Jaffrey, now Piper Sandler. And then Brianna Mayer, who’s one of our great co-hosts coming in from on background, pharmaceutical expert and faculty member from back in the day as well. So Tomas, you have been getting a lot of attention and a really good way for some of the things you’ve been saying about drug innovation and…

particularly the idea, think you put it in the Wall Street Journal about trying to find a NATO structure that’s kind of advanced medical innovation. What’s been exciting is that I haven’t found anyone who said like, that’s a bad idea, people are pretty excited about it. Can you just sort of give us a thumbnail sketch of what you’re thinking in that space?

Tomas Philipson (01:37.23)
Yes, this actually started. did a lot of research at the council, actually. I don’t know if you I think you were there at the time where we estimated, you know, what share of global earnings and biopharma come from US customers, whether public or private, essentially, which was in the order of magnitudes of 70 percent, even though US GDP is about 23, 24 percent of world GDP. So we’re overrepresented, obviously, in how much we reward medical innovation relatives.

to other countries. And that was really in line with what the president wanted to pursue at the time. And there’s been several proposals trying to pursue that, but it’s also sort of involving with the most favored nation. I’ll now get into why I’m sort of skeptical of that, that kind of pricing. So therefore, I proposed an alternative which would be essentially to

other areas of global public goods where we feel other nations are free riding on us such as defense or military expenditures. We set a GDP guided threshold that countries should spend on new drugs, not necessarily generics and I’ll get into why that’s a big difference later perhaps. There’s some background noise here, it sounds like someone is in a wind tunnel on my end. I don’t know if that’s true on your end.

Steve (03:06.865)
Let me take my mic off.

Tomas Philipson (03:13.901)
Now you’re, now I can’t hear you. Now I…

Steve (03:18.249)
I think I was the problem, Tomas will edit it out. I’m gonna take my mic off while you’re speaking. Go ahead.

Tomas Philipson (03:22.181)
Okay. So anyway, so, so,

Instead of most favorite nation, which is really price controls being imported into the U.S. essentially, and we are not setting our own prices. I think it would be more productive in some sense to do what we did for military spending so successfully when the president basically went over on the other side of the pond and said, look, you need to have a certain share of your GDP spent on this global public

good or not global, in this case a NATO public good that we are defending, that we all share equally in and you’re not free riding off US spending more. We’re obviously spending more in absolute terms, but this wasn’t relative terms to GDP that he’s a peg essentially. And I think that would be very useful for international agreements on innovation, innovator drug. And I have argued that that could actually reduce spending abroad if they

adopt our Hatch-Waxman framework because US, it turns out, public payers in the US spend less on the average prescription for a drug than foreign countries in Europe. And the reason is that 93 % of prescriptions are generic, where they are spending twice as much per generic drug that we are.

The 7 % of brand prescriptions that are brand, we are spending three times as much as they are on average, roughly. So the 93 where they’re twice as expensive dominates our 7 % where we are three times as expensive. So they could actually lower their…

Tomas Philipson (05:07.014)
their overall drug spending if they adopted a more competitive generic framework, which many of them are not willing to do because they have generic manufacturing, particularly in Canada, and instead essentially raised their spending on innovative drugs to align with ours and had more competitive pricing of their generics drugs. In that case, they could lower their drug spending and could have a higher share

that promotes innovation. High share of GDP that promotes innovation.

Steve (05:42.633)
Fabulous. I’m going to turn it over to Tom Gunderson. How does that sound to you, Tom, in terms of a way to help the market?

Thomas Gunderson (05:52.418)
Well, and that kind of touches on what I need some more clarification to us. And that is.

What is the end goal here? A lot of what we hear about drug pricing is sort of political PR. know, people want lower drug prices and that’s a good thing. And everybody knows that healthcare is too expensive in the United States, so let’s go after those nasty drug companies. But if you do this, which I think is an amazing idea, what’s the end goal here? Because is it really changing any of the pricing in the US or is it just…

making it more not just but is it making it more fair on a global basis?

Tomas Philipson (06:33.23)
mean, the end goal is to help patients and this would dramatically help patients because more innovation would come to the market obviously in the US and in the world essentially if other countries adopted a more pro innovation payment system like the Hatch-Waxman we have in the US essentially. So.

the health effects to patients would be enormous if this could be instituted worldwide. I agree that there’s an enormous amount of, know, pharma is trying to extend life. They’re treated like cigarettes who’s trying to cut life, essentially. But it’s such a, I don’t know, it’s a strange…

I don’t know why people are so I think it’s maybe the copay nature of drugs because they just essentially saved the world with COVID or had us come out of our bunker with COVID vaccines or treatments essentially. And then the thing they get is to get hammered with policy essentially. And there’s such a small share of overall health care spending that I think the discussion of going after pharma to curb health care

spending. think we have a paper on that how literally would do even if we froze pharma spending going forward 10 years, it would only curb spending by about 12 % spending growth by about 12%. So it’s not a big deal. And but in DC, it’s a very big deal. And I think it has to do with the copay. I mean, the amount of money we spend on tax dollars or our own dollars in premiums on ICUs or whatever are never discussed because that’s all bank.

through premium, I think it’s the copay nature of drugs that makes them such a target.

Thomas Gunderson (08:25.442)
got it. That helps a lot. My other question on this is, I know this is a relatively new idea and I read the editorial that Steve sent around and Steve said in his intro that he’s not that

He hasn’t heard anybody say it’s a bad idea. What about the other side of the argument? Have you had any responses from France or Benelux or anybody that might be involved in something like this?

Tomas Philipson (08:59.748)
I’m sure there’s people who don’t like my ideas. They don’t necessarily email me. They’ll probably email their friends and tell them how bad they are. But I haven’t heard a lot of bad things about it. think it’s like I said, the key here is that Europeans will argue, we can’t spend like the US on brand name drugs and we can’t afford that because we’re poor, et cetera. And the argument is not necessarily US prices, but it’s a share of GDP. And the second argument

is of course that if they promoted innovation and therefore had more competitive generic markets, they could actually save money going into US-style payment where there’s a bigger wedge between brand and generic prices than there is in Europe, let’s say.

Thomas Gunderson (09:49.41)
Got it. Brianna?

Bryana Mayer (09:57.199)
So Tomás, you mentioned in your Chicago Tribune op-ed last week that US pharmaceutical companies have limited flexibility to renegotiate pricing contracts for drugs that are already on the market. Can you explain a little bit further why that is the case?

Tomas Philipson (10:13.796)
Well, I mean, some of this comes up in, you know, what happens if you have most favorite nation pricing? That’s kind of the context. I believe I talked about it. So most favorite nation pricing, I think is sounds good on paper in the sense that in fact, when we had discussions when within the first Trump administration, the point was not.

to bring down foreign prices. No company, they would be sued probably by their shareholders if they did that. If you have Canada, which prices way below the US, and Canada is about 5 % of sales in the US, they’re 10 % of our population.

but they have price control. let’s say Pharma has about 5 % of sales in the US and Canada and you in response to most favorite nation lower the US price that would be, you know, I as a shareholder would probably sue the company if you did that. What would happen would be there’d be enormous pressure on Canada to come up to the US prices given that all earnings occur in the US not all but the large share of earnings occur in the US.

So it was a measure to basically try to pressure foreign governments who would know that if they did not pay, if they did not raise their prices, they would not be an incentive for companies to just walk. Why would you pay attention to 5 % of the market if they are holding down your profitable market in the U.S. essentially? So that was the intent. think the problem with that is

that if you walk, many countries will say, okay, now we have a free license to or free for all to compulsory license your drug. We can just have generics in our country, produce your drug because you refuse to sell into our country essentially. If that, think would be a very likely outcome. And therefore it would instead of increasing or decreasing free riding, the intent was to decrease free riding by doing that.

Tomas Philipson (12:19.986)
it would increase free-running because now you don’t have a market for innovative drugs in those countries once they have compulsory licences. You would have a smaller global market because they engaged in that behavior. So I think most favorite nation pricing in terms of free-riding has exactly the opposite, would exactly have the opposite effect of what it’s intending to do, which it increase free-running as opposed to decrease.

Bryana Mayer (12:49.366)
Yeah, it sounds like foreign countries might react in terms of breaking patent contracts that I think you’re alluding to perhaps if there were more pricing pressure. You also mentioned in the article that if existing US drug prices were capped at low levels that are set overseas, the result would be catastrophic, not just for the economy, you mentioned some of those ways, but also for American health. Can you expand on your thoughts there further?

Tomas Philipson (13:15.748)
Yeah, mean, innovation is driven obviously by if you go to any VC firm, you go to any private equity firm, what do they look at before they invest in a clinical trial? They look at what a how big is the market and how much reimbursement will take place for the drug in that market? How big is the disease? And what’s the insurance status of the people of having the disease? What are how much are they going to pay for it essentially through their insurance company?

That was, you know, that’s slide one or whatever of any presentation. And if you have that, that means R &D is sensitive to earnings. Obviously it is. think economists are questioning that. It’s just common sense. And I think it’s ridiculous to question that sometimes. But anyways, it is. So

If you then clamp down on earnings with price controls, obviously we’re going to have fewer treatments to treat diseases in the future and there will be an enormous health impact that takes place because of that, a negative health impact that takes place. Often those negative health impacts, because we value health so much,

You know, in economic studies, when we have revealed preferences, how much we care about reducing mortality, we get very, very large numbers. get, you know, foreign and the average federal department uses $450,000 per life year, which comes out of economic studies, which is different from the cost effectiveness field in health economics, which uses much lower levels because governments want to pay less essentially, it’s just a matter of having price controls. So I think, so I think

in some sense here

Tomas Philipson (14:56.55)
The loss in innovation is much more valuable or detrimental, I should say, than any gains in prices for the current generation. You’re really trading off generations or cohorts, if you want to think of it that way. If you have price controls in Medicare, yes, that benefits current seniors, but clearly their kids are worse off because they’re not going to be treated correctly or as well given their, when they come in with cancer.

cancer, heart disease, etc. in 20 or 30 years. So I think that’s the real issue is innovation is sort of the central component that makes us be able to have better health. And I think that’s what is at stake with all these price controls being discussed.

Steve (15:51.353)
So, Tomas, another recent thing, even most recent on the Wall Street Journal, I think I’m going to paraphrase how the Wall Street Journal put out your letter. basically said, FDA get out of the way, or really Marty get out of the way. I’m not sure quite what you wanted to say, why don’t you give a sense of what you’re thinking about there.

Tomas Philipson (16:15.781)
Yeah.

I love Marty. mean, he and I interact a lot actually through the Paragon Health Institute. I think he’s a great guy. He’s obviously bound by law. So I was complaining more on the law than the FDA. So in particular, a 1962 amendment that basically mandates that FDA needs to show that a drug is effective, not only safe, which it always has been a mandate since it starts to require to show a company has been required to show, but also that is effective.

And if you think about that, there’s very few.

industries in which the government comes in and arbitrate product quality and safety. do arbitrate a lot through government, through cars, etc. But in terms of product quality, how good is a particular products? There very few industries the government is involved with and trying to mandate that that sellers have to show that that their product is is good enough, essentially. And I have a long thought, a long thought. It’s not me. I mean, it started

think even with Milton Friedman who said, you know, if you have a hundred thousand people say by drug, you’re killing a million by having FDA sit on it a decade essentially. this long and Sam Pelsman wrote the first paper on this and a lot of health economists are aware of that paper on the damage done to innovation from these lengthy processes. What I wanted to stress in that letter, which I think is not recognized enough is that FDA

Tomas Philipson (17:49.261)
Once they approve a drug for safety, then goes to efficacy, the efficacy part takes a very long time and that’s the highest expense. Phase 3 of FDA approval are the large and long lasting trials.

The point is that once FDA approves a particular drug and goes on the market, doctors are free to use it off label, meaning they’re free to use it for other purposes not approved by FDA. And the private sector figures out through non off-label usage, is off the label. The label shows what they showed FDA was working for. But off-label prescriptions,

The private sector generates the evidence through the journals or through specialty organizations, etc. Generates the evidence to basically use the drug correctly in off-label situations. And many times that’s a very dominant form in oncology. It’s very, very common to have off-label use of a drug that was approved for one cancer and then start using it for another type of cancer or cancer site.

So, but if that’s the case, that the private sector can figure out how to use a drug off label,

then why are we taking 10 years for the first indication of the drug essentially, when they can do it for all the remaining indications in a successful way essentially? So why not let them do it for the first indication? What’s so special about that first indication that we need to take 10 years for the government to clear it as opposed to all the off-label uses which the private sector apparently can figure out how to use to drug effect.

Tomas Philipson (19:43.129)
And that’s what I wanted to stress in that letter. So I think it’s not this big leap of faith if we drop effectiveness, the effectiveness mandate of 1962, that it’s a wild west or whatever. It’s not that because we’re doing it already for all the off-label use essentially. And it’s not a leap of faith because the private sector would obviously step up. The government sort of approval.

Tomas Philipson (20:12.262)
The activity that now takes place in the public sector, the over-regulation of effectiveness, is crowding out all the private spending on that activity. Payers, doctors, and patients would demand that a drug would be, that there’s evidence on the drug working before they use it. You don’t need the government in order for them to demand that. In fact, some payers even don’t pay for FDA-approved drugs.

even though they pay for most obviously.

But clearly, payers with all this cost pressure would be demanding companies to show that it actually does them good when their drug is utilized. So I think the thinking is that if we take off that mandate, it’s like a completely new world. No, it’s not. It’s a completely present world of how the private sector figure out how to use drugs off label.

Thomas Gunderson (21:09.802)
What I like about that is what you were talking about earlier and that is the financial impact to the pharmaceutical companies. If you’re not spending 10 years on an extended clinical trial, your upfront costs are less. Your return on investment is going to be the investment smaller, your return will be bigger and faster, which means you’re going to do more of this. So it would actually speed up, I think.

the innovation that you were talking about earlier in the conversation.

Tomas Philipson (21:42.449)
Yeah, that’s Sam Pelsman’s argument and he had a lot of evidence on that. An additional fact is that that will speed up price competition, right? So right now, if you’re an approved drug, it’s a great entry barrier for competitors to have FDA out there, having them take 10 years to come in essentially. So it would also speed up the competition in a drug class because a lot more companies would come in and compete.

Thomas Gunderson (22:12.513)
Interesting.

Bryana Mayer (22:15.662)
Yeah, and as you mentioned, Tomas, mean, in oncology, off-label use is really the norm, right? I mean, you come out with an indication in one cancer, and then it’s often pretty quickly used off-label for other tumor types as well. So I know you worked with the Trump administration as the president of the Council of Economic Advisers from 2017 to 2020, and there was talk about

Tomas Philipson (22:26.726)
Thank

Bryana Mayer (22:40.322)
different policies around drug pricing in the first administration. Can you talk a little bit about maybe what some of the headwinds or challenges were at that time and what’s different this time around?

Tomas Philipson (22:53.626)
Well, I think at that time, actually, there’s an interesting sort of history before COVID. We were heavily involved in trying to get FDA to move a lot quicker. And Scott Godley, who was the FDA commissioner at the time, did a lot of work on generics coming on, generic entry being facilitated and therefore price competition coming in quicker when patents expire, essentially. But it’s an interesting history because just before COVID, half a year before COVID,

There was a lot of discussion between CEA and FDA on how can we deregulate FDA and make it quicker.

And obviously, we were in some sense, we were really often running once COVID came in and we started thinking about Operation Warp Speed, which was really an attempt to get FDA out of the way and get the private sector to go through FDA a lot quicker, essentially. So that was an interesting discussion.

And Trump was, I remember clearly in the oval, Trump said, we have tried, we speeded them up once, let’s speed them up now with the Operation Warp Speed, essentially. So I think Operation Warp Speed was really benefiting from that previous half year when we were going after it. The way I sold it, I remember clearly, discussion we had.

with the president is that obviously the president is the real estate developer who hates the permitting process. But if you just switch the language instead of real estate development, as you say drug development and you say FDA, know, light bulb went up very, very quickly with the president that this is something we have to fix, essentially. He hates these long permitting delays in real estate, and that’s just the analog of drug development delays at FDA.

Tomas Philipson (24:49.57)
So again, I think Operation Warp 3 benefited really a lot from all the warm-up work we did without knowing obviously that COVID was around the corner. That was just not known in September, October of 2019 when we had these discussions.

Steve (25:10.205)
Yeah, and think the other thing, Tomas, remember we also put out or actually put out that report, or at least you guys did before I got on the saying like, what if there was a pandemic, what would be the economic impact just to sort of drive home the message that like, if you don’t really move really quickly, you could have some major consequences. that that that foreshadowed what we had to worry about by like six months. That was super helpful, too.

Tomas Philipson (25:33.543)
I mean, we had no way of knowing that that was going to be productive six months after the report, right? Or actually was less than it was like, that was written in September 2019 and COVID started in February, right? So we had no idea that it was going to be helpful, but it turned out to be very helpful. Again, we proposed we should have a private public partnership if a pandemic comes and that’s kind of the line that Operation Warp Speed took at the time. So I think that was just pure luck that we were working on that.

Steve (25:44.199)
Yeah. Right.

Tomas Philipson (26:03.536)
topic before it hit.

Steve (26:06.313)
So one thing actually back in that day and you and I worked on this too, I we did, I IRA has come out but remember back in the day we called it HR3, there was the proposal for innovation and you’ve written since at Chicago, you know, what happens if IRA comes in, how it’s going to dampen innovation. Is this something, I mean IRA obviously happened.

put MFN on the side, is this something that you’re tracking to see like whether or not the innovation is slowing down because of IRA?

Tomas Philipson (26:37.464)
Yes, exactly. predict that University of you know, a much higher reduction of drug innovation or drugs introduced to the market due to this cutbacks in R &D that will be essentially the, or that is the result of IRA compared to CBO that says we would lose, I think, five drugs in 20 years or something, some ridiculously low number. They obviously wanted to downplay the cost of IRA and therefore downplay the lost drugs.

induced by IRA.

There’s now evidence of where people are tracking the earnings calls of companies and these are public companies obviously. So it’s only part of what of the cut but we can track that and essentially those earnings calls are pretty disciplined discussions because you can go to jail if you like your investors essentially. So during those earning calls I think they’re tracked now about 40 or 50 drugs that were pulled due to the

or at least that’s what the companies claim essentially. So only within a short amount of years, we’re own in some sense, our estimates looked actually too low as opposed to too high. We were criticized for people thinking it was too high. It looks too low relative to the amount of cutbacks that are now taking place. But that’s a dropping of a drug in the pipeline. You obviously don’t see when they don’t start the drug at all essentially.

Steve (27:53.373)
Mm-hmm.

Tomas Philipson (28:11.428)
see the private sector that’s not in public earnings calls in those data.

Tomas Philipson (28:19.118)
I mean the privately financed I should say. There are obviously companies in the private sector but they’re not privately financed.

Steve (28:28.657)
Tom, do want to bring us in for a landing?

Thomas Gunderson (28:32.3)
I’m not sure if I bring it in for a landing, for the people listening to the podcast, IRA, I’m assuming is Inflation Reduction Act from… Okay.

Steve (28:41.085)
That is correct, as opposed to the Irish Republican Army, which, you know, very well could have also dampened innovation along the way, or, you know, savings accounts. I mean, there’s lots of other vehicles that we could do. It’s good to have that qualification right up front. Yes. Thank you. Thank you, Professor Gunderson.

Tomas Philipson (28:41.094)
Correct.

Yeah

Thomas Gunderson (28:50.69)
Great.

Thomas Gunderson (28:55.182)
So. Yes, you’re welcome. The I guess my last question, Tomas, is something we were talking about before we actually started recording, and that is Steve talking about the media attention that you’re getting right now. We’ve been spending a lot of time just on one slice of drug pricing, but from.

The media standpoint, what are you seeing as the most common questions? What is the thing that seems to befuddle their audiences that they need you to come in and help?

Tomas Philipson (29:36.647)
Well, it’s actually interesting because a lot of times when I do media, they say they will talk about a particular topic and then I go on and then it’s a completely different topic. So you kind of have to be prepared to wing it. Not wing it, you say what you think, but it’s not necessarily something you thought about before the program, essentially. But it’s usually tracking pretty closely the news events of the day, essentially, which was, you know, at one point during the IRA, there was a lot of discussion of drugs, but then

And obviously before that…

There was lot of inflation discussion. mean, it’s the whole gamut, essentially. And it’s actually kind of fun activity. And you keep yourself very, very informed. I’m much more informed, obviously, now than I was before I went to DC about DC politics, not only because I’m working there, but because I’m also now tracking it more closely. So I think it’s actually a lot of fun to learn about things. You never learn about a thing as well as when you have to actually talk about

And talking about it in national TV in particular, you quickly learn things that you otherwise would kind of be slow on.

Thomas Gunderson (30:48.44)
Thanks, got it. Landing gear’s down, bring it in Steve. Orb your…

Steve (30:56.069)
I have one last question, I’ll let Brianna. Brianna is, Brianna’s eager for this. I could just see her. Go ahead. Or I could, I could feel her presence through the internet. Go ahead, Brianna.

Bryana Mayer (31:01.549)
No,

Bryana Mayer (31:05.26)
So Tomas, I was wondering if you’ve received feedback from the private sector, specifically pharmaceutical companies, how they’ve reacted to your ideas, your recent articles on price controls and or your ideas on having the private sector more involved in evaluating product quality of new drugs. What’s been the feedback there?

Tomas Philipson (31:23.92)
They haven’t specifically gone back to me on the FDA point I made in the Wall Street Journal letter. think, you know,

The innovators, the small companies love that because they’re stuck. The biotechs are stuck in FDA before they go on the market. So all the biotechs love a faster FDA. Like I said, once you’re approved by the FDA, there’s a two-edged sword, right? Like you have other drugs that are taking a long time, but you have your existing drug that’s approved, that’s not protected from competition through the FDA. It’s a huge entry barrier, like I said. So the big pharma, there’s like two effects on them.

essentially they like the protective nature but they also want to actually get through faster for the things they have in the pipeline. So I think the biotech sector is the one that are applauding that kind of stuff more more highly than I think big pharma.

Steve (32:23.017)
So Tomas, just to time index this call or this conversation, guess I should say, you know, we are less than 24 hours since the end of the longest government shutdown that existed. So you mentioned you’re ready for arbitrary questions out of left side. Here’s one. First, it’s a two-parter. One, did you expect it to last that long? And then two, are you surprised the way it shut down?

Tomas Philipson (32:47.046)
So you and I, don’t know if you were in back then, but we lived through the second longest shutdown in 1819 when we were in the White House essentially. And I felt that was very long. I was not surprised. And I said, actually, day two of the shutdown, I said, this will go on for longer than we think. And the reason is,

Steve (32:54.771)
Yeah.

Tomas Philipson (33:07.686)
because Rosvold and others were really happy of being able to essentially use this as an excuse to cut the government labor port. some sense, Schumer, said at the time, at day two, and I think you can go back on my look at it, but day two, said that Schumer just, you know, he became an honorary member of Doge essentially because he was basically setting up to do what Doge couldn’t do, which was eliminate.

a large share of the public or government workforce. That did not happen as much as I thought it would happen. But because of that benefit, I predict that the Republicans would not necessarily be so interested in trying to end the shutdown quickly because they perceive that as a benefit. And whenever you have a benefit of a shutdown, presumably it goes on longer. I was wrong how much they were gonna cut it.

But I think also they were trying to do it in that extended it certainly in the first two or three weeks.

Steve (34:11.069)
Yeah. And then I think the, the interesting thing, just for everybody to contest, Russ Vogt is the head of the office of management and budget, but in terms of White House parlance, in terms of money, this man is God. So that’s usually the way this works. I’m going to have that be the last, thoughts here. Thank you to Tomas so much for joining the podcast. Hopefully have you back. You’re just a fabulous person engaged in this conversation. my thanks to Tom and to Brianna. this is.

Tomas Philipson (34:22.103)
Yeah.