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Rewarding Value is Key to Sustainable R&D

David A. Ricks

From software to satellites to solar power, research and development is the centerpiece of California’s innovation economy.

But biotechnology is the state’s R&D crown jewel.

Biotech was born in California and continues to boom here. So it’s fitting that the BIO International Convention has come to San Diego this week.

More than 117,000 Californians work in biotech or medical R&D, according to the California Life Sciences Association, with a fifth of them right here in San Diego. Wages for those workers average about $150,000 statewide.

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VC Golden State

More than 40 percent of U.S. biotech venture capital flows to California. And nearly 1,300 medicines are in development by California companies. Those molecules could include the next breakthroughs for patients suffering from cancer, mental illness or rare disorders such as ALS.

Eli Lilly and Co. has invested heavily in San Diego in large part because of the state’s innovation climate. So have the 1,300 other biotech companies in California. So have the venture capitalists that pour $3.3 billion a year into California biotech.

But the state’s biotech dominance is at risk, due to some of the legislation pending in Sacramento. Leading the way is SB 562, which would implement a single-payer system for California’s residents if the Affordable Care Act is repealed.

While we want all Californians to have access to care, the estimated cost of $400 billion would require steep tax increases. And the bill would allow a public board to negotiate prices directly with pharmaceutical companies.

Price Setting Trap

It’s appealing to try to use the government’s buying power to get lower prices for consumers. But here’s how government negotiation works in real life: The government tells pharmaceutical companies how much it’s willing to pay. If the pharmaceutical companies don’t accept that mandated price, the government refuses to cover their drugs.

That would mean people who need a particular medicine couldn’t get it.

Such arbitrary price caps — whether here in California or nationwide — would discourage investment in the biotech R&D that thrives here in California. They would cut off funding for the next treatment or even the next cure from California’s labs.

The good news is there are proven ways to keep the breakthroughs coming without breaking the bank. And without threatening the enormous biotech advantage cities like San Diego have built.

First, instead of overhauling the entire system, let’s focus our help on those patients that are really struggling. Today’s health care system works well for the large majority of people. But for some patients — those without insurance or in high-deductible plans — we need new kinds of solutions so that no one pays the list price for their medicines.

Rewarding Value

Second, let’s change how we pay for medicines to reward value, not just volume. The entire health care system is shifting toward value-based payments, which could save $170 billion each year nationwide, according to a Harvard Business Review estimate. California’s public health programs could help accelerate this shift by instituting more pay-for-value contracts.

Pharmaceutical companies have been signing a growing number of contracts that pay us less if our medicines are no better or worse for patients than projected, but pay us more if our medicines work better than planned. These contracts could cut out waste and help patients get the medicines that truly keep them healthy—potentially saving costs down the line.

Let’s Be Competitive

Third, let’s keep promoting competition. The best route to cheaper medicines is to have lots of options — both generic and branded. Instituting price controls or burdensome disclosure requirements makes competition harder, not easier. And it’s a lack of competition that creates the distortions and price arbitrage that we all dislike.

While growing health care costs present real challenges, the answer isn’t more regulation. Instead, private market payment innovations are the best way to keep medicines affordable—and ensure that California remains the home of biotech long into the future.

David A. Ricks is chairman, president and CEO of Eli Lilly and Co.

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