Price Controls on Drugs Would Stifle Innovation, Reduce Access
For all the debate among economists about the minutiae of fiscal and monetary policy, they’re virtually unanimous in their condemnation of price controls, where the government arbitrarily sets prices instead of allowing supply and demand to work freely.
So it should come as no surprise that 150 economists have voiced their opposition to a recent proposal by federal health officials – and echoed in the halls of Congress – to establish price controls in America’s pharmaceutical market by pegging U.S. drug prices to what other countries (all of which impose price controls on their drug markets) are paying for the same medicines.
The goal of these proposals, to mitigate the very real problem of escalating out-of-pocket drug costs for consumers, is laudable. But importing the misguided policies of other countries would reduce life-saving drug innovation, limit access to cutting-edge medicines, and threaten America’s global leadership in the pharmaceutical sector. In the end, vulnerable patients would pay the price.
In a new paper from the American Consumer Institute, my coauthors and I lay out the likely effects of adopting an international reference pricing scheme in the U.S.
One crucial starting point for any discussion of drug policy reforms is the recognition that developing new medicines is a costly and high-risk enterprise. When all is said and done, bringing a new drug to market costs nearly $3 billion. And that doesn’t account for the nearly 9 in 10 drugs that reach clinical trials but don’t get approved by the FDA.
In countries with strict limits on drug prices, few manufacturers are willing to invest in the R&D needed to develop new treatments, and patients who could have benefitted from innovative drugs lose that opportunity. It’s no coincidence that the U.S. funds 44 percent of the world’s medical R&D, more than all of Europe combined. Researchers estimate that if pharmaceutical R&D in Europe had grown at the same rate as in the U.S. from 1986 to 2004, forty-six more medicines would be available to consumers today.
A 2018 analysis predicted that if other OECD countries lifted their pharmaceutical price controls and allowed market forces to determine drug prices, by 2030 the number of new treatments available would increase by 9-12 percent. As a result, the average 15-year-old’s life expectancy would increase by as much as 1.6 years.
The negative effects of price controls don’t stop there. The U.S. also vastly outperforms the rest of the world in drug availability to patients. Of the 290 new medicines launched worldwide between 2011 and 2018, Americans have access to nearly 90 percent. On average, residents of other advanced countries like Germany, Denmark, and France have access to fewer than half of all new drugs. In Greece, which some policymakers have cited as a potential model for the U.S., just 14 percent of new drugs are available. Even innovative medicines are ultimately made available, patients in other countries commonly wait more than a year longer than in the U.S. Importing the price controls prevalent in those countries to the U.S. may well lead to the same access restrictions on cutting-edge medicines.
Another crucial issue is that the heavily discounted drug prices that foreign countries enjoy are often achieved by ripping off the intellectual property (IP) rights of U.S. pharmaceutical companies. Some countries threaten to impose compulsory licensing (which allows IP to be expropriated without the owner’s consent) in order to coerce U.S. drug makers to accept lower prices.
An overwhelming majority of the American people understand the crucial link between strong IP protections and innovation and economic growth, according to a recent survey commissioned by the American Consumer Institute, and policymakers should aggressively pursuing ways to curb patent abuse abroad. Pegging American drug prices to foreign prices that are artificially deflated by undermining the IP rights of American manufacturers would only embolden this behavior.
There are ways to reform America’s drug market without compromising incentives to develop treatments or endangering access to life-saving drugs. For example, changing how pharmacy benefits managers (PBMs) operate by enhancing transparency could generate billions of dollars in savings for consumers.
Americans are right to be concerned about the high out-of-pocket costs of pharmaceuticals. But targeting America’s free enterprise system is the wrong solution. Putting bureaucrats abroad in charge of deciding how our drug market operates may save some money now, but it’ll hurt consumers in the long-run.
Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.