These days, policymakers in both parties are increasingly ignoring the tradeoffs that come with government price controls on medicines. The Inflation Reduction Act has already led to dozens of canceled biotech research projects, and Congress is now deliberating on further government price-setting through "Most Favored Nation" policies.
Patent rights lose their value under price controls. The purpose of patents is to protect innovators from early price competition by companies that did not undertake the costly research and development required to bring a drug to market. Lawmakers unfamiliar with how markets work, such as Senator Bernie Sanders, often point to the gap between drug prices and manufacturing costs as evidence of wrongdoing. But having price controls force prices down to generic levels -- reflecting only production costs -- leaves innovators with effectively no patent protection at all.
Price controls don't merely deter research into completely novel drugs, though. They also disincentivize companies from improving existing medications or finding new uses for them -- by undermining the efficiency of long-standing U.S. intellectual property frameworks.
A new study that I co-authored shows what we lose when policymakers weaken those frameworks. My colleagues and I examined 317 small-molecule medicines approved between 2015 and 2024. We found that an average 14-year market exclusivity period -- which intellectual property protections traditionally have afforded medicines in the market -- spurred the development of 89 post-approval treatments over that period, saving the equivalent of roughly 2.8 million lives due to expanded treatment options.
Conversely, undermining the efficiency of this system through price setting policies that effectively reduce currently observed periods of market exclusivity by 5 years would prevent the development of 32 post-approval treatments. That, in turn, would result in the equivalent of 1 million full lives lost due to the loss of expanded treatment options that would otherwise have benefited broader patient populations.
A National Bureau of Economic Research paper published in February reinforces these findings and underscores the collective threat of price-setting policies. That study estimates reducing U.S. market exclusivity periods by just two years reduces future R&D investment by up to 25%.
To understand why price controls cause such severe damage to post-approval innovation, we need to go back to basics and understand how our intellectual property system works.
Today, 90% of U.S. prescriptions are filled with generic medicines, which are vastly cheaper than newer branded drugs that still enjoy patent protection or FDA-granted exclusivity periods. These generics cost patients just $7 out of pocket on average, and are a key reason our government is already the "most favored nation" in drug pricing. The total cost of filling the average prescription in Medicare and Medicaid is 18% cheaper in the United States than in other developed countries.
This wasn't always the case. Back in 1984, just 19% of prescriptions were generic medicines and there was no clear regulatory pathway for generic approval, which delayed generic competition for years. At the same time, growing regulatory requirements were increasing the time it took to bring innovative treatments to market, reducing incentives to invest in pharmaceutical innovation.
The Hatch-Waxman Act solved this problem by establishing an abbreviated approval pathway for generic drugs, while also restoring parts of the patent term that innovators had lost due to the lengthy regulatory process. During the congressional debate around patent restoration, lawmakers determined that a 14-year average period of market exclusivity would provide research-intensive companies enough time to earn a return on their investment, giving them necessary incentives to increase R&D activities.
In recent decades, the average time to generic entry, or period of market exclusivity, has consistently aligned with what lawmakers envisioned -- 14 years.
But beyond the development of new drugs, this protection also encourages investment in post-approval R&D to maximize the therapeutic potential of approved products in different diseases and patient populations before generic entry occurs. Innovators are incentivized to do this work, which often involves additional, costly phase III clinical trials, to maximize the reach of their products and earnings potential.
For many diseases, patients rely on this post-approval research activity to not only improve an existing medicine, but also to offer new treatment strategies. For example, my prior research shows that nearly 60% of post-approval indications stemming from cancer medicines allow for targeting earlier stages of cancer -- thereby playing a major role in improving survival.
The efficiency of these follow-on development incentives is perhaps the most overlooked aspect of our intellectual property system from an economic standpoint. Not only does maximizing revenue potential for innovators benefit the broadest number of patients across and within diseases, but it achieves this goal without requiring investment in the discovery and development of entirely new products -- which can be associated with long development timelines and additional corresponding periods of protection.
Thus far, our intellectual property framework has efficiently aligned incentives for innovators with patients' needs -- maximizing the therapeutic potential of existing medicines in addition to incentivizing the discovery of entirely new products. When policymakers ignore innovation incentives and pursue short-sighted price-setting policies, they put the expanded uses of those medicines at risk. It is often the case that the most fruitful innovation occurs not at initial approval, but in the years that follow.
