Some federal health officials and members of Congress are championing proposals to establish price controls in America’s pharmaceutical market by pegging U.S. drug prices to what other countries are paying for the same medicines.
The goal of reducing out-of-pocket costs for American consumers is obviously important and laudable. However, as my co-authors and I point out in a new paper from The American Consumer Institute, that by adopting an international reference pricing model the United States would be imposing misguided price controls that have had devastating consequences for patients abroad.
All of the countries cited as comparators to the United States — including much of Europe, Canada and Japan — tightly regulate their pharmaceutical sectors and set prices by government fiat. By artificially suppressing prices, these price controls trigger a host of unintended consequences, including a sharp reduction in the incentives for drug manufacturers to invest in R&D efforts to develop novel medicines.
The process of creating a new drug is long, costly and fraught with risk. Bringing a new drug to market takes a decade or more and costs on average nearly $3 billion. Failures are commonplace; only about one in 10 drugs that reach clinical trials ultimately make it to market and a minority of those are commercial successes.
In countries with strict limits on drug prices, the payoff for pharmaceutical R&D is often not enough to attract investment — depriving patients of the next breakthrough treatment for cancer or Alzheimer’s. In fact, if pharmaceutical R&D in Europe had grown at the same rate as in the United States from 1986 to 2004, 46 more medicines would be available to consumers today. Researchers have also found that if other Organisation for Economic Co-operation and Development countries lifted their pharmaceutical price controls, the number of new treatments would increase by 9 percent to12 percent by 2030. Consequently, the typical 15-year-old alive today in these countries would live as much as 1.6 years longer than under the price-control regimes currently in place.
Compared to the United States, access to cutting edge medicines in countries that embrace price controls is also sharply reduced. Of the 290 medicines launched worldwide between 2011 and 2018, Americans have access to nearly 90 percent. On average, residents of other advanced countries have access to fewer than half of all new drugs, and some countries that have been cited as potential models for the United States — like Greece and Portugal — have access to fewer than one in four new drugs.
Even when new drugs are ultimately made available in foreign countries, patients typically face long delays. From its global launch, it takes a new cancer drug just three months on average to become available in the United States, compared to 18 months in a sample of other developed countries. Low prices are meaningless if the medicine you need is not available where you live, and Americans may well face similar access restrictions if we adopt the same pricing strategies.
Adopting foreign nations’ drug price controls would also jeopardize U.S. intellectual property rights, which the overwhelming majority of Americans recognize as fundamental to our enviable record of innovation and economic growth. Many countries pay less for drugs by threatening to ignore the patents of U.S. drug makers if they refuse to accept government-imposed terms.
Policymakers should be fighting these coercive tactics, not tacitly endorsing them by adopting the artificially deflated prices made possible by abusing American IP.
There are better ways to tackle rising out-of-pocket drug costs that rely on free market forces, not government control. Enhancing transparency in the pharmacy benefit manager industry would be a good start. Pharmacy benefit managers act as middlemen between drug makers, pharmacies and insurance plan sponsors. While their job is to negotiate rebates on drugs on behalf of plan sponsors and consumers, their secretive dealings allow them to pocket billions of dollars instead of passing these savings on to consumers.
Policymakers should reject efforts to tether U.S. drug prices to an international index. Though consumers may benefit from price reductions in the short-term, such a policy in the long run would shrink patient access to life-saving medicines, slash pharmaceutical R&D, and undermine the IP rights of American companies.