The true cost of price controls: No more cures

2015 is shaping up to be another banner year for medical progress. Regulators have already approved 29 new medicines, roughly on last year’s pace of 41 new drug approvals — the most since the Clinton administration.

But in future years, the list of medical breakthroughs could prove much shorter. In response to the high cost of certain medications, most notably Turing Pharmaceuticals’ admittedly outrageous 5,000 percent price hike on a generic AIDS drug — political leaders are proposing caps on drug prices.

Transparency bills in state capitals seek to force pharmaceutical companies to reveal their costs of production.

Congress is considering de facto caps in Medicare Part D, the federal prescription insurance program for seniors and the disabled.

And presidential candidates are floating a variety of price capping schemes, including Hillary Clinton’s proposal to cap out-of-pocket expenditures for individuals with chronic health problems.

Advocates of price controls hope that by artificially capping prices they will widen the availability of medications.

Unfortunately, they end up doing just the opposite.

Any discussion of drug prices must begin with the economics of research and development in the pharmaceutical industry. More than any other industry, getting a new pharmaceutical product to market is incredibly expensive.

A single drug can take billions of dollars and decades of research. Moreover, the vast majority of promising new treatments end in failure.

Drug prices must reflect this high cost of research and development and the prices must cover the company’s total capital costs that includes the numerous failures that accompany every success.

Currently, when the government deems certain medicines too expensive, regulators often choose not to cover them.

The danger here has been amply demonstrated in the Veterans’ Affairs health system, which refuses to cover medicines that don’t come with hefty discounts.

The result is lost access to medications for veterans. Of the most popular brand-name drugs seniors use, the VA covers only 82 percent.

In Part D, by contrast, 96 percent of those drugs are covered under the various plans from which seniors choose.

Price caps cripple innovation and stifle the creation of new cures.

If pharmaceutical companies and their investors can’t count on prices that will allow them an adequate return on their successes, funds for R&D will quickly dry up.

The empirical evidence is clear. Europe outspent the United States on pharmaceutical research and development by 24 percent in the mid-1980s, and introduced twice as many drugs between 1987 and 1991.

Then came increased adoption of price controls throughout the continent. Europe’s edge in innovation quickly evaporated.

By 2004, R&D spending there trailed America by about 15 percent. Unsurprisingly, the European market introduced 20 percent fewer new drugs than the U.S. between 2000 and 2004.

One study estimated that without price controls in the advanced economies, 10 to 13 additional new drugs would have been introduced each year of the past decade.

Yes, new drugs are expensive. But their price tags pale in comparison to the financial benefits associated with new treatments.

If researchers found a way to slow Alzheimer’s progression by just five years, for example, society could see a $600 billion economic boon per year by 2050.

Lawmakers need to take the long view. Innovation saves lives. Price controls take them.

Wayne Winegarden, Ph.D.
Senior fellow
Pacific Research Institute

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