Senior citizens are alarmed by their increased spending on prescription drugs. Unfortunately, some lawmakers have offered a solution to this problem without understanding the ailment.
Last month, Rep. Tom Allen (D-ME) introduced legislation that would base the United States price on the average price of a similar prescription drug sold in Canada, France, Germany, Italy, Japan, and the United Kingdom.
Contrary to intent, this legislation would raise health-care costs, reduce research and development (R&D) expenditures, and decrease patient access to new and innovative drugs.
An Aging Population. Changing demographics are a primary reason why demand for such drugs is increasing. From 1995-2010, the number of senior citizens is expected to increase from 33.5 million to 39.4 million. As these senior citizens age, many require new medications such as Cognex, to treat chronic ailments such as Alzheimer’s Disease. These newer, more cost-effective medicines are making expensive and intrusive alternatives, such as hospitalization, unnecessary.
For example, one drug, tissue plasminogen activator (tPA), used to treat stroke, reduces the need for rehabilitation and nursing home care, and saves $4 million for every 1,000 patients. Lawmakers should not only be aware of how these demographic changes affect prescription drug use, they should also understand that efforts to contain spending have repeatedly failed in other countries.
The Foreign Experience with Price Controls. To contain costs, various nations have utilized direct and indirect price control strategies, such as reference pricing systems and compulsory licensing. Although Germany, Japan, and Canada employ different methods, the results are the same. Higher health-care costs and decreased R&D expenditures are the unintended consequences of price controls. Imposing this failure on the United States would not be prudent policy.
Reference pricing limits drug producers’ reimbursement to the price of the cheapest drug in a group. This makes drugs appear to be cheaper, encourages individuals to consume more than they would at a higher price, and boosts total expenditures. The German government operates a reference pricing system and has faced dismal results.
Increased spending due to over-consumption and the use of less effective medicines eventually forced Germany to remove patented drugs from reference pricing and reimburse them according to market prices. When Dr. Baldur Wagner, Germany’s State Secretary of Health, exempted innovative drugs from the reference price system, he explained that “by correctly abolishing the reference price for patented drugs, more research is now taking place.” It is also particularly worthy to note that although market pricing increased providers’ spending, it reduced hospital costs because it boosted the usage of newer, more effective drugs that prevented hospitalization.
In Japan, the Special Committee on Drug Prices sets the price of drugs. This price-control mechanism actually increased spending on drugs. According to a Boston Consulting Group report, Japanese price controls cut prices by more than 60 percent. But lower prices and the use of less effective drugs intensified consumption, thereby increasing drug expenditures by 59 percent.
At one point, the Canadian government utilized compulsory licensing, which forces pharmaceutical firms to share their innovations with third-parties, reducing profits. Compulsory licensing had such a significant negative impact on R&D that in the early 1990s, the Canadian government increased the patent term from 6-7 years to 10 years. Canadian R&D then grew from $100 million in 1988 to $1 billion in 2000.
The Need for Research and Development. In the United States, it costs more than $500 million to develop a new drug. By reducing revenues, price controls harm innovation, essential to R&D for new, more effective drugs. Controls leave patients worse off since less R&D means fewer drug breakthroughs and new products.
The relative lack of restrictive price controls in the U.S. has made it the leader in pharmaceutical innovation. For example, 10 of the top 20 firms in the global industry in 1998-99 were based in the U.S. The bulk of global R&D is also financed by U.S. companies.
The U.S. should reject price control policies that would weaken R&D, particularly since the experience of foreign countries demonstrates that price controls don’t work. Price controls have increased health-care spending and decreased R&D in Germany, Japan, and Canada. Lawmakers in the U.S. should reject price controls and adopt policies based on market pricing that fuel innovation and R&D. These policies will benefit all Americans and patients around the world.
