COVID-19 Reminds Us That Both Innovation and Affordability Are Needed

In her March 25 Forbes editorial, Sally Pipes documented how the private sector is rising to the health challenges of the coronavirus. Whether it is Moderna launching clinical trials for a COVID-19 vaccine or Gilead Sciences investigating whether one of its medicines, Remdesivir, is effective against the coronavirus, private sector firms are innovating at lightning speed. These efforts exemplify the broader societal benefits created by an innovative pharmaceutical industry.

The second installment in PRI’s Center for Medical Economics Escape the Drug Pricing Maze video series explains that in order to foster innovation, the prices of cutting-edge medicines must be temporarily high in order to cover the capital costs for developing them. And, this process works.

Not only does the current system incent the development of vaccines and treatments for coronavirus, the strong incentive to innovate has also led to cures for spinal muscular atrophy and hepatitis C. Recent innovations have also led to more effective treatments for cancer and auto-immune diseases. This progress would have been impossible without the positive incentives created by the U.S. pharmaceutical market.

Innovation isn’t the only important goal, however. As the third installment in the Escape the Drug Pricing Maze video series explains, widespread affordability is also crucial. Here too, the U.S. pharmaceutical market excels – although not without some important flaws that must be fixed.

Starting with the good news, 90 percent of the traditional medicines that patients purchase at the pharmacy counter are low-cost generic medicines. The vast majority of these (over 95 percent) cost $20 or less. So, most of the times when a patient receives a prescription from their doctor, that prescription will be affordable.

But, there are exceptions.

First, even if each individual prescription is affordable, as people age they will typically take a large number of prescriptions. When added together, people’s total prescription costs are unaffordable even though the cost for each individual prescription is affordable. Michael Mandel of the Progressive Policy Institute termed this problem the prescription escalator.

Second, the top 5 medicines account for more than 10 percent of total drug spending, and the top 50 accounted for 40 percent of total drug spending. Patients who require one of these medicines will face excessive costs, especially if their out of pocket costs are not capped.

Third, there are cracks in the system that inflicts excessive costs on patients. For example, the overly complex (and opaque) pricing system distorts the costs and transfers an excessive amount of a drug’s cost on patients – particularly patients that lack health insurance.

It is imperative to fix these problems, but not at the expense of the broad-based affordability that has already been achieved, nor the innovative manufacturers searching for tomorrow’s cures. These fixes require effective out-of-pocket caps, reforms to promote competition in the innovative high-cost biologics market (e.g. promote biosimilars), and pricing reform that transition the distribution system to a net-price model.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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