Don’t let artificial caps stifle drug production

Don’t let artificial caps stifle drug production

This is shaping up to be another banner year for medical progress. Regulators have already approved 28 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 Massachusetts and a handful of other states 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 serious 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 potentially promising new treatments end in failure. Drug prices must reflect this high cost of research and development, and the prices must cover a company’s total capital costs, which include the numerous failures that accompany every success.

Currently, when the government deems certain medicines too expensive, regulators often simply choose not to cover them. The danger here has been amply demonstrated in the Department of 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 39 percent. In Part D, by contrast, 83 percent of those drugs are covered under the various plans from which seniors choose. VA coverage is so skimpy that 40 percent of participants buy supplemental insurance to ensure that they will have access to medications should the need arise.

The cost of price controls will be even higher. 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 research and development will quickly dry up.

The empirical evidence is clear. Europe outspent the United States on pharmaceutical R&D 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 United States 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.

Here in the United States, without price controls, medical innovation has been on the opposite trajectory. Recent breakthroughs have revolutionized medical care and brightened patient prospects.

For example, past treatments for the estimated three million Americans with hepatitis C required weekly injections that caused uncomfortable side effects and cured between 50 and 75 percent of patients. The new, expensive hepatitis C drug Sovaldi, by contrast, cures about 90 percent of patients in less time with far fewer side effects.

If the United States had imposed price controls similar to those in Europe, Sovaldi might be no more than a glimmer in the eye of a scientist unable to obtain investment dollars to fund R&D. Although we will never know exactly, the toll in lives lost due to European price controls is certainly staggering.

Yes, new drugs are expensive. But their price tags pale in comparison with 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. According to the National Institutes of Health, a cure for cancer is valued at $50 trillion.

Pharmaceutical research doesn’t just save lives; it also sustains Pennsylvania’s economy. Drug makers support more than 200,000 Keystone State jobs. Price caps would threaten citizens’ health – and the $51 billion that the pharmaceutical industry adds to Pennsylvania’s economic output.

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

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.