June 28, 2019 at 5:00 am ET
Rising out-of-pocket costs for drugs are a major concern of Americans, and for good reason. Recently, some members of Congress and officials at the Department of Health and Human Services have championed a particular strategy to address this problem: pegging U.S. drug prices to what other countries pay for the same medicines.
It seems simple and fair: Why shouldn’t we be paying the same as other countries for identical products? But, as my coauthors and I describe in a new paper from the American Consumer Institute, using foreign drug prices as a benchmark in the United States would import the misguided price controls those countries use to keep prices low — and all the negative repercussions that follow.
Limiting drug prices by government fiat, as most other advanced countries do, can deliver lower costs to consumers in the short term, but their long-term effects — including reducing life-saving pharmaceutical innovation and limiting access to cutting-edge medicines — far outweigh these temporary gains.
The process of developing and manufacturing new drugs is costly and fraught with risk and uncertainty. The average research and development costs for new drugs and biologics total nearly $3 billion per drug. Failure rates are staggering: Only 5 to 10 percent of drugs that reach clinical trials get Food and Drug Administration approval, and only 30 percent of those become commercial successes. As a result, manufacturers in countries that strictly regulate drug prices are reluctant to take on these risks, to the detriment of patients in need of novel treatments.
An analysis last year found that if other advanced countries lifted their pharmaceutical price controls and allowed market forces to set drug prices, “the number of new treatments available would increase by 9%-12% by 2030 (equivalent to 8-13 new drugs in that year). For an individual aged 15-years-old today, lifting government price controls would increase life expectancy by approximately 0.8 to 1.6 years. …”
Not only do fewer drugs get produced in these countries, but access to new medicines launched elsewhere in the world is also limited. Of the 290 new medicines launched worldwide between 2011 and 2018, the United States has access to nearly 90 percent.
By contrast, among comparator countries such as Germany, France and Denmark, fewer than half of all new drugs are available. If the United States adopts prices similar to those countries, American patients may well face the same access restrictions and lose access to existing treatment options.
Importing drug prices from abroad would also undermine the intellectual property rights of American pharmaceutical companies, which exported $54.5 billion in products in 2014. Nearly 90 percent of Americans agree that strong IP protections are vital to promoting innovation and creativity. Yet some foreign countries regularly violate U.S. drug patents by coercing U.S. drugmakers to share their products at heavily discounted prices.
Essentially, foreign drug prices are often artificially deflated by abusing the IP rights of American manufacturers. Using these prices as a benchmark for U.S. drug prices would constitute a tacit endorsement of these abuses.
Instead of adopting counterproductive price controls, our policymakers should focus on reforms that boost price transparency and encourage competition in the pharmaceutical sector.
One area ripe for reform is the pharmacy benefit manager industry, which acts as a middleman between drugmakers, pharmacies and insurance plan sponsors. PBMs are supposed to negotiate with manufacturers and pharmacies on behalf of plan sponsors and consumers to reduce drug prices.
But because their dealings are usually secret, PBMs end up pocketing billions of dollars in savings that should be passed on to consumers. Creating a more transparent, competitive PBM market would deliver enormous savings for consumers without endangering pharmaceutical R&D or access.
Don’t be fooled by the apparent simplicity and fairness of international reference pricing schemes. Putting our drug market at the mercy of what bureaucrats in other countries are willing to pay for lifesaving care is not the way to achieve lower drug prices.
Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization.
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