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The Truth Behind Drug Prices and Innovation

Virtually all consumers want the most innovative products and services as inexpensively as possible. Nowhere is this more acute than the health care sector, where quality of life — and life itself — is at stake.

The news cycle is replete with shock-value stories of prices for medicine, from Martin Shkreli to the EpiPen. While these flashpoint events have already been addressed through public pressure and investigations, they fuel a larger narrative that drug costs are rising too fast.

The truth is that innovation in medical treatments is expensive and costs are increased by regulatory compliance for market approval.

The United States, nearly unique in the world, allows free market forces to determine pricing. We tend to pay more, but we have the most innovation and the best access to new medicines.

Some countries deny legitimate patent rights and allow copycat manufacturers — who don’t have to pay for research and development — to drive down costs. Other countries use the monopsony power of a single-payer national health care system to negotiate (or dictate) what prices they will pay. And some governments simply issue price controls.

All of these tactics have the effect of lowering prices for consumers, yet lower income to innovative companies, which in turn have less incentive to spend on R&D for new treatments.

Addressing health care costs overall cannot be achieved by forcing lower drug prices. In fact, medicine accounts for only 14 percent of total health care spending in the United States, and new breakthroughs in medicine actually drive down other health care costs.

President Donald Trump has made clear that he will not tolerate other countries gaming the system and taking advantage of the United States. When countries such as India and Canada change the rules to deny American innovators their just patent rights, they subsidize their consumers and businesses at our expense. And when countries across Europe impose price controls and other mechanisms to distort the free market, they are sacrificing future global innovation for the expediency of cheaper drugs today.

As the administration negotiates our trade agreements, we should use that leverage to convince other countries to abandon the patent distortions and price controls that suppress innovation at everyone’s expense.

None of this is to say that immediate health care needs should be overlooked or ignored. Indeed, policies limiting prices have considerably less effect in the context of patients who lack the financial resources to pay more. Innovative companies already address this to some degree through differential pricing; setting the price at a level that market can bear, thus adjusting prices downward for poorer countries. Governments of wealthier countries can do more by investing in health care to prevent and manage disease, and subsidizing their poorest consumers.

A narrow view of health care costs that places the entire burden on drug costs will fail. And a myopic view of drug prices that reduces costs to patients by depriving innovators of the market value of their products, siphons off the support for research into the cures we hope will be available to future generations. If the government believes it needs to lower costs to consumers, it can subsidize their payments, while still ensuring that innovators continue to have the incentives to bring us the innovation we all want and need.

 

Steven Tepp is president and CEO of Sentinel Worldwide and professorial lecturer in law at George Washington University Law School.

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