How To Encourage Pharmaceutical Innovation And Why It Is Important

How To Encourage Pharmaceutical Innovation And Why It Is Important

Between 2006 and 2015 the S&P 500 grew 7.25% per year on average–if you had invested $100 in the stock market in the beginning of 2006 it would be worth nearly $188 by the end of 2015. Sounds great.

But, any investor during that period would surely feel less confident. After all, following the 36% decline in stock prices in 2008, a nervous investor might inaccurately conclude that the future is grim and that stock prices will never grow again. Alternatively, following the over 32% price surge in 2014, an overly exuberant investor might feel that prices can now only go up–only to be disappointed by the meager 1% growth in 2015.

The lesson here is that drawing long-term implications from short-term fluctuations will often lead to inaccurate answers. The same is true in the pharmaceutical market.

In misplaced attempts to address the problems with the U.S. healthcare industry, many analysts point to specific list price increases on specialty pharmaceutical drugs to claim that high drug prices are driving overall healthcare costs ever higher. Such proclamations misdiagnose the problem with the healthcare industry and risk future innovations that can address pressing healthcare needs.

It is true that the average price of medicines grew faster than average over the past two years. Over these two years, there was also a significant increase in new medicines. In 2015, 73 new brand name drugs were introduced, 43 of which were novel therapies. This followed 74 new brand name drugs being introduced in 2014, 45 of which were novel therapies.

While troubling practices by the likes of Martin Shkreli of Turing Pharmaceuticals garnered headlines, it should be expected that higher innovation comes with higher costs. And the average drug price increases accelerated during 2014 and 2015 in concert with the increase in new drugs.

It is also clear that many of these new drug innovations, such as Sovaldi and Harvoni, provide immense medical benefits to patients. Patients with hepatitis C now have access to a 12-week treatment with a 90% cure rate–prior to these drugs, there was no cure.

Periods of higher than average price increases, followed by periods of lower price increases, should also be expected–similar to our stock price examples, price volatility happens. Perhaps more important, over the longer-run, the cost of pharmaceutical drugs have maintained a stable share of overall healthcare expenditures.

Accounting for both in-patient and out-patient pharmaceutical spending, prescription drugs have been between 13% and 14% of total national health expenditures according to a study by the Altarum Institute. According to the Department of Health & Human Services (HHS), which estimates a slightly higher share of pharmaceutical spending, total drug spending has remained between 14% and 17% of total national health expenditures between 2009 and 2015.

Moreover, based on the latest expenditure data from the Centers for Medicare and Medicaid Services data, longer-term prescription drug expenditures are growing similarly to longer-term national healthcare expenditures. Between 2006 and 2015, prescription drug expenditures grew 4.1% per year, compared to 4.5% per year for overall healthcare expenditures. And, despite the surge in prescription drug expenditures over the past two years, forecasts for longer-term spending expect pharmaceutical spending to remain around its historical share of total healthcare spending.

For instance, HHS predicts prescription drugs will remain just below 17% of total expenditures through 2018. Accounting for discounts, IMS health projects that price increases will return to their historical average growing between 4% and 7% a year by 2020–around the typical cost projections for overall growth in healthcare costs.

In light of these data, price control proposals are particularly troubling.

Pharmaceutical price controls will lessen the incentives for future drug innovation. The likelihood that new therapies will be created to address diseases, such as Alzheimer’s, cancer and diabetes will significantly diminish. Pharmaceutical price controls will also not address the problems plaguing the U.S. healthcare system, therefore the problems of declining care, rising overall healthcare costs, and declining healthcare accessibility will continue unabated.

Calls to target pharmaceutical drugs with price controls are misplaced. There are many problems with our current healthcare system that must be addressed. Setting long-term healthcare policies based on short-term price volatility will not effectively address these problem, however.

Instead, reforms should start by restructuring the current third party payer system and focus on empowering consumers to enable a higher quality, lower cost healthcare system.

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