Price Controls Impose High Costs On Patients
Twenty-five years ago, the leading cause of death for adults between the ages of 25 and 44 was complications from HIV. At the time, 50,000 Americans were dying from AIDS-related causes a year, with the African American community particularly hard hit – 49 percent of the people dying from AIDS-related deaths were African Americans.
Today, thanks to highly active antiretroviral therapies (HAART), along with other medical advances, people with HIV like basketball great Magic Johnson are living longer and healthier lives. And, more and better medicines are on the way.
Beyond medicines to treat HIV, scientists have recently discovered cures for devastating diseases that include many forms of cancer, Hepatitis C, and spinal muscular atrophy. Treatments for hemophilia and sickle cell disease may soon be in the offing, and not too far down the road, perhaps medicines that treat Alzheimer’s disease will be developed.
Then again, perhaps not.
Thanks to the pervasive misperceptions about how medicines are developed, support for drug price controls is growing. The Trump Administration, for example, considered setting Medicare Part B drugs equal to an international price index (IPI). Speaker Pelosi’s “The Lower Drug Costs Now Act” (H.R. 3), which has passed the U.S. House of Representatives, would empower the federal government to negotiate prices on select drugs for the entire country.
While neither proposal uses the words, both policies are price controls by other names.
In the case of the IPI, tying the price of medicines in the U.S. to the controlled prices in 14 other countries such as Canada, Italy, and the United Kingdom is, for all practical purposes, importing their foreign price controls into the U.S.
Under Speaker Pelosi’s proposed negotiation scheme, if a drug maker did not accept the government’s terms, then the company would have to pay a tax that could be up to 95 percent of the medicine’s gross revenues. Such a penalty is so excessive that, in the tradition of Don Corleone, H.R. 3 allows Speaker Pelosi to impose price controls by “making them an offer that no drug maker can refuse”.
Both price control proposals are bad ideas.
When evaluating the impacts from H.R. 3, the President’s Council of Economic Advisers (CEA) found “that H.R. 3 could lead to as many as 100 fewer drugs entering the United States market over the next decade, or about one-third of the total number of drugs expected to enter the market during that time. CEA also estimates that by limiting access to lifesaving drugs, H.R. 3 would reduce Americans’ average life expectancy by about four months—nearly one-quarter of the projected gains in life expectancy over the next decade.”
Of course, the Administration’s proposed IPI is a similar policy; therefore, based on the CEA’s logic, implementing the President’s IPI will also discourage future innovation and harm American’s average “life expectancy over the next decade”.
But, we don’t need forecasts to see what the future of the U.S. drug industry would look like; all one has to do is look at the EU’s past. According to the Milken Institute, “prior to 1980, European firms defined the [drug] industry, both in terms of market presence and in their ability to create and produce innovative new products. Historical advantages and an enviable concentration of resources fueled the success of firms in Germany, France, the U.K., and Switzerland.”
Today, the U.S. defines the industry, with nearly 60% of all new drugs being developed in the United States. Germany, once one of the top global leaders, developed 6% of all new drugs. Switzerland, France, and the U.K. are not much more innovative, developing a mere 13%, 6%, and 8% of all new drugs, respectively.
This decline in innovation across Europe coincided with the imposition of price controls in these countries. As a result of these regulations, Europe has watched as the well-paying innovative pharmaceutical industry migrated across the Atlantic. Now, the pharmaceutical industry creates hundreds of thousands of well-paying jobs in the U.S., not in the EU.
Beyond the cost in terms of lost jobs and economic growth, Europe’s price controls are also imposing costs on patients worldwide. Summarizing these effects, a study in the journal Pharmacoeconomics found “price controls cost EU firms 46 fewer new medicines and 1,680 fewer research jobs during our 19-year sample period. Had the U.S. used controls similar to those used in the EU, we estimate it would have led to 117 fewer new medicines and 4,368 fewer research jobs in the U.S.”
Importantly, repealing these price controls would alleviate these costs. According to a report from the Brookings Institution, simply easing the price controls in Europe “by 20 percent— just part of the total gap — would result in substantially more drug discovery worldwide… These new drugs lead to higher quality and longer lives that benefit everyone. After accounting for the value of these health gains — and netting out the extra spending — such a European price increase would lead to $10 trillion in welfare gains for Americans over the next 50 years. But Europeans would also be better off in the long run, by $7.5 trillion, weighted towards future generations.”
Unfortunately, European countries are not even considering such policies. Making matters worse, the U.S. (through proposals like H.R. 3 or the IPI) is considering the same destructive policies. Consistent with the historical impacts of drug price controls, the imposition of price controls in the U.S. will devastate the amount of innovation in the drug industry for years to come.
The consistency of the CEA’s results with the EU’s experience should be a caveat for the politicians considering drug price control schemes here in the U.S. Drug price controls will diminish future innovation and deny the hope of treatments, perhaps even cures, to patients living with Alzheimer’s, sickle cell, and the many other devastating diseases that currently lack effective therapies.
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