“While price controls that prevent a drug company from selling a particular drug for more than a certain amount might make that particular drug cheaper, it will destroy innovation in the industry.”
Is Congress really going to do anything useful with respect to lowering drug prices? When the question is presented that way the answer almost seems painfully obvious. Of course not. The question is just how bad they will mess things up, and will they destroy the incentive to innovate as they attempt to seek a very worthwhile solution for the problem of growing costs for healthcare.
The Dangers of Political Theater
Unfortunately, the political climate in the United States has increasingly become more circus and circumspect than bold and visionary. It is better to do something entertaining and memorable that plays to the crowd than to go about the business of governing the country, not just for the moment, but for the future. And the political structures in place create outright gerrymandering that practically ensure the overwhelming percentage of Representatives have more to fear from a primary challenge than from a contender in the general election. It is no wonder nothing truly useful can get accomplished in Washington, DC.
Sadly, the fact that nothing useful can be accomplished doesn’t mean that nothing at all can or will get done.
No one likes paying high prices for drugs. But we all say we want innovation. In the biotech and pharmaceutical industries, innovation means new drugs, vaccines, treatments and cures. While we can and should have a conversation about whether it is appropriate to count the advertising costs into the overall amount of money it takes a bio-pharma company to take a drug or biologic to market, no one can seriously argue that it does not require extraordinary investment to go from conception of a lead compound in a laboratory through the byzantine process that is the FDA approval process. It takes many years and many hundreds of millions of dollars, and frequently runs into the billions of dollars just on the science the regulatory procedures.
During the most recent hearing in the Senate, there was a moment of complete honesty when Senator Kennedy explained that he is not in favor of price controls, but that if the pharmaceutical industry does not propose some kind of workable solution, that is what will happen. Kennedy explained that people are upset that the same drug costs much more in the United States than it does overseas. He is right, and people have a right to be upset by the fact that the price of drugs is lower in other countries. It is appalling and unacceptable, period.
The Cost of Cheap
The reason drugs are cheaper in other countries is because those other countries have price controls. If pharmaceutical companies want to sell into those countries, they have to charge those low prices. And if the required low price is set above the marginal cost to produce the drug, then the pharmaceutical company makes money on the sale because the research and development and cost of regulatory approvals are already paid. Therefore, when the pharmaceutical company sells for a low price, they are not recouping a fair portion of R&D and regulatory costs, and instead just making a profit when those innovation costs are not considered. This means the American consumer is left to pay for the innovation costs (i.e., the research, development and regulatory process to ensure the drug is safe) because there are no price controls in the United States. So, U.S. citizens are now and have been subsidizing cheap drugs for the world.
Will Congress do anything productive and appropriate to stop U.S. citizens from subsidizing cheap drugs for the world? That seems doubtful because a solution that will not kill the golden goose that is biopharma innovation will be extremely difficult, will take real determination, and won’t be easy to explain on a bumper-sticker or in a campaign slogan. Instead, what Congress seems to be contemplating is introducing price controls like other countries. And while price controls that prevent a drug company from selling a particular drug for more than a certain amount might make that particular drug cheaper, it will destroy innovation in the industry.
Raising the Risk
It is already risky enough to invest in pharmaceutical research and development, with only a small fraction of drugs ever being profitable. Why would anyone invest the hundreds of millions, or billions of dollars required if 9 out of 10 drugs are unlikely to succeed and the one that does succeed will be subjected to price controls? Investors would have to be insane to take the risks given the reward.
If Congress wants drug prices to be lower, and they should, price controls are a bad idea that will stifle innovation and cause long term damage to our healthcare system. Instead, Congress needs to look outside the United States and place blame on free-riding nations that demand low prices for market access. U.S. citizens have subsidized healthcare in these free-riding nations for long enough.