As debates over high drug prices continue to grab headlines, it’s worth taking a deeper dive into the substance of the policy issues at stake. Recent Kaiser Family Foundation polling found that while almost 90% of Americans supported Medicare negotiating drug prices if it could help people save money, around two-thirds opposed that same measure when told it could limit innovation.
Studies indicate that limiting drug industry profits would negatively impacts innovation. So how can we balance this apparent tradeoff between making drugs affordable and preserving future innovation?
Our current regulatory scheme, as Professor Craig Garthwaite points out, heavily favors maximizing innovation. In Professor Garthwaite’s words, “[t]he existing U.S. system refuses to truly say no to any pharmaceutical product regardless of its price.” The popularity of scapegoating ‘big pharma’ in the media and the popular support for lowering drug prices suggests that this arrangement may not be politically sustainable much longer. While the substance of current bills will be covered in a future post, it’s worth looking at what scholars and policymakers are proposing from a bird’s-eye view.
In a report released this month, the White House Council of Economic Advisers argued for a globally-focused free-market solution to the price-innovation tradeoff. The council contends that “reducing foreign price controls would increase profits and innovation, thereby leading to greater competition and lower prices for U.S. patients.” The Trump administration has also promoted price transparency here in the U.S., passing two laws in 2018 that aimed at outlawing pharmacy gag clauses that prevent pharmacists from helping consumers pay less out of pocket.
Some scholars like Dr. Peter Bach have advanced more regulation-based approaches. In an article published in the New England Journal of Medicine in November, Dr. Bach proposed that government insurance programs like Medicare could negotiate the prices of drugs that haven’t been proven to improve clinical outcomes and drugs that have been on the market for a long time. Dr. Bach reasons that this approach would preserve incentives for innovation while lowering prices for patients, adding that the government could lower drug prices even further if it were willing to forfeit some future innovation. The Council of Economic Advisers and Dr. Bach’s divergent proposals illustrate how prominent policymakers and experts still differ on how to best navigate the drug profit-innovation tradeoff.
One important distinction to make here is that the tradeoff is not between drug prices and innovation so much as between drug profits and innovation. Blume-Kohouta and Sood (2013) showed, for example, that the passage of Medicare Part D in 2003 increased drug profits while simultaneously lowering prices. By increasing the number of seniors with prescription drug insurance and thus the volume of drug purchases nationwide, policymakers could lower prices without negatively impacting drugmakers’ bottom line. In fact, profits actually increased on average across the industry.
If generalizable and reproducible, this analysis has substantial ramifications for the possibility of future legislation that could simultaneously extend insurance coverage and lower drug prices. It also clarifies the point that profits, not prices, are the primary driver of drug industry innovation.
Drug profits do not come from just anywhere, though. Generous patent exclusivity laws, the lack of a central health technology assessment agency, and passive reimbursement schemes in the United States mean that American patients bankroll global drug innovation. This setup arguably isn’t fair. But the reality is that if American policymakers constrain prices, and therefore constrain drugmakers’ profits, there will be far-reaching consequences for patients worldwide.
As the work of Frank and Ginsburg (2017) demonstrates, however, the relationship between drug manufacturers’ profits and innovation is not linear. Rather, investments in research and development are governed by the law of diminishing returns. This means that each additional investment in research and development yields less of a return in innovation, which is reflected in recent increases in me-too drugs. It’s worth considering whether some of what American patients and the government spend on prescription drugs could be used more efficiently elsewhere, like on education, infrastructure, or other priorities.
As Frank and Ginsburg argue, studying how to align the profit-making incentives of drugmakers with the needs of American patients should be a priority for researchers and policymakers. One option is to look at how other countries navigate the profit-innovation tradeoff, which I will explore in my next post.