As the ire over high prescription drug prices in the United States escalates, it’s easy to blame pharmaceutical companies. But pharmaceutical companies aren’t to blame. They’ve executed well on the rules set by the U.S. government as well as the “make the most money” dictum set by their stockholders. Over the last five years, returns for the S&P Pharmaceuticals Select Industry Index have been virtually double that of the S&P 500 (roughly 24% vs. 12% annually).
But blaming them for their high prices is short-sighted finger pointing. Americans need to take some responsibility for deciding how drug prices are set, and they need to ask the larger question for the future: how should future pharmaceutical advancements be funded?
American drug prices are among the highest in the world. Prices in advanced countries are often 50% cheaper than what Americans pay for drugs. The AARP estimates prices for commonly used
name prescription drugs in the U.S. rose by 8 times the general inflation rate in 2013. The annual expense for a recently developed cancer drug cocktail is $295,000. (No wonder health insurance expenses are one of the biggest costs facing many employers.)
There’s no mystery why prescription drug prices are higher in the U.S.: virtually every country regulates prices and the U.S. doesn’t. In fact, Congress has explicitly prohibited Medicare from negotiating drug prices with pharmaceutical companies. (Close to 40 million people in the U.S. have this prescription drug benefit). Prices in Norway, the fourth wealthiest country in the world (U.S. is number 6), for instance, are amongst the lowest in Western Europe. The bottom line: most countries play hardball on drug prices, while the U.S. pays retail. As a result, consumers in the U.S. are stuck footing most of the bill for developing new drugs, even as consumers throughout the developed world reap the benefits.
I believe in the free market and rarely advocate any type of price regulation. There are compelling reasons, however, to consider doing so for pharmaceuticals. The biggest expense of a new drug is R&D; once developed, the cost of producing pills is relatively trivial. Most important, everyone in the world can – and should – benefit from pharmaceutical advancements, especially since the variable costs are so low. In other words, the R&D behind new drugs is a common good. Typical solutions to the dilemma of high drug prices include single payer (e.g., U.S. government negotiates “take it or leave it” prices for its territory) and price regulation (e.g., the government simply specifies prices). These tactics will lower prices but don’t address the issue of paying for new pharmaceutical developments. How can we make sure that the cost of developing new drugs is equitably split among the various beneficiaries around the world? That high-price-paying Americans are not essentially subsidizing R&D for pharma multinationals?
A tethered price regulation is the answer. Regulators could pass a law that says neither American insurers nor government agencies would pay more than a set percentage above (or below) what other developed countries pay for drugs. In other words, our prices are tethered to theirs. This accomplishes two goals. First, drug prices will be lowered for Americans. Second and just as importantly, pharma companies and other countries will be on notice that sick Americans are no longer going to shoulder a disproportionate share of drug development costs. Tethered regulation should apply only to new drugs, not existing drugs, which were developed with the understanding that U.S. prices will be as high as the market can bear. We made a bad deal, but we should keep our word.
A common reaction to any whiff of price regulation is concern that pharma R&D will be reduced. This is a fair concern, but it’s not a given that R&D will decrease. Pharma companies may opt to cut sales and marketing costs (which 9 out the top 10 pharma companies spend more on than R&D), executive compensation, or dividends instead, keeping R&D budgets healthy. That said, it is very possible R&D may decrease as a result of regulation. In utopia, it’d be wonderful for pharma companies to have unlimited R&D budgets. But back here in reality, tradeoffs are made. Even today, R&D budgets are not infinite. And if budgets are cut by 20%, instead of funding 100 initiatives, it may be that only the top 80 with the highest potential will be greenlit.
The word “regulation” and threats of lower pharma R&D can be polarizing. There’s room for a more balanced discussion: regulation may be appropriate for select products, the possibility of lower R&D may be acceptable in return for lower costs and expanded access to important drugs. Now is the time to have this crucial discussion. And if the U.S. decides to keep the status quo – that’s fine. But in that case, Americans should recognize that we have chosen to keep prices high and subsidize drug development for the rest of the world, rather than pointing the finger at pharmaceutical executives.