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December 7 2017

Making Prescription Drugs More Affordable -- The Wrong Way to Do It

by Hadley Heath

More than 7 in 10 Americans take prescription drugs; drugs are clearly an important part of American health care. 

However, we often hear stories in the news about people who struggle to pay for very expensive drugs, and given how critical drugs can be for saving and improving lives, we all want them to be accessible. 

A new report published in the National Academy of Sciences (NAS) dives into the issue of drug affordability and makes some recommendations for how to ensure access to affordable drugs.

Unfortunately, the report gets it wrong on some of the root-cause reasons that drugs in the United States are costly, assuming that the main driver of high cost is that pharmaceutical companies are looking to widen profit margins at the expense of poor, sick patients.

There's nothing wrong with for-profit companies seeking a profit, but this overly simplified narrative ignores the complexity of the drug ecosystem, which involves many players, from the government to insurance companies to benefit managers and so on. There are many reasons why drugs are expensive. 

For example, there's a very high cost to researching and developing new drugs -- costs that companies try to recoup during the initial introduction of drugs under a patent. Calling patents "legal monopolies," the NAS report misunderstands how critical patent protections are (not just in the drug industry, but as a bedrock to America's economy and a critical driver of innovation). The price of drugs falls dramatically after patents expire, due to market competition from generic drugs. This is good news for patients, but so is innovation. There's a careful balance here.

When policy researchers have a hammer in hand, everything looks like a nail. Regulators want more regulation. Too often, the policy recommendations to make drugs more affordable focus on regulations that ultimately result in price controls. These controls, in pharmaceutical language, would come with serious side effects. 

For example, the report encourages more government intervention in drug pricing in Medicare. As the dissenting view (published along with the study) notes: "Allowing all government plans to negotiate as a single block would establish a near monopoly that would translate into functional price controls. This, in turn, would be likely to have a devastating effect on long-term, high-risk investment." In other words, if Medicare, Medicaid, and the VA could bully drugmakers into lower prices on certain drugs, this could result in drugmakers producing fewer drugs, especially new ones, which require a great deal of investment. 

Also, you may have also heard of drug "reimportation." The NAS report recommends allowing drugs to be reimported to the United States from other countries (at lower prices) to induce greater competition. Of course, competition is the key to lower prices, but the situation with drugs is quite complicated: Many countries already have price controls on drugs in place, so the prices they offer are artificially low. This is why there are legitimate drug shortages in Canada and other countries with highly regulated drug markets. Price controls in foreign countries, as well as safety concerns over how foreign drugs are produced, stored, and transported, would make a truly free-market drug reimportation policy challenging.

The long and short of it is this: We all want drugs to be more affordable, but certain policy measures -- like price controls at home or abroad -- come with the downside of implicit rationing. America leads the world in drug innovation because of our strong market protections for intellectual property. We've seen so many diseases conquered or at least quelled with innovative drugs and vaccines that would have never been invented had we pursued wrong-headed policies that put numbers ahead of the needs of individual patients. As we consider changes to policy aimed at helping those patients, let's keep this in mind. 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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