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September 19 2018

Americans are financing pharmaceutical R&D but price control is not the solution

by Heather Madden

In the medical world, breakthrough findings are those that can result in new treatments and cures for patients who desperately need them.

But the cost of developing and bringing new drugs to the market is high. A survey by the Tufts Center for the Study of Drug Development found the cost of developing a new drug from start to finish is, on average, a whopping 2.7 billion dollars. The same survey also found that these companies also receive a reliable return on their investment. That’s because pharmaceutical companies price drugs based on the cost of the research and development put in.

In the United States, the market still determines the price of a prescription drug. But in many other major countries, price controls—which are put in place in an attempt to keep the cost of prescription drugs for consumers low—prevent companies from charging what the drug is worth. Unfortunately, price controls force producers to underprice drugs sold abroad and overprice the same drugs when sold to Americans.

Why do Americans pay more? It’s the only way companies can compensate for the loss.

While price controls may sound great in theory, they can actually stifle innovation and even harm patients waiting for new drugs to be developed to treat their illnesses.

Drug companies need these funds in order to continue investing in research and development. When a cap is placed on the price of innovation, companies have less incentive to take on the risk and costs associated with developing a new drug.

It is unfair that Americans are disproportionately the ones financing pharmaceutical research and development costs. But forcing U.S. pharmaceutical companies to simply lower their prices to match foreign prices would only backfire. As IWF Policy Director Hadley Heath Manning explains in an IWF policy focus examining why pharmaceutical drugs are so expensive published earlier this year:

Some Americans advocate for “drug reimportation” as a means to introduce foreign competition to domestic drug markets. The hope of such a policy would be to force drug sellers in the U.S. to lower prices to match foreign prices. (Indeed, some U.S. consumers already order some drugs online internationally.)

There is a safety concern with such a practice: The U.S. government cannot ensure that drugs from other places have been manufactured, stored, or transported in ways that meet U.S. safety regulations. Obviously some, but not all, consumers are willing to take that risk.

But the more important concern with drug reimportation is the idea that Americans would be “importing foreign price controls.” Put another way, if foreign price controls lowered prices within the United States, the same problem would result here as is the case overseas: Drug makers would see a diminished return, decreasing their incentive to produce drugs in high demand, resulting ultimately in shortages and the end of continued research and innovation.

Free trade is valuable: It allows various countries to specialize and exchange goods and services to mutual benefit. But price controls, even in foreign nations, introduce a distortion into the global market that Americans should not have to face. Some advocates of free trade suggest that allowing drug reimportation could be a first step to dismantling foreign price controls, but Americans ultimately have no control over the domestic policies of foreign governments, over drugs or any other area. This strategy would come with critical short-term costs, as well as great risk.

The cost of drugs is not something that can be solved with price controls because the cost of researching and developing new drugs is so high. Instead, we can continue to foster innovation and combat high costs by negotiating for a more equitable distribution of research and development costs and by relying on a free and competitive market to drive down prices.



Independent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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