Proposals to control drug prices may have populist appeal, but they miss the mark by ignoring the root cause of high health care costs—poor health—and the relatively modest role that medicines play in U.S. health care spending. More important, the assumption that European-style price controls would have no effect on innovation is deeply misguided.
Because America is the world’s largest pharmaceutical market, its market-pricing structure for pharmaceuticals generates the lion’s share of the profits necessary to fund drug development. Cutting into these profits would dampen incentives for innovation, shorten lives, and impose higher costs on future patients. Price controls are a losing proposition—for industry and for patients who receive little, if any, benefit from currently available therapies.
U.S. drug spending is not out of control; reducing it will not substantially affect overall health care costs.
- U.S. spending on drugs accounts for a smaller share of total health care spending—about 10 percent—than in Europe, where drug price controls are in place.
- U.S. drug spending as a share of health care spending is expected to remain flat; the out-of-pocket share of drug spending is expected to decline.
Drug spending is cyclical. After a decade of low increases in drug spending, driven by generic competition (drug spending by private insurers actually declined by 0.5 percent in 2013), more new, powerful drugs are coming to market. Eventually, these drugs will lose patent protection and become cheap generics.
Drug companies do not earn excessive profits. Investors treat the pharmaceutical industry as 25 percent–37 percent riskier than other industries and therefore require a higher rate of return. The industry’s profit margins reflect the greater risk and long timeline required to develop successful U.S. Food and Drug Administration (FDA)–approved medicines.
Drug price controls cost more than they save by slowing innovation.
- Modest price controls that reduce pharmaceutical industry revenue by 20 percent would shorten life expectancy for children today by nearly one year by 2060, imposing costs of $51,000 per capita.
- Aggressive price controls that reduced prices by half would slash the number of products under development by 30 percent–60 percent.