Want Companies to Innovate Life-Saving Drugs? Don’t Dissuade Them With Price Controls.
Stamping out the next great cure is one bad economic policy away.
Last month, the Centers for Medicare & Medicaid Services announced that Medicare patients taking Gilead’s $373,000 lymphoma drug Yescarta would only be responsible for a $79,076 co-pay—just over 20 percent of the sticker price. And believe it or not, some of the biggest critics of high drug prices said that it was totally appropriate.
Yescarta belongs to a new class of medicines called “gene therapies,” which work by extracting a patient’s own genetic material, and engineering it to fight potentially deadly diseases, like cancer. Gene therapies are borderline miraculous, but they are also incredibly expensive. Hoping to save some lives while turning a profit along the way, pharmaceutical companies are clamoring to develop their own gene therapy, devoting tons of R&D to developing their own breakthrough cure.
With gene therapies, we’ve seen the future of medicine. The question now is: Can we afford it?
“It costs, on average, $2.6 billion to develop a new drug. That means a company will only bring a new drug to market if they feel confident that, once it hits shelves, the drug will help them make back the money they spent up front.”
The answer is no, at least according to congressional Democrats, who have made lowering drug costs one of the focal points of their midterm agenda. The same goes for the 35 states currently considering laws that would cap how much companies could charge for drugs, how much they could spend on R&D, and even how much of a profit they could turn.
So-called “price controls” come in many forms, but the one thing they all have in common is the underlying belief that the government has the authority to decide the right amount to pay for a life-changing drug. The argument goes something like this: Unlike drug companies, who set high prices to try and make money, a government agency will be motivated by just the public interest and keep prices low.
This argument gets one thing right: A government agency wouldn’t set prices with an eye to turning a profit. However, it’s precisely that profit-seeking incentive that leads pharmaceutical companies to develop groundbreaking new drugs. You don’t make money reinventing aspirin—you make money curing cancer.
It costs, on average, $2.6 billion to develop a new drug. That means a company will only bring a new drug to market if they feel confident that, once it hits shelves, the drug will help them make back the money they spent up front. Take away their ability to recoup their investment, and companies will stop spending the billions of dollars necessary to innovate. The next breakthrough cure will die in a lab before the government even has a chance to slap a price control on it. It’s as simple as that.
If, on the other hand, you allow companies to innovate freely, competition will eventually drive down prices across the board. People tend to dismiss this argument because it’s often made by drug companies, but it still holds true. Just look at Gilead, which made headlines in 2014 with its $84,000 hepatitis c drug, Sovaldi.
The public outcry was enormous. Activists and lawmakers seized on the high list prices to decry corporate greed and demand price controls. A group pushing price controls in California even released a 30-minute, documentary-style ad called Your Money or Your Life that vilified Gilead in an attempt to shore up support for its mission. Gilead was destined to be lumped in with Epi-Pens and Pharma Bros in an unending series of op-eds and floor speeches directed against “big pharma.”
However, after the spotlight faded from Gilead, the FDA approved a handful of alternative hepatitis c medicines, the cheapest of which cost $26,400. Up against the competition, Gilead had no choice but to lower their prices. By the end of 2017, the average Medicaid patient could get one of their hepatitis c drugs for less than $10,000.
The Sovaldi saga is par for the course. We buy into the beginnings of outrage cycles, but never see them through to the end. There are consequences to this kind of rhetoric: If we remember the $84,000 drug but not the $26,000 drug, we’ll think ideologically, not economically, and vote for policymakers who derail the process with price controls. It makes no sense to deny future patients lifesaving cures because of misplaced outrage that dominated a few news cycles in 2014, but that is exactly what will happen if price controls become the law of the land.
Price controls that prevent new cures from ever coming to market are not a serious answer to one of the most serious public policy questions we face. However, just because competition works better than government control does not mean it will lower drug prices all on its own. $80,000 may be less than $400,000, but it’s still a lot to pay for a drug, even a lifesaving one.
The best attempts to make medicines affordable will supplement effective market forces with the latest advances in medical science and smart regulation to bring the best drugs to market cheaper and faster than ever before. These smart solutions can have a real impact, but only if we change the conversation.
This piece originally appeared in The Weekly Standard
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Tim Rice is project manager for health policy at the Manhattan Institute.
This piece originally appeared in The Weekly Standard