Curing the Pharmaceutical Industry

The United States remains one of the few developed countries without governmental price controls on pharmaceutical drugs, with prices a startling 117 percent higher than those in most peer nations. Within the last ten years, pharmaceutical companies have skyrocketed their drug prices to increase profits. CNN reports that in 2018 the prices of the twenty most commonly prescribed brand-name drugs rose nearly ten times more than the annual rate of inflation over the last five years. In the next decade, prescription drug costs could grow at 6.3 percent per year. Decreasing these prices is critical: the New York Times reports that the lack of accessible prescriptions causes approximately 125,000 deaths and at least 10 percent of hospitalizations annually.

The rising price of pharmaceuticals has clearly been detrimental to Americans. Nearly one-third of individuals in a CVS Caremark study decided not to fill a prescription because of its high price. Given that the United States is constantly innovating in the medical field, it is rather ironic that that medicine is becoming inaccessible to the public. Even with insurance, Americans continue to find drugs too expensive. As drugs become more expensive, healthcare costs also rise, which incentivizes health insurers to shift the burden of expenses onto patients through higher deductibles or premiums. Since 2010, the average deductible for drugs has increased by over 67 percent. The pharmaceutical industry needs a massive restructuring so that Americans do not suffer from ailments that can be easily be prevented or cured with better access to drugs.

President Donald Trump’s administration proposed cutting what Medicare pays for—including costly drugs for cancer and other conditions—to match lower prices paid by European countries, where governments control pharmaceutical costs. Trump has outlined a plan to lower pharmaceutical prices by implementing the international reference pricing system, which categorizes drugs based on their effectiveness. All drugs in a certain class are then given a price ceiling, a maximum price at which they can be charged. Trump has declared that other countries are benefiting from cheaper drugs at the expense of Americans and is looking to match the prices of US drugs to the prices of foreign drugs.

While there has been a lot of chatter from the Trump administration about decreasing the prices of pharmaceuticals, the conversation has not manifested as real change for Americans yet. The United States needs to take a page out of other developed countries’ playbooks and implement price controls on pharmaceuticals, which would improve access to and quality of drugs for Americans.

Making the Case for Price Controls

The implementation of price controls will directly drive down the prices of pharmaceuticals by creating a price ceiling. Price controls would allow the federal government to use its bargaining power to negotiate with drug companies for lower Medicare drug prices. Currently, the market is dominated by monopolies that are free to increase prices as much as they want to maximize profits. The US Department of Commerce found that in 2005 pharmaceutical prices in other OECD countries were up to 67 percent less than US prices because of their price controls on pharmaceuticals. If the price controls Trump proposes are passed, it is likely that the United States would see a similar drop in prices.

Furthermore, the status quo allows large pharmaceutical companies to take generic companies, which produce similar drugs at significantly cheaper prices, off the market. Generic companies face great obstacles when trying to enter and survive in the market in two ways. First, big pharmaceutical companies can incentivize doctors to prescribe brand drugs rather than generics. Indeed, 37 percent of doctors surveyed said that they sometimes prescribe a brand-name drug even when there is a generic one available, as customers are usually more familiar and comfortable with the brand. The lack of prescriptions for generics often leads to these companies being squeezed out of the market.

Second, Big Pharma companies can manipulate costs to price smaller competitors out of the market. Large pharmaceutical companies spike their prices to increase profits and then drop them below those of generics once they enter the market, making generics unaffordable. Large pharmaceutical companies’ ability to manipulate prices at will allows them to generate their own revenue and create greater barriers to entry for smaller businesses to enter the industry. Price controls could help mitigate the disparity: After price controls were implemented in other countries, the market share for brand-name pharmaceuticals dropped by 15 percent. Price controls would prevent Big Pharma from dominating the market and giving generics a fighting chance.

Moreover, drug prices directly affect insurance premiums because health insurance companies want to offset the costs of higher drugs onto consumers. Thus, higher drug prices translate to higher health insurance costs for all Americans. Empirically, high drug prices account for 23.2 cents for each dollar spent on insurance premiums. Implementing price controls will decrease not only drug prices but healthcare premiums as well, which would help increase the number of insured Americans overall. It is a relatively intuitive argument: decreasing drug prices will decrease the premiums of healthcare and incentivize individuals to become insured by making health insurance more affordable to those in need of it.

Lastly, implementing price controls will improve innovation in drug research and development for two reasons. Firstly, with price controls, the government can use its bargaining relationship with firms to incentivize them to invest in certain projects in exchange for allowing their drugs to be sold on the market. The government can then direct research and development and ensure that the pharmaceuticals produced are beneficial to citizens and not just profitable to corporations. Secondly, in the European referencing pricing system, similar to what Trump has proposed, companies are directly incentivized to create new drugs for pressing ailments rather than “me-too” drugs, which are slight alternatives to drugs that already exist. Companies will be incentivized to find drugs that are substantially better because placing their drug in a higher class brings greater profit.

The Case Against Price Controls

Despite these benefits, price controls on pharmaceuticals remain up for debate in the United States. Critics of price controls argue that price controls will decrease revenue for pharmaceutical companies, leading to decreased investments in the research, development and production of new drugs. Such logic is flawed for a few reasons. First, Big Pharma is empirically not the big investor in innovation that it portrays itself to be anyway. Instead, large pharmaceutical companies choose to prioritize marketing and sales. Of the top 100 pharmaceutical companies, 64 spent twice as much on marketing than research and development. Because research and development is a risky investment, companies opt to simply advertise to increase profits, spending a mere 1-1.5 percent of sales on R&D.

Second, concerns about a sudden drop in innovation simply do not hold up in countries that have price controls. Empirically, countries with direct price controls appear to exhibit more corporate innovation proportional to their own contribution to prescription drug spending. While critics like to claim that the United States innovates significantly more than other countries, that claim is fundamentally untrue. The United States’ higher spending on research and development can be attributed simply to the fact that the United States has a massive economy - not because of insanely high drug revenue for Big Pharma.

Third, the type of innovation at hand is a result of investment from the public sector, not from Big Pharma itself. 85-90 percent of all new drugs that Big Pharma companies invest in provide few or no clinical advantages to patients. Indeed, roughly 75 percent of the most innovative drugs trace their existence to NIH funding. Big Pharma has pulled away from risky research and development, instead opting to produce more me-too drugs. In any case, large amounts of funds flowing into research and development do not automatically result in more diseases cured or more lives saved. To create real benefits, government-directed investment ought to be prioritized over sheer quantities of cash influx from Big Pharma.

The influence of price controls on innovation can be seen when comparing American innovation to European innovation. Donald Light of Stanford University reports that, when accounting for how much money is spent in the industry, European companies discovered more significant drugs than US companies from 1982-2003. European drug prices are about half the cost of drugs in the United States, but those companies fund significantly better research efforts.

For example, Prilosec is a drug for stomach acid that holds both an L-isomer and R-isomer (chemicals that are mirror images of each other). When the patent for Prilosec expired, the drug maker released Nexium, which only containers the L-isomer but does the exact same thing and earned $3.9 billion for its maker. It is time the for United States to change its narrative about research and development in the medicinal field. Rather than produce a gel version of a solid pill and call it “innovative” there should be a push to implement policies that will create new drugs for new ailments.

The status quo has halted productive pharmaceutical innovation and left patients struggling to protect their health. In order to cure the virus that has pervaded the American pharmaceutical industry, government intervention is necessary. Without governmental regulation, the industry is diseased with monopolies and sky-high prices, unable to be checked back by competition. It is time that the government makes sure Americans stop dying of preventable diseases, which can easily be done with the implementation of price controls.

Price Controls Will Cure the Pharmaceutical Industry

Decreasing drug prices is one of the few areas where Trump and Democrats actually agree, yet no effective policy has been passed. While pharmaceutical companies continue to catapult drug prices to all-time highs, Americans are dying of preventable causes every day. The United States must stop falling for the guise of “innovation” as a justification for extreme drug prices and work to make medicine more accessible. The Big Pharma monopoly ought to be broken and price controls are the solution to cure the pharmaceutical industry.

Opinions expressed in this article are not necessarily reflective of The Gate.

The image featured with this article is used under the Creative Commons 2.0 License. The original was taken by Chris Potter (ccPixs.com) and can be found here.