Biden would be wrong to undercut innovation
As the COVID-19 vaccines show, pharmaceutical innovation provides the best hope of ending the pandemic. Unfortunately, the Biden administration is launching what amounts to a federal assault against such innovation.
That assault will take the form of federal price controls on prescription medicines. When the House of Representatives attempted to impose such controls in 2019, the White House Council of Economic Advisers (CEA) said it could result in as many as 100 fewer drugs entering the market over the next decade.
Administration sources say the next phase of the Biden “build back better” platform will likely include drug price control provisions similar to those the House passed that year on a party-line vote. The measure died in the Senate, which the GOP then controlled.
President Joe Biden plans to revive it. His proposal is expected to follow the House bill in setting an “upper price limit” for cutting-edge medicines based on prices set by foreign governments. Those prices, however, are one reason that citizens of those countries lack access to cutting-edge drugs that Americans take for granted.
The Health and Human Services secretary would then seek to “negotiate” prices below that upper limit. The government would impose prices resulting from these “negotiations” throughout the U.S. economy.
A manufacturer refusing to negotiate the price of a product would incur an excise tax of up to 95% of the revenues it derived from that product in the preceding year.
In its December 2019 report, the CEA estimated that the bill would reduce the pharmaceutical industry’s revenue by anywhere from $500 billion to $1 trillion over the next decade. They also noted that pharmaceutical companies spend about 15% to 20% of revenues on research and development. That suggests that price controls would cut R&D spending by $75 billion to $200 billion over the next decade.
A company spends an average of $2 billion on R&D for every drug it successfully brings to market. Much of that spending is on failed projects — promising ideas that don’t yield breakthrough treatments.
If drug price controls along the lines of the 2019 House bill were to reduce R&D by $200 billion over the next 10 years, the CEA concludes, the industry will introduce as many as 100 fewer products over that period. Instead of 300 new drugs, we would have 200.
What difference would that make? According to the CEA, Americans would be less healthy and less economically productive. The $34.5 billion in annual savings that the federal government would realize from price controls would reduce annual economic output by $375 billion to $1 trillion, imposing a cost to society 10 to 30 times the federal savings.
To put this in more concrete terms, imagine our society without COVID-19 vaccines. Had the U.S. been left only with strategies that public health experts call “non-pharmaceutical interventions” — lockdowns, school closures and mask mandates — the end of the pandemic would not be in sight.
Pharmaceutical interventions, however, do help. Thanks largely to the availability of vaccines developed by innovative companies, hospitalizations and deaths continue to plunge.
The immunization effort is the fruit of decades of research by private entities on new vaccine technology. Price controls will choke off tens of billions of dollars of that capital, curtailing research and preventing scores of new drugs from coming to market.
President Biden is happy to claim credit for the pace of immunizations. Manufacturers are distributing hundreds of millions of doses of vaccines that the Trump administration ordered. As many as 4 million adults are daily getting their shots at pharmacies, supermarkets, clinics and government-funded facilities.
Claiming credit for things you didn’t do is garden-variety politics. Having spent half a century in that field, Biden long ago mastered the art of benign mendacity.
What he seems not to have grasped is the connection between pharmaceutical revenues and medical innovation. We have vaccines not because President Biden is a great leader, but because private enterprises had sufficient resources to persevere through years of failure on the road to historic success.
Pharmaceutical innovation is our most effective weapon against COVID-19 and other horrific diseases. The federal government shouldn’t disarm us.