Balancing innovation, cost with drug prices
The United States receives worthwhile innovation (and also some not so worthwhile innovation) as a result of its high drug prices. But there is no consensus about what the “right” level of innovation should be, so it’s unclear how much to lower or raise prices.
Other countries at least have ways to think about this at a national level. The United States doesn’t — the topic has been a third rail — but the Biden administration could change that.
U.S. brand-name prescription drug prices are the highest in the world. For those available from only one manufacturer, prices are three to four times higher than those in Britain, Japan or Ontario, Canada, on average.
Policies to reduce prescription drug prices have an obvious benefit: Drugs we buy today would cost less. But they create a less obvious problem: Drugs we would like to buy in the future might not exist; innovation could be slowed.
Higher prices mean higher potential profits, and more money to invest in the development of new drugs. Although there is considerable debate over the value of the innovation motivated by the promise of higher profits, it’s clear there’s a connection. Several studies indicate that limiting the market and profits for drugs would slow innovation. One found that when Medicare created a new drug benefit in 2006, preclinical testing and clinical trials increased for drugs for older patients — those most likely affected by the policy.
Another study found that policies in the 1980s that expanded the market for vaccines encouraged 2.5 times more new vaccine clinical trials per year for each affected disease. This fits with the general finding that more new drugs enter expanding markets that promise greater profits.
“There is a trend between how much is spent on research and development by pharmaceutical companies and how much they will earn in profit,” said Ronald Aubert, a visiting professor at Brown University School of Public Health. “But there’s a remaining question about whether the innovation that stems from that research and development addresses the unmet needs of the population.” In other words, is the innovation well targeted?
The extent to which profitability prompts innovation has limits. Scholars see the law of diminishing returns at work, with each additional dollar of investment in pharmaceutical research and development yielding less gain in innovation than the prior dollar.
This means that some of the additional money going to drug innovation because of higher prices might be better spent elsewhere.
We’re not accustomed to openly managing this trade-off in the United States, partly because of the power of health care interest groups, and perhaps because of a more individualistic culture.
In the United States, drug prices reflect what the market will bear, under the influence of government-granted monopolies for novel medications. Because of the byzantine political compromises they reflect, there is no good reason to believe that the duration of those monopolies — or the prices they support — match the value of the drugs for which they’re provided or the degree of innovation they motivate.
The tool is blunt, so in some cases drug prices are arguably too low, even if they’re very often arguably too high. (This problem is pervasive throughout the health system.)
Yet the United States does have some history of assessing the value of health care treatments, albeit limited. Before Congress abolished it in 1995, the U.S. Office of Technology Assessment advised the body on Medicare coverage decisions, including those for pneumococcal vaccination, and screening for breast cancer, cervical cancer and colorectal cancer.
Subsequently, the Centers for Medicare and Medicaid Services applied cost-effective analysis in considering coverage for screening for HIV and lung cancer, and counseling for alcohol use disorder. Other government agencies have either funded or have the authority to use cost-effectiveness analysis, as have private health plans.