In his 2018 State of the Union address, President Trump said that “fixing the injustice of high drug prices” will be one of the top priorities of his administration in the coming year. Lower drug prices could directly benefit consumers without insurance or those with high-deductible health plans; commercially insured individuals could hope to see lower premiums or lower out-of-pocket payments if health plans decide to pass these savings on to consumers. What often is not taken into account in these discussions, however, is the long run affect on consumer health, which could suffer if lower prices lead to decreased incentives to innovate.
This latter point is at the heart of a commentary in Morningstar by Dana Goldman and Darius Lakdawalla. They agree with President Trump that the U.S. pays more for prescription drugs than other countries. In fact, the U.S. market is largely the driving force incentivizing biopharmaceutical research and development (R&D).
Our calculations suggest that the U.S. market accounts for as much as 78% of all global drug profits…These are the profits that drive innovation, and they are coming out of American wallets.
Why does this happen? Branded prescription drugs are 20% to 40% cheaper in Europe in large part because the national health plans there drive hard bargains (https://www.ncbi.nlm.nih.gov/pubmed/16966733).
What is the solution? Goldman and Lakdawalla argue that European countries should start paying their fair share to encourage more R&D. Using USC’s Future Elderly Model the authors found that:
…increasing prices in Europe by 20% would result in about $30 billion in extra worldwide pharmaceutical revenue every year from the five largest European markets…And that extra R&D spending eventually means more drugs find their way to market — on the order of one new drug approval for every $2.5 billion in added revenue (https://econpapers.repec.org/paper/idewpaper/24352.htm)…Over time, we find that European price increases would result in $10 trillion in welfare gains for Americans over the next 50 years, and $7.5 trillion in Europe (https://www.healthaffairs.org/doi/abs/10.1377/hlthaff.28.1.w138)
The authors provide additional details of the positive societal and economic implications that would occur if European and other developed countries increased drug prices. While much of the political rhetoric focuses on the short-term burden of current drug prices, one must not forget about the long-term benefits that higher prices can have for brining the next ground-breaking therapy to the patients who need it.