Pharmaceuticals Public Policy

Do expensive drugs reduce the price of health?

The answer is ‘yes’ according to a report by the Council of Economic Advisors (CEA) titled Reforming Biopharmaceutical Pricing at Home and Abroad.

Innovations such as new drugs often reduce the price of health even when the new drug is very expensive relative to other goods. Consider the example of a patient diagnosed with HIV in the early 1990s. Before new breakthrough therapies for HIV emerged, the price of a longer life was prohibitively high because a longer life could not be bought at any price anywhere in the world. Once new HIV drugs were developed and marketed in 1996, the price of a longer and healthier life for HIV-positive individuals decreased dramatically: it reached the equivalent of the price of the new, patented drugs. Generally, the price of better health falls further as competing drugs enter the market, then fall even further to competitive price levels upon patent expiration when cheaper generics become available. The example of innovative HIV drugs makes the essential point that even though the price of the drug was considerable and drug spending rose, the effective price of better health declined.

The report notes that most funding for biopharmaceutical medical innovation comes from the U.S.

The U.S. market makes up 46 percent of OECD sales of brand name innovative drugs, funds about 44 percent of world medical R&D, invests 75 percent of global medical venture capital,

The U.S. GDP makes up 22% of the world economy so clearly the U.S. is funding a disproportionate share of medical innovation.

The CEA report also discusses how to balance two goals: (i) reduce drug costs now, (ii) ensure financial incentives for innovators to invest in R&D for new treatments for future generations. Proposed reforms to reach these goals include:

Reducing drug costs

  • Increased use of value-based contracts,
  • End cost-plus pricing for physician administered Part B drugs
  • Potentially shift all Medicare Part B drugs to be covered by Part D
  • Allow for Low-Income Subidsidy (LIS) beneficiaries to pay copayments for low-value pharmaceuticals
  • End Medicare Part D Coverage Gap Discount Program
  • Allow health plans more discretion of what treatments to cover on formulary among covered classes
  • Discouraging plan formulary design that speeds patients to the catastrophic coverage phase of benefit and increases overall spending.
  • Lowering co-pays for generic drugs for patients
  • Expanding FDA expedited review for new molecular entities that are second or third in a class, or second or third for a given indication for which there are no generics.
  • Advocates for policy to increase competition in the PBM market

Incentivizing innovation

  • Incentivize other countries to raise their prices
  • Reforming Medicaid best price regulations
  • More restrictive hospital eligibility for the 340B program
  • Speed up the FDA approval process, particularly for generic drugs and biosimilars


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