Is America Getting “Ripped Off” on Drug Prices?

Just recently, the House Ways and Means Committee passed Speaker Nancy Pelosi’s drug pricing bill which would lower prices on 250 drugs. To accomplish her goal, she plans to implement a “International Pricing Index” (IPI). While it might sound like a workable solution (in theory), it could lead to several disastrous consequences, especially for the American patients receiving lifesaving medications.

The IPI is a proposal that averages the price based on what other developed nations are charging for the same drug. For example, if Germany, England and Spain set the price of a drug at $100, $150 and $200, then the U.S. would pay $150 for the drug. But the entire system hinges on the U.S. producing new drugs, something that we couldn’t afford to do under an IPI system.

With various regulations, market research and clinical trials, the path for a successful drug from conception to shelf is a long, grueling process. It takes 10 years and $2.6 billion dollars for a new drug to come to the market. By the end of the process, 9 out of 10 drugs will fail Food and Drug Administration approval.

As one could imagine, having profits that reward the time, energy and risk that are put into drug development are essential to encourage innovation. Yet IPI threatens to lower the price a company can charge, thus making it infeasible for new drugs to come to market. With few countries having this supportive environment means the U.S. alone accounts for 60 percent of the global pharmaceutical research and development (R&D).

Since other countries use drugs coming from the U.S., this means they can fully reap the benefits. Americans pay for 70 percent of every new drug that hits the market, yet as a nation we only make up 26 percent of the global income. In 2015, the U.S. spent 48 billion in pharmaceutical R&D, 15 billion more than all of Europe.

Herein lies the true cost of IPI. Pharmaceutical companies would have little incentive to create new drugs, leaving a void in the healthcare industry for both the U.S. and the rest of the world. Economists at the National Bureau of Economic Research found that price controls would decrease R&D investments by 50 to 60 percent. With the U.S. accounting for over half of the world’s research, global R&D would drop by one-fourth.

But it’s not all bad for the U.S. American Consumer Institute’s report shows that Americans have access to 90 percent of new drugs compared to France which has access to less than half. Furthermore, the average waiting time for new life saving cancer treatments is only 3 days compared to average non-U.S. waiting time of 18 days. With these unique benefits, Americans can expect to see .8 to 1.6 years of life gained compared to other nations.

But all of these benefits would disappear under an IPI system, as the U.S. would no longer be able to produce as many new drugs as we do now. While Trump and Pelosi have encouraged the U.S. to be more like the world, they should instead encourage the world to be more like the U.S. Simply put, price controls always lead to shortages.

If other nations loosened their drug price controls, we could expect to see a rise in pharmaceutical innovation. One study estimates that 8 to 13 new drugs could be developed annually by 2030 if other nations deregulated their drug prices.

Furthermore, if other countries deregulated their price controls, American consumers would face lower prices as the costs would be more evenly spread across the board.

As Pelosi’s bill now goes to the house floor, politicians should be concerned about high drug prices, but price controls, such as IPI, are not the answer. Foreign governments, whose countries negotiate lower prices, should be encouraged to incentivize drug innovation in their own countries. Not only would this increase R&D but also lower prices at home. Only then will everyone win.