Pharma Price Controls aren't the simple answer they promise to be

Pharma Price Controls aren't the simple answer they promise to be

Why is it that an overwhelming majority of the world’s “cancer tourists” — people who travel abroad to obtain cancer care — find themselves on a plane to the United States? The answer is simple: the United States has the highest quality healthcare in the world, especially when it comes to developing and administering new treatments. Making this claim, though, stirs controversy, because for the last few decades, the US has also struggled to ensure equal access to healthcare for all Americans. Despite amazing innovation, the amount Americans spend on cancer medications doubled from $15.9 billion to $37.8 billion from 2016-2021. Individual treatments have seen price hikes from $4,500 to more than $10,000 per month of treatment (a rate much higher than inflation), and of the 13 treatments approved in the last five years, 12 cost over $100,000 per year.

Americans Can't Keep Up with High Cost of Cancer Treatment
Figure: The heavy costs of cancer treatments

It is alarming that drugs cost many patients half their annual incomes or more, even after insurance has paid its share. So, who do we turn to fix the problem? Many turn to the Federal government, claiming that Congress could easily pass a law capping drug prices, allowing everyone to afford treatment. This is the intuition that legislators and bureaucrats have followed countless times, including in the Affordable Care Act (which set strict limits on drug prices for those covered by government healthcare plans) and in non-medical contexts such as during petroleum shortages in the 1970s. Proponents of government-enforced price controls still follow this intuition. However, while high drug costs are a major problem with the healthcare system today, price controls are ultimately detrimental to both patients and industry. Instead, America should implement market-based solutions that promote innovative therapeutics and keep costs in check.

Proponents of price controls claim that they are necessary to ensure fair access to treatment for all Americans. It is imperative, however, to first understand the inner workings of the pharmaceutical industry, specifically, how the industry is different from just about every other major industry. This understanding allows us to realize that we must take a cautious approach to balance healthcare innovation with accessibility.

In medicine, especially cancer medicine, where scientists try to control or eradicate living organisms  that intelligently resist the best treatments, innovation and discovery can take decades. To get a new drug on the market, companies must spend 10 to 12 years to collect the clinical data necessary to submit a New Drug Application (NDA) before receiving FDA approval, at an average cost of $2.6 billion per compound. Moreover, pharmaceutical R&D is different from that of most companies: just because they spend billions developing new drugs, only about thirty percent of NDA drugs are approved by the FDA. Last I checked, Apple, Facebook, and Google’s products never face such regulatory scrutiny. To be clear: pharmaceuticals are different and require more regulation than consumer software, but the costs imposed on health innovators are extreme.

Drug companies make enormous investments with even larger risks. They face a 70% chance of failure, of losing billions and wasting a decade of time if a new treatment fails. There's a reason behind the high and rising costs of pharmaceuticals. The complicated nature of disease, the increasing demand for new treatments, and stringent government regulations all create a situation where the only incentive to innovate comes from the prospect of maybe earning astronomical revenue some time in the future after spending a very real sum of money in the present. Price controls will slash the prospect of making money on risky treatments and drive firms away from solving serious diseases like cancer, the opposite of what we need! This is what happened in Greece and the Czech Republic, where price controls on cancer drugs resulted in pharmaceutical companies pulling more than 1100 novel treatments from those countries’ markets, yielding no new cancer drugs for all of 2018.

So, what should be the solution to the drug cost crisis? While politicians butt heads over known-to-fail strategies, the answer can be found in the American economy’s core: competition. America is known for amazing innovation across all industries, because the strength of market competition compels firms to continually create newer and better products. We need a way of replicating the consumer-firm relationship that we see in other industries, in which many firms compete by making increasingly better versions of the same product, driving costs down while maintaining high quality. Fortunately, the key to this strategy already exists: generic drug competition.

Generic drugs are drugs whose patents have expired. When a patent has expired, any company can mass produce that drug, often at a much lower cost, making it more available and much cheaper to the general public. As reported by the President’s Cancer Panel, the use of generic oncology drugs saved the U.S. healthcare system an estimated $10 billion in 2016. To solve the drug cost problem, Congress, in conjunction with the FDA, must close loopholes currently exploited by drug companies after patent expiration to prevent their compounds from rightfully entering the generic market, as this anti-competitive practice is hugely responsible for high costs. When pharmaceutical compounds are made to be generic in a timely manner, pharmaceutical companies are compelled to innovate while costs naturally drop, a win-win by all accounts! To further bolster competition, competitive bidding, a process whereby drug companies “bid” for limited-time exclusivity in offering a drug, could be implemented. A “one winner” system would compel firms to not only develop their best products, but also to offer their true best price, another win-win!

The American pharmaceutical industry is at a crossroads: it’s pumping out new treatments at an unprecedented pace, but the high costs of those treatments threaten to erase the benefits they bring. While price controls may seem like a straightforward solution, they aren't. Hope lies in the system that made America great: the market. In the last year, we’ve seen the unprecedented power of individual citizens to affect real socio political change in the United States. The time is now to use our power, to merge the tested principles upon which our nation was built with the unique demands of the modern age, to build an America where all are able to reap the benefits of the world’s most innovative healthcare system.

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