Drug Price Controls and Their Unintended Effects

by Jonathan Wen

Introduction

Estimates suggest that the United States comprises up to 80% of total global medical innovation. This is because the U.S. has a unique lack of price regulation on drugs, allowing pharmaceutical companies to thrive. However, leaders across the political spectrum including Clinton, Sanders, and Trump have been proposing the implementation of price controls on the pharmaceutical industry to slow rising drug prices. However, because price controls hurt drug launches and reduce innovation, it is clear that price controls should not be implemented on the United States’ pharmaceutical industry.

Drug Launches

Throughout history, important drugs have been created when people needed them the most. However, price controls disincentivize drug launches from months to years, and sometimes even indefinitely. “In a study of the 1990s launch experience of 85 drugs in 25 industrialized [and price controlled] countries, only roughly half of the potential country-compound launches occurred, and many of the eventual launches involved months or years of delay”.

This is critical, as the executive director of the Global Colon Cancer Association reports that “some 600,000 European deaths could be avoided each year”, if delays were less prominent. Importantly, this number itself is far greater than the amount of Americans currently dying because of a lack of access to treatment. This means that by trying to increase accessibility for U.S. citizens accessibility would only decrease, especially in the long-term.

Drug Investment

Launch delays would have large negative impacts, but the worst effects of price controls manifest in long term decreases in investment. In the last year alone, medical innovation has allowed for the creation of groundbreaking gene therapy treatments, new powerful vaccines, closed system insulin delivery, and many other advances. This was only possible because biopharmaceutical startups have thrived in the U.S as a result of limited price regulation.

Currently, venture capitalists have been funneling an immense amount of capital into biopharma startups. However, price controls would decrease the financial incentive to invest in these high-risk startups as less money is made from the drugs. This is critical, as Professor Grabowski of Duke University, who specializes in the study of economics in the pharmaceutical industry, reveals that price controls have immense effects on venture capital investments.

A new start-up company has no revenues to use for research and development spending, so it must entice investors to support its research and development efforts. US policies designed to decrease prices toward those that prevail abroad would have particularly adverse consequences for young [startups] that invest in uncertain early-stage research. Venture capital firms do not restrict their activities to investments in new drugs and medical technologies, but also invest in web-based applications, new and improved energy sources, advanced scientific instruments, and many other competing opportunities. If expected returns in start-up biopharmaceutical companies are reduced, early-stage investors will look elsewhere for returns.

A lack of successful biopharma startups would be terrible as Syed Husain the CCO of Alcami, a contract pharmaceutical research company, found that “small and medium-sized companies generate greater than two-thirds of the clinical candidates in the pharma and biotech industry drug pipeline.” Without new cures and treatments for the plentiful amount of diseases and viruses in the world, billions all across the world who depend on U.S. innovation will be let down as they suffer or die at the hands of diseases that would have previously been cured.

Accessibility

The main argument of many price control supporters is that regulations would result in widespread accessibility for needed medication by overall decreasing drug prices as well as stopping price gouging.

One of the most commonly cited examples of price gouging is the Epipen, a drug used to reverse anaphylactic shock in those with severe allergies. The key issue with this argument is that price gouging practices are never sustained. In fact this was even displayed in the example of the Epipen. After dramatically increasing the price of the drug, the producer, Mylan, could not support this decision for long, and released a much cheaper generic version of the drug soon after. This entire incident shows that price gouging is inherently short term, and not a problem that has to be solved through price controls.

On the argument of an overall increase in accessibility, there is an extremely important fact which many people miss. Historically, price controls have only been implemented on more expensive brand-name drugs rather than generic drugs, as generic manufacturers already operate on very low profit margins.

Problematically, Rose et al. of the National Bureau of Economic Research found that empirically, price controls increase the price of generics which account for 90% of drugs dispensed each year. This is because the free market creates a space for cheap drug manufacturers to thrive as an alternative to name brand drugs, however, price controls force unnatural competition between manufacturers. In all aspects, price controls end up causing more harm than good.

Conclusion

Although many believe that price controls would fix all of the problems in the pharmaceutical industry right now, it is clear that any effective solution to expensive drugs would be much more complex. Insofar as price controls would kill hundreds of thousands of people each year through launch delays and less innovation, it is clear that price controls are not the solution that the American public is looking for.

Jonathan Wen is a Policy Research Fellow at the American Freedom Institute

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