By Donald W Light, Arthur L Caplan
BMJ, March 16, 2018
Why are drug prices in the US so high? In a recent and long awaited white paper, the US Council of Economic Advisers provides erroneous answers to a problem that is threatening household, state, and national budgets.
The advisers tell the White House and Congress that other affluent countries in the Organisation for Economic Cooperation and Development (OECD) force drug companies to overcharge Americans because “centralized pricing” in these countries sets prices so low that they act as “foreign free riders,” who allegedly fail to pay for the cost of research and development. As explained in The BMJ years ago and updated here, industry leaders, the US trade association for pharmaceuticals, and the commissioner of the FDA made this claim in the early 2000s to redirect widespread anger at high prices. Independent reports and evidence then and now indicate that prices for patented drugs in other affluent countries such as the UK and Canada do pay for research and development. Higher prices in the US simply generate extra profits.
Take for example the UK’s Pharmaceutical Price Regulation Scheme. Even the UK pharmaceutical trade association says it’s an “integrated, holistic agreement” that supports innovative research, economic growth, and industry vitality by letting companies set their prices on new drugs to cover documented costs and fair profits. Unlike the US, the UK policy features transparency, accountability, and fairness. It also supports innovative new companies better. The resulting UK prices are among the lowest in Europe. Prices are 231% higher in the US.
US system failure
Companies charge much more in the US because it has no system for dealing with the fact that about 90% of newly approved drugs add few or no clinical benefits since regulators do not require evidence that they do. Most drug research aims to generate new patents on minor variations in order to charge patent protected prices. Safety evidence is so weak that one in four new drugs results in serious harm.
American laws and practices allow companies to charge any price they like and to keep raising prices on older drugs.
Relentless promotion of the “foreign free rider” claim by industry supported science writers, policy experts, journalists, and lobbyists has nearly every policy maker furious and ready to make other countries pay up. Yet the whole story makes no sense.
The economic advisers urge the White House and Congress to force other countries to raise their prices in order to lower US prices, but companies do not act that way. For example, so called free trade agreements require all trading partners to raise patent trade barriers for prescription drugs that protect high prices. The resulting higher drug prices in other countries have not lowered US prices. They have just made new drugs less affordable to millions of people with treatable conditions.
The economic advisers note that while the US paid $270bn (£195bn; €220bn) for patented drugs in 2016, OECD countries paid more—$316bn. This is hardly a free ride. Most OECD countries also spend more of their healthcare budgets on drugs than does the United States. Trump’s economic advisers fail to report that dollar for dollar, European researchers have developed more first-in-class and global drugs than US researchers.
Trump’s economic advisers should tell the White House, Congress, and Americans that they could and should pay far less than companies currently charge them. Americans are not subsidising research costs for Europe and the OECD. The advisers should recommend requiring that payers first obtain direct evidence that new drugs will benefit patients, and that they are safe. US prices could be much lower if a national value based pricing programme is put in place that provides reasonable profits as well as covering verifiable costs for research, production, and distribution of new drugs that are demonstrably better for patients than the old ones.
By Don McCanne, M.D.
In this article, Donald Light and Arthur Caplan help to dispel some of the excuses given for outrageous drug pricing in the United States, especially the myth that our drug prices are higher because of other nations’ free riding on our drug research.
We rely too heavily on the private sector and markets to set drug prices. When the private sector is failing, the government needs to step in. We do not have to nationalize the drug industry, but we need much more effective regulation. If we don’t we’ll soon have new products priced at seven figures; there are already many at six figures. We really can’t afford that.
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