The myth that they have drives Biden’s proposals for price controls, which would throttle innovation.
by Joel Zinberg, The Wall Street Journal, December 26, 2021
Build Back Better may be dead, but its proposed drug price controls will likely reappear: negotiating prices for high-cost drugs in Medicare and price controls for most drugs limiting price increases to the annual inflation rate.
President Biden insists such controls are needed because pharmaceutical companies are “jacking up prices on a range of medicines.” He promises “to end the days when drug companies could increase their prices with no oversight and no accountability.” Yet while inflation has skyrocketed under Mr. Biden, drug prices are lower than when he took office. As the consumer-price index over the past year rose 6.8%, the largest increase in 39 years, prescription-drug prices fell 0.3%.
Mr. Biden and other pharmaceutical critics have mistakenly focused on increases in the list prices set by companies. But the actual prices consumers pay, after various discounts and rebates, are considerably lower than list prices, and changes in the two measures differ substantially. Insulin, with large increases in list prices over the past few decades, has become the poster child for unreasonable price increases. Yet net prices have increased much more slowly or not at all.
The best measure is the consumer-price index for prescription drugs, or CPI-Rx, which measures price changes in a large basket of drugs over time, accounting for discounts and most rebates. Another strength of the CPI-Rx is that it accounts for price declines that occur when consumers substitute cheaper generic versions for brand-name drugs. Too often, Mr. Biden and others focus on a few high-priced drugs and fail to consider the entire market.
Prices for brand-name prescription drugs are higher in the U.S. than in other countries. But U.S. regulatory, legal and incentive structures encourage aggressive price competition and switching from branded drugs to generics. As a result, Americans use more generics (accounting for 9 out of 10 prescriptions) and pay less for them (16% lower on average) than in other developed countries. Nearly all European countries impose price controls on generics, which results in delayed market entry and availability, less competition and higher prices.
CPI-Rx has been negative for much of the past three years. The decline stems largely from increased drug approvals by the Food and Drug Administration since 2017. When new brand-name drugs enter the market, they compete with other drugs that treat the same condition. When generic versions are approved, prices fall rapidly as patients switch, especially as multiple generic versions enter the market.
An analysis of per-unit prices of 27 types of insulin by GoodRx, a healthcare company that tracks drug prices and provides discount coupons, found that overall retail prices declined by nearly 6% since 2019 because of recent approvals of generics and biosimilar drugs.
Mr. Biden’s proposed price controls aren’t merely superfluous. They risk lowering the number of innovative new drugs that improve health and eventually become the low-priced generics used by most Americans. Pharmaceutical companies invest in research in anticipation of future profit. Unlike most industries, they primarily finance it out of current revenues. University of Chicago economist Tomas Philipson estimates Mr. Biden’s proposed price controls could lead to a 29% to 60% reduction in research and development, resulting in 167 to 342 fewer new drug approvals over the next 20 years.
The rapid development of Covid vaccines and therapeutics confirmed the importance of preserving our innovative pharmaceutical industry. The pandemic also confirmed that the FDA is capable of safely shortening approval times. Speeding approvals and increasing competition are a far better prescription than price controls that would strangle future innovation.
Dr. Zinberg is senior fellow at the Competitive Enterprise Institute, director of Paragon Health Institute’s Public Health and American Well-being Initiative, and associate clinical professor of surgery at the Icahn Mount Sinai School of Medicine. He was general counsel and senior economist at the White House Council of Economic Advisers from 2017 to 2019.