The myth of sky-high drug prices
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Politicians from both parties have come to a rare consensus: drug prices are spiraling out of control.

To bring prices down, most Democratic senators and a dozen of their Republican colleagues want to legalize importation of price-controlled drugs from Canada. And Democrats and the Trump administration have both called for Medicare, the public insurance program for older and disabled Americans, to impose its own de-facto price controls.

This notion that drug prices are out of control is widely held but factually incorrect. Americans spend roughly the same amount on drugs, as a share of total healthcare costs, as they have for decades. Artificially lowering prices through regulatory fiat would jeopardize current and future drug research and deprive patients of life-saving new treatments. Drug development is conducted on a global basis by the private sector, and attempts to impose undue regulations are problematic. 

Americans spend far more on hospitals and doctor's offices than on medicines. Prescription drugs dispensed at pharmacies account for just 12 percent of total U.S. health spending, compared to 20 percent in Japan and Korea and 17 percent in Canada.

Nor are drug prices rising abnormally fast. Insurers and pharmacy benefit managers negotiate with drug companies for significant discounts. The after-rebate prices of brand name drugs rose just 3.5 percent last year.

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Those concerned about the cost of new medicines too often lose sight of the value these drugs deliver. New medicines accounted for three-quarters of life expectancy gains in higher income countries between 2000 and 2009. Since antiretroviral treatments were introduced in 1995, AIDS deaths have fallen 85 percent in the United States and Western Europe.

 

The pace of cancer research has been particularly impressive. Researchers have created a series of life-saving "firsts" in recent years. In 2006, they created the first vaccine for cervical cancer. In 2009 came the first treatment for peripheral T-cell lymphoma, a deadly blood cancer. And in 2013, two new personalized drugs became available for the most dangerous forms of skin cancer.

Two out of three Americans diagnosed with cancer today will still be alive in five years. Five years isn't just a stat — it's the time needed to see a daughter graduate or to see a son become a father. Or, for that matter, it can be the time needed to survive until a cure is developed. And 83 percent of the survival gains are due to new treatments. 

If the government attempted to set prices by capping reimbursements or requiring mandatory rebates in Medicare's drug program, the returns for successful new research would diminish. Companies would struggle to make up their huge development costs in sales. Some firms would have no choice but to scale back research. Medical innovation could decline.

Importing drugs from Canada would similarly threaten research and wouldn't result in significantly lower prices. Canada, which has a tenth of the population of the United States, is a relatively small market for pharmaceuticals. It is impracticable to think that the drug supply available for export would be sufficient to affect U.S. prices in any appreciable way.

Government interference on drug prices isn't needed — the private sector is already coming up with ways to bring costs down. Advances in diagnostics and personalized medicine have improved our ability to deliver the right treatment, to the right patient, at the right time. That reduces waste and inefficiency by avoiding treatments that will not work for specific patients.

Insurers are also striking "value-based pricing" agreements with drug companies. An insurer pays the market price for a drug, but if that drug does not perform as expected, the drug company has to pay back some or all of that price in the form of a rebate. For instance, Harvard Pilgrim, an insurance company, requires Amgen to provide a full refund if one of Harvard Pilgrim's customers suffers a heart attack or stroke while taking Amgen's cholesterol-lowering medicine.

These deals prevent insurers and patients from paying hefty fees for medicines that are only marginally effective. When it comes to drug pricing, the facts are often overlooked in favor of politically popular soundbites.

Attempts to lower prices through regulation and importation could snuff out research investments that could save millions of lives in the coming years. Any drug that is too expensive for an individual patient is problematic and needs to be dealt with immediately by the drug’s maker and insurers, but price-setting is not the solution.

Robert A. Freeman is professor of pharmacy administration at the University of Maryland, Eastern Shore. Previously he was professor of pharmaceutical sciences and director of graduate studies at Texas A&M University.


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