Americans Aren’t Willing to Endure the Costs of Imposing Price Controls

July 29, 2020 12:57 pm

Patients in the United States should not have to pay higher drug prices than consumers in other countries. This argument is a fallback for proponents of the International Pricing Index (IPI) and other drug price control policies. On its face, the argument seems correct. Differing prices do not seem fair.


But when they examine what could happen to innovation under a European price control scheme, Americans often think twice. As the Trump administration has revived discussions on implementing an IPI with its recent healthcare executive order, we wanted to review the proposal’s unintended consequences on innovation – and why Americans are concerned.


As this 2006 research paper explains, countries in the European Union (EU) “closely regulate pharmaceutical prices whereas the U.S. does not.” The price controls eroded drug development in Europe. In 1986, for example, EU pharmaceutical research and development (R&D) exceeded U.S. R&D by about 24 percent. By 2004, EU R&D trailed the United States by about 15 percent. The paper also notes that, between 1986 and 2004, U.S. R&D spending grew at a real annual compound rate of 8.8 percent while EU R&D spending grew at a real 5.4 percent rate. The difference resulted in 46 fewer new medicines introduced by EU firms and 1,680 fewer EU research jobs.


These policies are why, today, 57 percent of all new drugs are developed in the United States.


Europe’s policies have continued to erode the number of new treatments available to patients. A 2018 study by Precision Health Economics estimated removing EU price controls would produce a 12-percent increase in research and 13 new drugs per year. According to the Information Technology and Innovation Foundation, “Assuming these drugs would also be introduced into the United States, the expected longevity of American 45-year-olds would increase by 0.86 years, which the report values at $1.54 trillion, or $67,000 per individual.”


As The Wall Street Journal editorial board has explained, patients in Europe pay for government price controls in other ways as well. Of the 74 cancer drugs launched between 2011 and 2018, for example, 95 percent were available in the United States. Only 74 percent were available in the United Kingdom, and only 8 percent were available in Greece.


The United States would not be immune to these impacts if it goes the way of Europe. Economists Michael Maloney and Abdulkadir Civan estimate that a 50-percent drop in drug prices in the United States would reduce the number of drugs in the development pipeline by 14 to 24 percent.


When these potential impacts are outlined for Americans, they are much less likely to support drug price controls. A March 2019 Kaiser poll, for example, asked respondents what they thought about certain policies, including drug price negotiation, that some policymakers—and John and Laura Arnold and their funded groups—say will keep drug prices increases in check.


As CNBC reported, only 31 percent of Americans said they would support price negotiation if it reduced research and development. Support for price negotiation declined to 29 percent when respondents were told that it could result in diminished access or Medicare not covering some prescription drugs. Additionally, more Kaiser respondents (50 percent) said competition among drug and insurance companies would do a better job than regulation (41 percent) of managing drug prices.


There is an imbalance between Europe and the United States when it comes to pharmaceuticals. But it isn’t Americans who are paying the biggest costs.