Competition Makes Medicine More Affordable

October 25, 2018 9:00 am

Apple unveiled its first computer, the Apple I, in 1976. The list price: $666.66 (or nearly $3,000 in today’s dollars). And it didn’t include a screen or a keyboard. Similarly, the first VCRs cost between $1,000 and $1,400 (or $5,100 to $7,100, adjusted for inflation), a steep price for family movie night.


Before long, competition drove down the price for both products. Personal computers got smaller, faster and cheaper. So did VCRs, until newer technologies drove them to extinction. These days, you can buy a high-powered personal computer for less than $200. Even high-end iMacs cost a fraction of their initial list price, when adjusted for inflation.


This is the cost of innovation – and the benefit of market competition. The initial list price for the Apple I and first-generation VCRs reflected the enormous cost – in time, money and risk – of developing those products and bringing them to market. But it didn’t take long for rival companies to improve on those initial offerings and sell them for less money.


That dynamic helps explain the recent evolution in breakthrough medicine.Bringing new treatments to market is exhausting and expensive. The average cost to develop a new medicine exceeds $2.8 billion, and the development process takes more than a decade. Only one in five new treatments approved ever generates enough revenue to recoup the money a company will spend to develop it. 


The initial list price of those medicines reflect the enormous risk and investments required to develop breakthrough drugs, the billions researchers, companies and private-sector investors spent on trial-and-error to treat once-untreatable diseases and cure once-incurable illnesses. The initial list price of those medicines reflect the enormous risks and investments required to develop breakthrough drugs.


Innovation is costly, but that doesn’t mean prices stay high.


Remarkably (written with just a hint of sarcasm), prices for VCRs and computers fell even without the U.S. Department of Commerce intervening to set prices. Demand increased supply (and the number of innovators in the market) and in 1985 the Wall Street Journal ran this headline: “The VCR Boom: Prices Drop As Their Popularity Continues To Grow.”


The marketplace worked.


Just as a personal computer costs a sliver of its initial list price, competition also swiftly reduces the cost of medicine. Tim Rice, deputy director of health policy at the Manhattan Institute, recently explained how the list price of a life-changing Hepatitis C cure plummeted within four years of its introduction.


In 2016, Premier CEO Susan DeVore cited competition as an explanation for that swift drop in the list price of Hepatitis C drugs. DeVore also explained prices for the antidepressant Cymbalta dropped 27 percent in the month after seven generic equivalents were introduced. The price was down by more than half within a year.


2016 IQVIA report found, “Generics that entered the market between 2002 and 2014 reduced the price of medicines by 51 percent in the first year and 57 percent in the second year following loss of exclusivity.” Prices for oral medicines dropped even more substantially, by 66 percent in the first year after generics came onto the market and 74 percent in the second year. According to DeVore’s Premier, generic drug competition saved the health care system more than $1.6 trillion over the last decade. 


The number of lives saved and improved by these innovations? Millions.


Innovation costs money, but competition quickly makes that medicine more affordable. Disrupting that market threatens to stifle future innovation.