ITIF Paper: Price Controls Reduce Innovation

November 7, 2018 1:20 pm

The Information Technology and Innovation Foundation (ITIF) this month released a paper by its founder, former Progressive Policy Institute vice president and former Clinton administration appointee Robert D. Atkinson, which, like a recent Wall Street Journal editorial, explains how price controls in the United States would affect research and development into new life-changing medicines.


Atkinson starts out his paper by explaining that biopharmaceutical companies spend generously on R&D and contribute to a strong U.S. job market. He notes these companies:

-Provided more than $2.5 billion to U.S. colleges and universities for research in 2017, accounting for more than 60 percent of all industry funding of university research;

-Invested more than $56 billion in 2014 in R&D in the United States, an increase of 17 percent from 2008;

-Had the fastest growth rate (231 percent) in R&D capital stock from 2005 to 2016; 

-Per employee, lead all other U.S. manufacturing sectors by investing more than 10 times other sectors in R&D per employee; and

- Support 4.7 million direct and indirect jobs.


According to an article published in 2010 in the New England Journal of Medicine, this dedication to research and development suggests the United States has been the world’s top funder of biomedical R&D investment over the past two decades—by a substantial amount, in fact. At least one analysis found the United States was responsible for 70 to 80 percent of all investment. 


The ITIF paper also explains, as APMI has, that it takes a very long time for the products of this research and development to make it to market. Atkinson says a new pharmaceutical compound takes an average of 11.5 to 14 years of research, development, and clinical trials and $1.7 to $3.2 billion in investment before it gets into patients’ hands. 


Atkinson concluded, “Overly restrictive price controls levied against pharmaceuticals, by definition, [would] mean less revenue for biopharma companies to invest in R&D.” 


Indeed, Atkinson says, that outcome is what has come to pass on other continents, including Europe. Using data from 1986 through 2004 and maintaining real pharmaceutical prices constant over 19 years, Atkinson explains that researchers found European Union countries likely had 46 fewer medicine compounds because of price controls. Researchers, according to Atkinson, also determined “if the United States had adopted EU-type price controls over the same time period, then the result would have been 117 fewer new medicine compounds.”


Atkinson concludes, “[T]he debate about price controls is not really one about whether society wants lower prices in exchange for lower drug company profits; it is about whether society wants lower drug prices in exchange for less and slower drug innovation—that is, cheaper prices today, and less effective drugs when our children become adults.”


That’s a stark choice, but it’s one that parents and policymakers will need to keep in mind as the debate on prescription drug prices unfolds.