Can the US cut drug prices without sacrificing new cures?

Congress’s ambitious plans to expand health coverage are crashing up against one of the great questions in health policy: Can they force the pharmaceutical industry to hold down prescription drug prices without sacrificing the medical innovation that could lead to new treatments and cures in the future?

Democrats’ Build Back Better reconciliation bill sets a hard cap on the price Medicare would pay for some prescription drugs, ensuring that the program would pay no more than 20 percent more than other wealthy nations. Those prices would also be available to the commercial plans that cover most working Americans.

The policy is central to Democrats’ health care agenda: The $450 billion in estimated savings from the prescription drug reforms would pay for most of their other health care proposals.

The pharmaceutical industry warns the price controls that are contemplated in the Democratic bill would lead to fewer new medications and ultimately hurt patients. Progressives, Democratic leaders, and the Biden White House argue that the drug industry pumps up its profits in the US without much justifiable public benefit.

So who is right? It’s a question academics and analysts have been trying to answer for years. The US is the biggest pharmaceutical market in the world, representing 60 percent or more of the industry’s global profits. Nobody can say for sure what would happen if the world’s largest prescription drug market — by far — suddenly instituted government price controls. The Congressional Budget Office estimated in 2019 that international revenue from new drugs could drop by as much as 20 percent.

Many analysts agree this means that the industry would spend less on research and development, fewer drugs would be approved, and those losses would increase over time, although estimates range widely because there is so much uncertainty in the drug development process.

The crucial question is not whether it would hamper new drugs, but how. Drugmakers develop lifesaving innovations, and also many treatments that don’t represent huge medical advances, but do help the companies’ bottom lines. Which kind of innovation would take the hit if profits dropped?

“It’s an unanswerable question,” Darius Lakdawalla, a health care economist at the University of Southern California, told me. “You’ve gotta take this for what it is, which is a risk-reward trade-off.”

Democratic leaders are gambling that drug companies would still develop true breakthroughs under their new pricing regimen. To a degree, it’s a bet they are taking to meet centrist Democrats’ demand to pay for their proposals: Congress usually uses savings from the health care industry to offset new federal health care spending.

But they are also trying to address a real flaw in the US health system: One in five Americans say they skip necessary medications because they can’t afford them. The US is locked in a situation where prescription drugs are unaffordable for many Americans — but any attempt to address the root cause of their high costs could backfire.

The exceptional — and expensive — US pharmaceutical market

There is nowhere like the United States of America for the pharmaceutical industry. Americans have unparalleled access to cutting-edge treatments — if they can afford them, because they also pay higher prices for prescription drugs.

The United States accounts for between 64 and 78 percent of the drug industry’s profits across the world. Americans pay about 3.5 times more money on average per dose of medication, brand-name and generic, than Europeans. Some of that is borne directly by patients, through out-of-pocket costs, and some of the cost is paid instead by insurers, who then pass on those costs in the form of higher premiums.

A lot of that money goes into research: About 25 percent of revenue goes to R&D, meaningfully higher than the amount in other “innovation industries,” such as telecoms, according to the CBO. (The total dollar amount has gone up as the industry’s revenue has grown, but the share invested has increased more modestly since the ’80s and ’90s.)

US pharmaceutical companies — and ultimately American consumers and insurers — subsidize drug research and development for much of the rest of the world, with at least 40 percent of the world’s pharma R&D originating in the United States.

Perhaps most importantly for American patients, they get the earliest access to the latest drugs: The US is where novel treatments debut, accounting for 65 percent of global sales for newly launched medications, according to data from IMS Health.

Research has consistently linked drug companies’ revenue to research and development spending and to new drug approvals.

“When the anticipation of future profits is higher, companies invest more in R&D and produce more new drugs,” the CBO said in an April 2021 report. “Similarly, if expectations about prices and profits were lower, companies would invest in less R&D, and fewer drugs would be developed.”