Drug companies exaggerate — controlling drug prices won’t threaten innovation

It is hard to not be impressed by the progress Americans have made in combatting diseases. Cures for hepatitis C and advances in breast cancer treatments have changed lives. This is in part due to scientific breakthroughs at our national laboratories, universities and the pharmaceutical industry. But progress creating new drugs has led to a new problem: a drug pricing crisis.

Nearly 1 in 3 American adults report not taking their medicines as prescribed because of the cost. In Washington and across the country, people are engaged in a spirited debate about the affordability of prescription drugs for households and public budgets. 

By virtually any metric, Americans pay the highest prices in the world. Prescription drug makers claim that high prices and record profits are necessary to continue the flow of cures. 

In fact, the pharmaceutical industry frequently claims that any efforts to control prescription drug prices “threatens future innovation.” The result is that for the past 50 years we have strongly emphasized innovation over affordability. It is time to reconsider that balance.

Drug companies have exaggerated the threats to innovation.

Most new drugs aren’t that innovative. The existing proposals to reduce prices leave many opportunities to make money from truly innovative drugs. And the drug industry could do a great deal to make their research and development activities much more efficient thereby reducing the need for such high prices.

Let’s start with the level of innovation being supplied by the pharmaceutical industry. The Government Accountability Office (GAO) recently reported that novel drugs — those recognized by the FDA as meeting a previously unmet need or significantly advance patient care or public health — accounted by between 8 percent and 18 percent of all drug approvals between 2005 and 2016. 

Academic research and industry data reflect a similar pattern. That is, the majority of new products enter markets where 5 products are already being sold

Moreover, only 1/3 of products approved under priority review by the FDA were new to their class of treatments. 

So if drug companies claim lowering drug prices means somewhat fewer new drug launches, remember that there are numerous new products sold every year whose elimination would have little to no impact on the health of Americans. 

What about those profit-making opportunities? Many American blockbuster drugs are also blockbusters abroad only at significantly lower prices. 

Proposals like H.R. 3 — the drug reform bill proposed by House Speaker Nancy Pelosi (D-Calif.) — agrees to pay drug companies more for more effective drugs and sets a maximum allowable price at 120 percent of the prices in high-income foreign countries. 

That means the U.S. will for example pay 20 percent more than other nations rather than 80 percent as it does in Part B of Medicare. So H.R. 3 would simply shrink the price gaps between the U.S. and those countries. 

Finally, we come to the industry’s house and their production of innovations. The fact is, the drug industry’s efficiency in producing new drugs has declined continuously for decades. 

This is even so during a time of growing profits. Industry studies have pointed to excess costs of drug development, the pursuit of bad bets and the failure to recognize and adjust to erroneous lines of investigation as reasons for that inefficiency.

Improving the efficiency of research in drug development would allow for more drugs to be developed per dollar of R&D spending — offering an opportunity to offset revenue declines that might affect the flow of new drugs.

American consumers and taxpayers are doing their part paying higher prices, higher taxes and larger insurance premiums for drugs all in the name of supporting R&D. It is time for the industry to do its part by ceding some revenues, improving its processes and focusing on the drugs that matter to the health of Americans.

Richard Frank is a professor of health economics at Harvard Medical School and previously (2014-2016) served as assistant secretary for Planning and Evaluation at the U.S. Department of Health and Human Services.