Commentary: Proposed Drug Price Caps Would Stall Advances in Health Care

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This op-ed by William Smith and Adam Crepeau appeared in the Portland Press Herald on April 23, 2019.

Imagine if the Maine Legislature decided that large pickup trucks were becoming too expensive for the working class people who drive them.  Then imagine that legislators established a commission designed to study the costs to manufacture and sell these trucks. After careful study, the commission then concluded that large pickups produce a $3,000 profit per truck for their manufacturers.  Finally, the commission then established an “upper price limit” on pickups sold in Maine that was $3,000 below the average price at which pickups were currently being sold.

Lastly, suppose 45 other states, seeing Maine’s attempt to make pickups more affordable, also established similar price caps.  What, then, would happen?

The answer is quite simple:  Major brands like Ford, Chevy and Dodge would stop making large pickups.  They would adjust their business strategy and push out far fewer large pickups and attempt to sell more profitable SUVs or sedans, and the large pickup truck would fade from the market.

Right now, a Maine legislative committee is considering the creation of such a commission to establish price caps, not on pickups, but on prescription drugs.  But if the commission was successful in artificially pushing down drug prices and many other states were to adopt similar strategies, the certain result would be fewer new and often groundbreaking drugs coming out of biopharmaceutical laboratories.

The committee is failing to take into account a simple, bedrock principle of economics, i.e. that price controls produce scarcity. But despite strong arguments that price controls would dampen the incentives to develop new drugs, the committee argued that this is a “threat” regularly leveled by the drug industry that simply wants to protect profits.  In defiance of every principle of economics and common sense, the implication of some legislators was that price controls would not result in fewer new drugs.

Do drug makers want to make big profits?  Of course they do.  Most inventors want to invent something never invented before and to sell it “for a limited period” as the U.S. Constitution permits, exclusively.   This monopoly-style ability of patent-holders to sell their discovery without others being able to copy it is, of course, bound to stir anger and resentment because the prices patent holders can charge will be higher while they hold exclusive rights to sell it.  But the Framers of the U.S. Constitution knew that patents would “promote the progress of science and useful arts.”

The patent clause of the Constitution and the current federal incentives in place to develop drugs for rare diseases are producing a gusher of new drugs for very difficult and challenging diseases.  In 2018, 34 of the 58 new drugs approved by the FDA were for so-called “orphan” diseases, generally defined as diseases with a universe of patients less than 200,000.

With the emergence of gene and cell therapies, there is real hope of cures for rare cancers, cystic fibrosis, multiple sclerosis, hemophilia, sickle cell disease, and many others.   These cures will, no doubt, be expensive.

However, with patent expirations on older blockbuster drugs such as Lipitor and Nexium, the healthcare system can afford to pay for these new therapies.  Patent expirations will save the U.S. healthcare system $95 billion over the next five years and $26 billion in 2019 alone.  The savings from patent expirations is offsetting the growth in new expensive drugs for rare diseases; net new drug spending in 2017 grew only a modest .6 percent.

There are undeniable challenges for some patients on expensive drugs who have weak insurance plans with high out-of-pocket costs.  This is a discreet and narrow problem that can be fixed with insurance reforms, negotiated discounts to patients, and creative strategies that link drug prices to their actual value for patients.

If the Maine Legislature moves forward with a price control commission, the result will be a slower pace of innovation and fewer cures for the coming generations.  Future generations are already being burdened by the current generation with massive federal and student loan debt.  Do we also want to bequeath to them a dearth of new cures?

 

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