Exorbitant drug prices have two bad effects. First, high costs mean that lots of patients are unable to take their medications. A recent study in the Journal of Clinical Oncology assessed patients’ access to 38 different oral-cancer drugs and found that 13 percent of cancer patients did not buy approved chemotherapy drugs if they had a co-payment of $10 a month, while 67 percent did not when they had to pay $2,000 or more.
Second, the high drug prices distort research priorities, emphasizing financial gains and not health gains. Cancer drugs are routinely priced at about $120,000 to $150,000 a year, and more than 600 cancer drugs are now being tested on humans. This can lead to great societal benefits: The United States is expected to face 1.76 million new cancer cases and more than 600,000 cancer deaths in 2019 alone. But many of the drugs that companies are pursuing have low promise, where the health gains are small—weeks of added life, not big cures. While even this short extra time can be valuable to individual families, too much investment in oncology means not enough in drugs for other illnesses whose treatments cannot be so highly priced.
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Consider antibiotics. The Centers for Disease Control and Prevention ranks antibiotic-resistant infections as one of the nation’s top health threats. An estimated 2 million Americans become infected with such bacteria each year, and 23,000 die. A superbug that is resistant to all known antibiotics is an imminent threat. Yet because antibiotics are generally cheap, for most pharmaceutical and biotechnology companies they are not a primary focus. The Pew Charitable Trusts reports that only about 41 new antibiotics with the potential to treat serious bacterial infections were in clinical development for the U.S. market in March 2017.
The simple explanation for excessive drug prices is monopoly pricing. Through patent protection and FDA marketing exclusivity, the U.S. government grants pharmaceutical companies a monopoly on brand-name drugs. But monopolies are a recipe for excessive prices. A company will raise prices until its profits start to drop.
To address the problem of high prices and reduced access to drugs, Johnson & Johnson advocates eliminating rebates to pharmacy benefit managers and insurers, which would increase price transparency and lower patient co-pays. But it would not necessarily lower total drug prices. The proposal avoids the standard economic response to monopoly pricing: price regulation. Every other developed country regulates drug prices, often through price negotiations pegged to cost-effectiveness analysis or some other measure of clinical benefit.
Will R&D go down if the United States follows this model? Not necessarily. Remember, the high drug prices fund R&D but also marketing, manufacturing, administrative expenses, and profits at the companies. Lower revenue from lower drug prices could reduce marketing, administration, and excessive profits before R&D costs have to be reduced.
Where cuts are made is up to drug companies. Their claims of lower R&D costs appear designed to generate fear, but as some former executives themselves have acknowledged, there is no necessary link between a decline in drug prices and a decline in R&D. Drug companies could make other choices that maximally improve the health of all Americans.