Price Controls Reward Special Interests And Slow Innovation

Remarkable new wonder drugs have caused a new confrontation over pricing wars between manufacturers and health plans, now reaching a fever pitch over hepatitis C treatments from Gilead. Unfortunately, rather than the industry players settling the issue through negotiation, health plans are turning to Congress to step in and arbitrarily limit prices, which could undermine the investment that is critical to developing new cures.

Phil Kerpen1

Developing new life-saving drugs is expensive. The total cost of bringing a new drug to market is now $1.2 billion according to the Tufts Center for the Study of Drug Development, in part due to regulatory compliance and litigation expenses. And for biotech drugs the costs can be even higher. So too, are the prices and that has brought controversy.

Health insurance companies were already bristling over the cost of Gilead’s $84,000 hepatitis C cure Sovaldi and are going apoplectic over the company’s next-generation version, Harvoni, which is priced at $94,500. The company says that because the new version replaces multiple companion drugs that are no longer required, it is therefore actually less expensive.

Are they right? Well, that should be a matter for negotiation between the different industry players.

Unfortunately, an industry group formed to lobby for prescription drug price controls has seized on the issue to opportunistically press Congress to impose price controls and force Gilead to sell at a lower, politically-determined price. That would set a very dangerous precedent for several reasons.

First, the argument for price controls fails every reliable economic theory in the book. Ten years ago, the late-Milton Friedman joined over 150 of his peers in arguing against them. In their words, “Drug price controls are more difficult to remove than other price controls. Controls on oil and other products often tend to be limited or short-lived, as voters eventually object to the resulting shortages and distortions. The effects of drug price controls, however, are far more difficult to observe because they mainly affect medicines that haven’t been invented yet.”

When innovators are on the cusp of major advances in cancer, diabetes, HIV/AIDS and hepatitis C, among others, arbitrarily limiting the economic rewards for a major breakthrough will make it more difficult to raise capital, stunt innovation, and hurt patients who rely on new advances.

Second, if this concept were ever to see the light of day, we would risk one of our greatest opportunities to address chronic disease prevention and management. Nearly half of the U.S. population has at least one chronic disease. These conditions lead to higher utilization of medical services and therefore higher costs. The drugs at the center of the controversy are a great example, because a cure, even an expensive one, for hepatitis C is far less costly than ongoing treatment.

Third, the principal advocate for price controls is masquerading as a consumer interest group, while actually representing major industry players who should be capable of negotiating without getting Congress to put a thumb on the scale.

The so-called Campaign for Sustainable Rx Pricing, under the umbrella of the National Coalition on Healthcare and headed by longtime activist John Rother, is funded by the health insurance industry’s trade association, America’s Health Insurance Plans or AHIP, the Pharmaceutical Care Management Association, and the American Hospital Association. Not exactly the little guys.

From a policy standpoint, the most important thing for health policy to accomplish is to get the incentives right for new cures to be developed and made available to improve and extend people’s lives. That should mean less regulation and more competition and choice. Price controls would do the exact opposite, and Congress should reject the rent-seekers calling for them to get involved in a pricing dispute between industry players who are perfectly capable of negotiating for themselves.

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