Editor’s Note: Scott W. Atlas is the David and Joan Traitel Senior Fellow at Stanford University’s Hoover Institution and the author of “Restoring Quality Health Care: A Six-Point Plan for Comprehensive Reform at Lower Cost” (Hoover Press, 2016). The views expressed in this commentary are his own.
New Health and Human Services Secretary Alex Azar has identified his main priorities. At the top of his list is lowering prescription drug prices.
Even though prescription drugs constitute only 11% of US health expenditures, according to the Centers for Disease Control and Prevention and Centers for Medicare and Medicaid Services, and US drug spending ranks in the bottom one-third of comparison lists with other developed nations, prices continue to increase rapidly here, with a year-over-year rise of almost 10% for drug list prices, according to a 2017 Credit Suisse report.
Controlling drug prices through government action though is fraught with peril, because it could also slow the process of making new drugs available to Americans. A much smarter way to go is to make drug prices – which can vary dramatically from one pharmacy to another – readily apparent to patients and equip them with the incentives to shop around.
Drugs are the most significant reason behind the past half-century gains against both chronic and life-ending disease. Policies aimed at reducing drug costs must not restrict their supply, jeopardize their quality or inhibit essential drug innovation necessary for tomorrow’s cures.
American patients in particular have benefited more than others from drugs. For decades, the United States has been the most frequent country, by far, where new drugs are first available. Life-saving cancer drugs, as one critical example, are at least four times more likely to be made first available here compared with any country, including Germany, Japan, Switzerland, France, Canada, Italy or the UK, as reported in the Annals of Oncology in 2007.
Similarly, two-thirds of the novel drugs OK’d in 2015 were approved in the United States before any other country. Most recently in a 2017 study, of 45 new cancer drugs approved by the Food and Drug Administration from 2009-2014, all of which were covered by Medicare in the United States, only 26 were approved and covered in the UK, only 19 in France, only 13 in Canada and only 11 in Australia.
This early and broad drug access is key to delivering America’s better treatment results than nationalized systems elsewhere, where drug prices are strictly regulated by government, for virtually all serious diseases reliant on drugs, including cancer, heart disease, stroke and the most important chronic disorders, including high blood pressure and diabetes.
Prices and profit margins
Not surprisingly, prices and profit margins for prescription drugs in the United States dwarf those in foreign markets. It is obvious that economics represent a key incentive for the constant innovation and first access to life-saving drugs that Americans enjoy. Indeed, that is the conundrum: The same policies that are associated with the lower prices seen in other countries – price regulation and weaker patent rights – are also those that are typically associated with delayed launches and reduced access to drugs.
In addressing legitimate public concern about drug prices, our politicians must avoid the temptation to impose top-heavy regulations. Price caps may seem intuitively attractive, yet price caps always restrict supply of the product, and drugs are no different. One study showed that price regulation strongly delayed drug launches of 642 new drugs in 76 countries. Another showed that price controls significantly diminish early-stage research and development.
We also know that if a single buyer is as dominant as Medicare, it functions like a monopsony, where price “negotiation” ultimately leads to supply shortages and fewer new products, as economist Paul Krugman and others have noted in other industries. Empowering the government as price negotiator would also facilitate future restrictions based on political budgets, rather than on medical data.
Case in point is Britain’s National Health Service 2017 “budget impact test,” which delays introducing any new drug – even though it may already be proven cost-effective – if the cost would exceed an arbitrary £20 million (about $28 million) per year, and even though all branded drugs are already price-regulated under the UK’s Pharmaceutical Price Regulation Scheme.
One major p