The Issue
High prescription drug prices are a major concern for many Americans. At the same time, people also value innovation in the development of new drugs that can improve people’s lives. Lowering drug prices, however, reduces incentives for pharmaceutical companies to invest in drug innovation by decreasing their expected return on investment from new medicines.
How can the United States lower drug prices while maintaining innovation? In June 2020, the USC-Brookings Schaeffer Initiative for Health Policy, with support from the Commonwealth Fund, convened a roundtable of experts to explore how to minimize disruption of important innovation while designing effective policies to reduce U.S. drug prices. Participants included current and former pharmaceutical and biotech executives, physician–scientist entrepreneurs, private equity and venture capitalists, and economists. Writing on the Health Affairs Blog, Steven M. Lieberman, Paul B. Ginsburg, and Kavita Patel summarized the roundtable discussion about high U.S. drug prices and ways to reduce them while maintaining innovation.
High drug prices are a major concern in the United States, but attempts to reduce them could inadvertently impair beneficial pharmaceutical innovation.
Why the United States Has High Drug Prices
The U.S. pays more for prescription drugs than other countries and relies on market competition to set drug prices, rather than directly regulating prices like most other developed countries. Competition generally works for generic drugs but has a limited effect on prices of brand-name drugs protected by patents and market exclusivity. In 2018, brand-name drugs accounted for just 10 percent of prescriptions but nearly 80 percent of all drug spending.
Developing new drugs is expensive, with a median cost of $1.3 billion per drug. In the U.S., there is a large gap between what is paid to pharmacies for drugs and pharmaceutical company net revenue: significant amounts are spent on marketing (about $26 billion in 2016) and rebates — discounts that flow through pharmacy benefit managers (PBMs) and are paid to insurers after prescriptions are dispensed.
How the U.S. Can Reduce Drug Prices While Preserving Innovation
The roundtable participants believe that steep, across-the-board drug price cuts would reduce pharmaceutical innovation. But they also recognize that the current system does not incentivize the most transformational health care innovations. The roundtable discussed the potential for:
- Lowering drug development costs, which could lower prices while maintaining companies’ return on investment.
- Letting drug companies capture a larger share of revenues in exchange for lower prices, such as by reducing marketing.
- Having government set prices that are initially high but fall in a systematic and predictable way, citing Japan’s experience as an example.
- Avoiding linkage of U.S. drug prices to the prices used in other countries. Linking prices in this way could have unintended consequences and would likely not be as effective over time as having the U.S. address high prices directly.
- Developing better measures of value for new drugs in the U.S. to help determine prices, which could lead to the U.S. following other countries in adopting price regulation tied to the cost-effectiveness of new drugs.
Roundtable participants discussed multiple ideas about how policymakers might balance the tension between lowering drug prices and encouraging investment in important innovation, including:
- Exploring how to lower the costs of drug development and approval.
- Understanding how lower drug prices could expand access, which would increase sales.
- Taking actions to lessen the impact of lower prices on drugmakers’ revenues, with attention to differentiating between reducing prices for most existing drugs versus maintaining higher prices for important new therapeutic advances.
- Ending unintended extensions of market exclusivity gained through the manipulation of patent protections.
- Reducing sales uncertainty for drug companies — for example, by using multiyear contracts — in exchange for lower prices.
- Structuring rules to facilitate reduced spending on marketing and on intermediation (PBMs) in an environment that relies on regulated prices.
- Establishing cost-effectiveness measures that encourage transformational drug innovation.
The Bottom Line
High drug prices are a major concern in the United States, but attempts to reduce them could inadvertently impair beneficial pharmaceutical innovation. Policymakers should strike a careful balance between lowering drug prices and maintaining incentives to support important innovation.
