The cost of capital for developing a new drug is $2.9 billion, including post approval research and development costs. Meanwhile, the process to develop a drug takes 10 years and only 12 percent of drugs make it to market.
These costs do not change simply because governments impose price controls on drugs. Consequently, price controls inevitably lead to all sorts of burdens that are manifested in various and unexpected ways.
In the OECD countries, the price controls limit patients’ access to new medicines – only 29 percent of all new medicines are available, on average. In the U.S., which has resisted calls for price controls so far, patients have access to 85 percent of these innovative treatments. The lack of access to new medicines means that European governments may be spending less money on cancer drugs but also must endure lower cancer survival rates. Consider that the cancer death rate in the U.S. dropped 33 percent between 1991 and 2022, while in the UK it only dropped 19 percent. These unnecessarily worse health outcomes mean that Europeans pay a much higher cost than the price-controlled prices indicate.
It is also true that patients in the U.S. suffer from the OECD price controls. Remember, innovation will cease unless the cost of capital for drug development is covered. The uneconomical pricing mandated in Europe means that, to cover the capital costs, prices in the U.S. must be higher. It is, essentially, a cost shift from these other OECD countries to the U.S. These costs are what the America First Policy Institute is rightly concerned about.
Having recognized the dangers of price controls, the authors recommend, as one of their solutions, that the U.S. adopt the same destructive policy. Specifically, they suggest several pathways to mandate that Medicare’s bad Medicaid’s prices equal the average prices set in these price-controlled markets – a most favored nation (MFN) model. According to the authors, the purpose of the MFN policy is to force drug manufacturers to either (1) increase the prices sold in these other countries, (2) withdraw the drug from those markets, or (3) lower prices in the U.S.
The authors’ expectation that adopting this policy will increase the prices in the other OECD countries is unrealistic. Their solution assumes that U.S. drug firms can somehow force these countries to increase their prices. How this goal could be achieved is unclear. And, if the drug companies can negotiate higher prices, then why aren’t they already implementing these strategies?
The answer, of course, is that there is no secret strategy that these private companies can implement to increase prices in the OECD countries. In fact, withdrawing the drugs from these markets will increase pricing pressures in the U.S. because the marginal revenue contribution from these sales would be lost.
There are also some practical problems that make it difficult, if not impossible, to renegotiate current drug prices. Specifically, any company that attempts to withdraw a drug from the market would be exposed to the loss of their patents. Specifically, Article 5 of the Paris Convention for the Protection of Industrial Property allows EU governments to grant compulsory licenses to other firms if a company independently withdraws from the market for commercial reasons. Consequently, withholding the sales of an existing product does not provide companies negotiation leverage to increase current prices on drugs. In fact, these governments have significantly more negotiation leverage.
And the negotiation process only gets worse from here. Should multiple drug companies simultaneously withdraw from a market absent higher payments, it would likely be seen as a cartel-like strategy to manipulate drug pricing that would violate EU competition law.
Due to these realities, adopting the MFN policy will essentially mean that the U.S. has adopted destructive price controls. Such an outcome would devastate the U.S. health system.
Access to innovative drugs in the U.S. would plummet. Less access to drugs would mean worse health outcomes for patients and, potentially, higher overall health spending as a greater amount of more expensive surgeries and hospital stays would be required. Patients living with diseases without treatments would face an exceptionally high burden as the hope that efficacious treatments to devastating diseases such as Alzheimer’s, pancreatic cancer, and muscular dystrophy would be lost.
These realities demonstrate that adopting the MFN policy will harm Americans and should be avoided. Similarly, it is clear that individual company actions can’t resolve the core problem. Instead, government-to-government trade negotiations are the only solution. Importantly, as I have written here, this negotiation should avoid the threat of tariffs that will only harm U.S. interests. Instead, those negotiations should use the opportunities created by expanding trade to ensure that prices in the other OECD countries reflect the capital costs of innovation.
The government price controls imposed by many OECD countries, while harming Americans, impose the largest costs on their own citizens. Adopting an MFN policy would simply import price controls into the U.S. market to the detriment of patients.
Dr. Wayne Winegarden is the director of the Center for Medical Economics and Innovation at the Pacific Research Institute.
