Tomas J. Philipson: Price controls on medicines are stymieing innovation. Trump’s plan will make it worse.
CHICAGO TRIBUNE
Lawmakers in both parties are increasingly embracing the idea of price controls on medicines — and in doing so, they’re making a losing bet.
Price controls involve a fundamental tradeoff: lower prices today in exchange for less innovation tomorrow. Consider the “most favored nation,” or MFN, drug pricing proposal currently before Congress. It would cap U.S. drug prices at the lower rates paid in other countries — dramatically undermining the incentives that drive high-risk research and development (R&D).
Proponents of MFN are implicitly wagering that savings on existing medicines will outweigh the lost benefits of treatments never developed. But in fact, the opposite is true. That’s because modern innovation is increasingly aimed at treating disease earlier and preventing progression altogether — driving compounding human and economic benefits over time.
As drug innovation advances toward earlier intervention and better long-term outcomes, the societal costs of undermining it through price controls will only grow.
Developing a new medicine is expensive and extremely risky. On average, it takes over a decade and costs more than $2 billion. For every new drug that launches, nine candidates fail before completing the gauntlet of clinical trials necessary to win Food and Drug Administration approval. And much of the value of medicines comes from “follow-on” improvements developed after their initial launch, which require further spending and clinical study.
Companies and investors cannot take on those risks without confidence that if a drug succeeds, they will be able to earn the return on investment that enables them to continue to pursue new innovations. The United States has long been the world’s drug development powerhouse — accounting for at least half of global biopharma investment — because of its commitment to market-based pricing and strong patent rights, which provide investors the assurance they need.
By curtailing drugmakers’ expected returns, price controls would undermine these core incentives, discouraging companies from investing in valuable, high-risk research. And as drug research increasingly focuses on treating earlier stages of disease, the potential costs of undermining that innovation are only growing.
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