Expensive prescription drugs are a bargain

Now that 30 days have passed, I, within my contract, can post Charlie Hooper and my entire op/ed. The Wall Street Journal. Here it is.

Expensive prescription drugs are a bargain

The deflationary act gives the government the power to ‘negotiate’ prices. People will die.

Charles L. By Hooper and David R. Henderson

September 13, 2022 12:37 pm ET

The Inflation Reduction Act contains eight provisions intended to lower drug prices in the future. Some observers must have been pleased that Congress gave the Centers for Medicare and Medicaid Services new powers to negotiate with pharmaceutical companies. They shouldn’t have been. The Inflation Reduction Act will not significantly reduce inflation, and it will do little or nothing to reduce health care costs. Forcing drug companies to charge lower prices would likely lead to fewer new drugs.

Virtually no product is more valuable than the modern drugs produced by the biopharmaceutical industry. They cure disease and increase life. We’ve all heard that Americans pay more for medicine than people in other countries. This is true, but only when comparing retail prices of brand-name drugs. Pays very low American retail price; Most pay a fraction—a copay—as determined by their insurance plan. Most country-to-country comparisons also exclude generics. Nine out of 10 prescriptions in the United States are filled with lower-priced generic drugs than in other countries.

In many countries, the government is the sole purchaser of drugs. For a new drug to be used, the government must buy and distribute it. Medicines will not be available if the government refuses. These governments bargain, take it or leave it. Drug companies often accept this, because once research and development costs are covered, some money is better than no money.

Except in rare cases, pharmaceutical companies manufacture drugs for the US market. Drugs that manufacture in America, Europe, Japan, Canada, China and elsewhere are potential sales gravy. Drugs that cannot be manufactured in the United States are wasted. Potential success in America is a necessary and sufficient condition for the development of new drugs. There are four main reasons for this:

First, the United States is a relatively large country. Second, the United States is a rich country; Americans are 46% richer than the British, 59% richer than the French, and 36% richer than the Germans as measured by per capita gross domestic product. Third, it takes time to negotiate prices with government bureaucrats, resulting in one to two years of lost sales. Fourth, prices in the United States are somewhat more influenced by market forces and, until the Inflationary Reduction Act, were not determined by negotiation with the government.

Where CMS is concerned, “discussion” is a “godfather”-esque euphemism. If a drug company does not accept CMS pricing, it will have to pay up to 95% of its Medicare sales revenue for that drug. The penalty is so severe, Eli Lilly CEO David Ricks reports that his company considers the possibility of negotiations as a possible loss of patent protection for some products.

Drug research and development involves a lot of fixed costs. As of 2013, the cost per new drug approved by the Food and Drug Administration was $2.9 billion. Historically, this fixed cost has doubled in real terms every nine years. So in 2022, inflation-adjusted fixed costs per approved drug are closer to $7 billion.

That huge cost must be spread over a small portion of the world’s population within a limited period of marketing exclusivity. With wealthy American consumers and insurers paying at or near retail for brand-name drugs, some drugs will not be manufactured at all. While it is true that foreign governments mostly free-ride on the huge investments in R&D made by the United States, it is also true that someone has to pay. If no one paid, many treatments that would improve and extend people’s lives would not exist.

Research by Columbia University economist Frank Lichtenberg suggests that 73% of the increase in life expectancy in high-income countries between 2006 and 2016 was due to the adoption of modern medicine alone. He also found that drug costs saved per year in 26 high-income countries were $13,904 and $35,817 in the U.S. Most Americans would pay $36,000 to live an extra year.

Although the U.S. shoulders the lion’s share of global pharmaceutical R&D spending, Americans get a lot of it. New medicines are a fantastic investment in humanity, and Americans benefit as much as everyone else. It should be an easy decision to accept that deal and get a better outcome or reject the deal and get a worse outcome. Before Congress attacks drug prices again, it should account for the exorbitant prices of products stemming from this surprising but harmful industry, and consider the possibility that the United States is shooting itself in the foot if it tries to emulate more restrictive governments.

Mr. Hooper is president of Objective Insights, a life-sciences consultancy, and author of “Should the FDA Reject Itself?” Mr. Henderson was a research fellow at the Hoover Institution at Stanford University and a senior health economist on President Reagan’s Council of Economic Advisers.

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