Why are Americans Expected to Cover the Cost of New Cures?

Can the citizens of the United States keep paying exorbitant costs for the pharmaceutical industry?

Dylan Scott, a health policy reporter over at Vox, has a meandering article out titled “Can the U.S. cut drug prices without sacrificing new cures?” In the article, Scott writes that the policy of the Democratic’s Build Back Better reconciliation bill of setting a hard cap on the cost that Medicare will pay for certain drugs needs to be balanced with the potential consequences of decreased innovation in the pharmaceutical sector. His main point is from the Congressional Budget Office report from 2019 that estimated a likely decline in revenue of approximately 20% for pharmaceutical companies if the hard Medicare cap.

“So who is right? It’s a question academics and analysts have been trying to answer for years. The U.S. is the biggest pharmaceutical market globally, representing 60 percent or more of the industry’s global profits. Nobody can say for sure what would happen if the world’s largest prescription drug market — by far — suddenly instituted government price controls. The Congressional Budget Office estimated in 2019 that international revenue from new drugs could drop by as much as 20 percent.

Many analysts agree this means that the industry would spend less on research and development, fewer drugs would be approved, and those losses would increase over time. However, estimates range wildly because there is so much uncertainty in the drug development process.”

Total spending on medications rose to $539 billion in the United States for 2020 for a total increase of almost 71% over the past decade for U.S. consumers. Americans spend about three times as much on medications as Europeans and 90% more as a percentage of income. The United States pharmaceutical market accounts for 64-78% of worldwide pharma profits. Hilariously, the report that Scott cites from the University of Southern California recommends that Europeans should actually pay 20% more for medications to increase the amount of innovation in the pharmaceutical sector instead of concluding that Americans should be spending less.

If the hard cap survives the reconciliation process, Medicare will pay no more than 120% of other wealthy countries’ average cost. So, Americans will still pay more than every other country for life-saving medication, but significantly less than the current norm. The CBO estimated that this cap would result in a 15-25% decline in revenue for the entire pharmaceutical sector and a subsequent decline in innovation in the range of .5-8% of new drugs on the market. In other words, that in the next decade, two fewer drugs will come to market and potentially 30 fewer drugs the following decade. For reference, the CBO expects the FDA to approve about 300 new medications within the next decade without the Medicare cap.

Innovation is important. It leads to jobs, economic growth, and lower rates of poverty. In the pharmaceutical sector, it can lead to life-saving or life-enhancing medications, so certainly, we do want to consider any drastic decline in the number of novel drugs coming to market. The problem is that Americans cannot afford the medications as is, and certainly should not be expected to serve as funders for the world’s medicine. The Vox article is terribly one-sided against price controls, going as far as to include a Rand Corporation research paper that says Americans and Europeans would lose .7 years of life expectancy by 2060 due to lack of innovation in the sector. The actual wording used in the article is blasphemous when you factor in the difficulties in assessing innovation within a vacuum over 40 years, but even more so when libertarians are writing the assessment while opposed explicitly to any price controls in their crusade for individual liberty.

“But RAND analysts tried to do that in 2008 and found that with drug price controls, life expectancy would drop over 50 years unless innovation were somehow not tied to pharma revenue, which the authors considered unlikely. By 2060, that projected decline in life expectancy for both Americans and Europeans would reach approximately 0.7 years.”

Of course, nowhere in the Vox article does Scott mention that the United States has much lower life expectancy than every comparable country. Americans spend an incredible amount more on healthcare than any other country globally and have a life expectancy significantly shorter than every other rich country. At best, I would recommend Scott to reframe his article as, “Can Europeans afford a decline in novel drug innovation funded by Americans?” because, as it currently stands, Americans are already not receiving the benefits of a profit-focused healthcare system. Our life expectancy in the United States is as close to Saudi Arabia and Iran as it is to Germany and France. With a life expectancy of about 78.9 years, we fall short of France and Germany’s 81-83 years of life expectancy while paying twice as much in health costs per capita.

Will pharmaceutical innovation decline with the addition of the Medicare hard cap? Although the hard cap will result in a decline in revenue of approximately 15-25% according to the CBO, it is important to note that big pharmaceutical companies both make up the vast majority of the revenue generated in the sector and do not spend much money on research and development into novel drugs. Research shows that 78% of patents approved by the FDA correspond with medications already on the market.

“Part of the problem is how pharmaceuticals use the patent system. Instead of creating new drugs, they extend existing patents beyond the initial 20-year protection set by the United States and use gimmicks, such as overly-wide patents, to block knowledge creation and issue patents for what is essentially the same drug. Losec, for example, which is produced by AstraZeneca to treat heartburn and ulcers, was later tweaked and placed under a new name. This enabled the company to issue a new patent for the barely modified medication, effectively extending the company’s monopoly on this type of drug well beyond the period granted by the original patent.” Mazzucato, M. (2019, April 1). Opinion | Big pharma is hurting drug innovation. The Washington Post.

Pfizer, the developer of one of the COVID-19 vaccines, spent $139 billion on share buybacks to boost its share price over the past decade compared to $82 billion on research and development. Any argument in favor of the current modus operandi of big pharma price gouging Americans in the name of innovation has to grapple with the current economic environment of a pharmaceutical sector pursuing profits over public health. Worse yet, Americans already pay large amounts of money on the research of medications through taxes. Every one of the 210 new drugs approved by the FDA between 2010 and 2016 was funded by taxpayers.

The COVID-19 vaccines developed by Pfizer and Moderna are great examples of the actual innovation performed in the pharmaceutical sector, which is often done at both the private and the University level in the United States. The innovation necessary for the rapid development of the COVID-19 vaccine wasn’t due to the reinvestment of profits into research. Instead, it resulted from many decades of taxpayer-funded science that eventually became mRNA-based vaccines. Pfizer and Moderna did not develop the vaccines and certainly did not spend the requisite amounts necessary to fund the innovation behind the vaccines. Studies have shown that taxpayers account for $18-39.5 billion of the development costs of the mRNA vaccines, only also to have to pay Pfizer and Moderna additional billions upon purchasing doses for U.S. citizens.

“While the NIAID was funding these basic science innovations, the U.S. Department of Defense was making high-risk investments in RNA vaccine technology through its Defense Advanced Research Projects Agency (DARPA). In 2011, DARPA awarded CureVac (a Sanofi-affiliated company) and In-Cell-Art $33.1 million to advance their vaccine platforms and test candidate products.6 In 2017, CureVac researchers published the first phase I clinical trial demonstrating that an mRNA vaccine could induce functional antibodies against a viral antigen, the rabies virus.7 In 2013, DARPA awarded Moderna $25 million toward developing RNA vaccines against the viral diseases Zika and Chikungunya, validating the concept that mRNA sequences could be used to produce a secreted human protein and potentially scale antibody responses against a specific target in the human body.” -Lalani, Hussain S et al. “US Taxpayers Heavily Funded the Discovery of COVID-19 Vaccines.”

The mRNA vaccine development represents a significant path forward for the pharmaceutical and healthcare industries -- a path that must acknowledge the role of government and taxpayers in the development of medications. Price controls can, and often do, result in decreased innovation in many sectors. Unfortunately, in a society as capitalistic as the United States, they appear necessary for items required for essential quality of life enhancement and to prevent mortality from curable diseases. U.S. taxpayers already pay significant sums for healthcare innovation for the entire world. It is time to stop the middle-man, rent-seeking, big pharmaceutical companies from extracting more from the economy than they are willing to invest.

The pharmaceutical industry has been plagued by profit-seeking motivation for a while now. There is little incentive to develop truly life-altering drugs, instead seeking to simply rebrand current drugs with slightly new uses. There may not be much money to be made with a drug that can truly make life better without the additional requirement of taking a prescription for the rest of your life. Big pharmaceutical companies have greatly benefited from the lack of novel drugs.

Research and development are notoriously tricky in pharmaceuticals, only about 14% of drugs that reach clinical trials win approval from the FDA. At a certain point, which Pfizer and Johnson and Johnson seem to have met, big pharmaceutical companies may be as much of a hindrance to competition in the sector as they are innovators. Does it make more sense to invest large sums of money in medications that may never head to the market or to invest large sums of money in stock buybacks and advertisement? Well, if you’re focused on health outcomes, the answer is clearly to spend additional money on medication development, but the fact is that is not what is happening when Pfizer and Johnson and Johnson are spending twice as much on selling as on research.

Is the CBO report correct that innovation will decrease with the enaction of Medicare price reform? The speculation is fair; it may well decline if the assumption is that no future legislation ever passes. The CBO predicted two fewer drugs over the next decade, an additional 23 fewer the following decade, and 34 fewer in the third decade. The new drugs may be novel, but new medications are often less valuable than even existing drugs. Just taking the first decade, you can assume that the odds are against humanity losing a game-changing drug out of two fewer drugs. The analysis of the second and third decades should be disregarded as wildly speculative – predictions for 20-30 years away are likely to look foolish (for better or worse), and that includes plenty of time for legislation that could spur additional pharmaceutical innovation.

Potential solutions for the very slight decline in novel drugs expected over the next decade include additional NIH funding and reforming patent law that Big Pharma exploits to prevent competition in the sector. A great article in the Harvard Business Review covers some potential fixes:

“The United States needs a new strategy for drug innovation that recognizes the new reality of the biomedical innovation process and the true, limited role of Big Pharma. We could start by reinvesting a substantial fraction of the hundreds of billions of dollars that could be saved from pending drug-payment-reform legislation into the most powerful engine of innovation in drug development: the NIH and its academic research partners. This would likely generate a flood of truly innovative, life-saving products — not a flock of me-too drugs — that small companies could perfect and Big Pharma could steer to market.” - Blumenthal, D. (2021, October 2). The U.S. can lower drug prices without sacrificing innovation. Harvard Business Review.

America is a wealthy country. We can afford to pay more than the rest of the world for pharmaceutical innovation – but the additional cost burden needs to be alleviated by taxation. When a fourth of your population suffers from not having enough cash to afford prescription drugs they need, you don’t have an innovation problem. You have an accessibility problem. Arguments in favor of keeping drug prices exorbitantly high are also in favor of American deaths from lack of medication access.