Senate Democrats’ Drug Price Proposal Would Slow the Pace of New Drug Discovery

Senate Majority Leader Chuck Schumer (D-NY) recently announced a proposal to establish a drug price negotiation program under Title XI of the Social Security Act, wherein the secretary of Health and Human Services will negotiate the price of a specified number (varying by year) of eligible drugs. Such legislation would reduce America’s competitive position in biopharmaceuticals and slow the pace of drug discovery, harming workers and patients.

Congress should ignore pressure from progressive activists who want to use drug price controls to move to a government-led drug discovery and production system and instead focus on more pragmatic reforms.

The push for significant drug price controls is based on the belief that drug price increases are out of control. For example, a team of researchers from Harvard recently claimed drug prices are rising 20 percent annually. In fact, the study misrepresented data regarding drug price increases, using figures based on the newest, most innovative drugs, rather than all prescription drugs. This is akin to saying because the latest smartphone became more expensive, that all phones did as well.

In fact, data show that drug prices are not increasing significantly, especially compared to other health-care-related costs. While consumers are facing their highest inflation rate in 40 years, patients’ out-of-pocket drug costs are at an all-time low relative to total U.S. health spending, according to data from the Bureau of Labor Statistics (BLS). In fact, according to the St. Louis Federal Reserve Bank, the consumer price index (CPI) for pharmaceuticals (and other medical product expenditures) actually decreased from 2009 to 2019.

While the CPI increased 8.6 percent year-over-year through May, prescription drug prices only increased 1.9 percent. In contrast, other health-care-related costs of at-home care, nursing homes, hospital services, medical equipment and supplies, and health insurance rose faster at 2.4 percent, 3.4 percent, 3.9 percent, 4.7 percent, and 13.8 percent, respectively. In fact, the percentage of health-care spending going to retail prescription drugs was consistent from 2000 to 2017 (at mostly under 10 percent), dipped slightly to 8 percent in 2020, and is expected to remain stable in the 9 percent range through this decade.

Despite this, many progressive activists continue to fight for government-negotiated drug prices as a way to lower prices and limit drug company revenues. However, this will mean delays in access to innovative treatments. A 2018 report from the Department of Health and Human Services analyzed the price and availability of 27 drugs in the United States versus 16 other countries. It found that only 11 of the 27 drugs examined were widely available in all 16 comparator countries. For example, out of the 95 percent of new cancer drugs available to patients in the United States, just 55 percent are available among the other 16 countries.

In addition to limited access, these countries face a 25 to 80 percent time lag (average 17 months) between the time new drugs are available in the United States and their availability elsewhere. In 2020, 87 percent of new drugs became available to Americans within three months of global launch; the next closest countries were Germany and the United Kingdom at 63 percent within 10 months and 59 percent within 11 months, respectively.

According to EU data from 2012, nearly 600,000 European deaths could be avoided each year if the continent’s health-care systems simply offered “timely and effective medical treatments,” suggesting the costs of not getting innovative drugs and therapeutics to patients in time is quite high. American patients deserve to keep the faster access and wider options they already have, and drug price control proposals would take that away.

If this were not enough, anti-business progressives would have policymakers believe reduced industry revenue would have no effect on R&D and innovation, only reducing stock buybacks and advertising. Again, this ignores data. First, the pharmaceutical industry is not excessively profitable. In 2021, the pharmaceutical and biotechnology industries earned lower returns than the total U.S. market. Second, advertising in the pharmaceutical industry is not the mostly zero-sum endeavor intent on besting the competition that it is in other industries. Rather, the $6.58 billion spent on advertising in 2020 provided important education for patients and healthcare providers on health conditions and treatment options.

Third, and most importantly, drug revenues enable the R&D that contributes to American jobs, competitiveness, and drug innovation—so, the Senate Democrats’ drug-price proposal undermines the very same objectives that the administration and Congress are trying to achieve with legislation such as the U.S. Innovation and Competition Act (USICA), which aims to bolster the competitive position of America’s innovation-based industries. The Congressional Budget Office finds the U.S. pharmaceutical sector was the most R&D-intensive sector in the nation, investing more than 25 percent ($83 billion) of revenues into R&D in 2019, compared to around 2.5 percent on average across all U.S. industries. The next closest R&D-intensive industry, software and semiconductors, invested less than 18 percent. This investment generates employment and innovation. R&D jobs account for 23 percent of the biopharmaceutical industry’s workforce, giving the industry a share three times higher than the national average of R&D-dedicated employment. This industry also boasts the country’s highest share of female to male R&D employees, with 4 percent more women. Additionally, America’s biopharmaceutical sector alone employs over one-quarter of America’s entire R&D workforce.

Moreover, the scholarly literature is clear that drug price controls reduce R&D and new drug development. The fact that the United States has limited price controls is a key factor in the fact that the United States accounts for almost half of the world’s new drugs introduced over the past two decades. One study finds that every $2.5 billion of additional revenue leads to one new drug approval. Biopharmaceutical R&D requires prices that can cover high failure rates, as drug development is an 11 to 15 year process wherein 0.05 to 0.1 percent out of every 5,000 to 10,000 compounds make it from basic research into clinical trials, and less than 12 percent of those in trials are ultimately approved by the U.S. Food and Drug Administration. In other words, the price of a single drug doesn’t just have to cover that drug’s development and production costs; it also has to cover the costs of other drugs that didn’t make it to the market.

Moreover, claims by progressives that the government already funds most of the R&D are unfounded, as a National Science Foundation report found that pharmaceutical manufacturing companies account for approximately 90 percent of all their R&D funding.

With significant drug price controls, companies large and small won’t be able to invest in high-risk and expensive R&D endeavors such as mRNA vaccines, rare diseases, or improvements to existing treatments. Struggling start-ups will find it more difficult to acquire funding for costly clinical trials. And ultimately, it will be patients in need of cures and treatments who lose.

One factor in out-of-pocket spending on drugs stems from wholesalers, insurers, and pharmacy benefit managers (PBMs). From 2014 to 2018, these middlemen earned higher returns on equity than the pharmaceutical industry. Moreover, the share of revenues going to non-manufacturer entities like PBMs in the drug supply chain surpassed the manufacturers’ share in 2021. In fact, since 2013, pharmaceutical manufacturers’ share of drug expenditures has actually decreased by 17 percent. The reality is, the three largest PBMs hold a 72 percent market concentration and ultimately determine the final out-of-pocket cost for patient medicines.

As such, Congress should abandon the drug pricing control proposals, which are harmful to U.S. patients, workers, competitiveness, and innovation.