We can cut drug prices *and* foster innovation

October 14, 2021

Summary: As Congress considers enabling Medicare to negotiate down out-of-control drug prices, pharmaceutical companies warn that innovation will suffer. Not so, says the president of the Commonwealth Fund. And not so, experts agreed back in 2004. It’s time to empower the public purchaser!

The U.S. Can Lower Drug Prices Without Sacrificing Innovation
Harvard Business Review
October 1, 2021
By David Blumenthal (President, Commonwealth Fund), et al

With Congress considering legislation to allow Medicare to use its bargaining power to negotiate lower drug prices, large pharmaceutical companies are once again waging a campaign that contends that doing so would seriously harm the development of breakthrough drugs. This is not true. Smaller companies now account for the lion’s share of such breakthroughs. The key to supporting drug innovation is to increase NIH funding of the efforts that gives rise to these new companies, cut the costs and accelerate the speed of clinical trials, and reform patent law.

The United States needs an effective strategy for maximizing drug innovation and the huge benefits to humanity that it promises. Protecting the revenues of Big Pharma is not that strategy.

Border Wars: The Prescription Drug Battle with Canada
January 27, 2004 (yes, 2004!)

Debate excerpts:

James K. Glassman: Dr. McCanne, as a physician do you have concerns that if drug importation and re-importation forces down prices, that drug companies will cut back research, and that ultimately Americans will not be able to get the life-saving medicines that they have been getting over the last many decades?

Don McCanne, MD: We don’t think that we really need to re-import drugs from Canada. We think we need to import Canadian drug prices. Every other nation has some mechanism of controlling excessive prices. And we need to do the same thing. In Medicare we do that for physicians, hospitals, laboratories. And now that we’ve accepted prescription drugs as a part of Medicare, we need to do that with the prescription drug industry as well.

JKG: Top-down, command and control stifles innovation, writes someone sitting in front of me. I think that’s a pretty good proposition. How does Dr. McCanne expect innovation to occur?

DM: Well, just not top-down control, but funding. You know, price controls and budgeting and so forth. And that really is an important issue in innovation. But if we look at the history in technological innovation, probably two of the very greatest advances in the last half century have been MRI scans and CT scans. Each of those appropriately received the Nobel Prize for those developments. Where were they developed? Well, the Nobel Prize was shared with a British scientist. England has amongst the lowest rate of funding of their health care system, but that did not stop the technological innovation that occurred in the CT scanning and MRIs, and some of the other research that has taken place.

JKG: Disrupting that system in the way that you propose, many people think would stifle that kind of innovation. Where is this innovation going to come from if it’s not from drug companies wanting to make decent profits on developing new drugs?

DM: There’s no way the drug industry is going to walk away from $1.6 trillion, period.

JKG: Dr. Friedman, Congressman Gutknecht just said the best way to get drug prices down is to have the government negotiate on peoples’ behalf. Do you think that’s the best way to get drug prices down?

Nobel laureate Milton Friedman: No, I don’t think that would get drug prices down. You would still have the situation that a pharmaceutical company produces a drug, that drug involved a lot of cost in developing it. It has to get that money back. It’s going to charge a high price.

Congressman Gil Gutknecht: The idea that no research goes on in Europe is really a myth. And so the idea that somehow if we open up markets and allow more competition that research will somehow stop I think is really a myth and we need to discard it. The idea that you [need] billions of dollars in return, and especially when much of the research is essentially funded by the taxpayers. We’re going to spend this year, and I’m proud of this number, we’re going to spend $27 billion of your dollars on basic research from the federal government this year. And much of that will be given away to the pharmaceutical industry. And so this whole notion that unless we protect these exorbitant prices that Americans are forced to pay, that research won’t be done, I think that’s a myth. And I think there’s plenty of history to prove that.

JKG: Dr. Friedman?

MF: Of course research will be done. I think it is an exaggeration to say that the only source of research is the existence of patents. It isn’t. There’s been enormous progress in medical science over the last 100 years, most of it in ways that have very little or nothing to do with the patent system. They’re through universities, they’re through non-profit organizations, through government [things], so that the issue is not will there be any innovation or not? The issue goes back to the question of do you want to grant patents? And if you want to grant patents, what contracts which the patent owner makes are enforceable in the courts? That it seems to me is a straight-forward issue.

I’m not arguing that this is the be all or end all of innovation, it isn’t. But it is true that it costs a great deal of money, thanks to FDA provisions to bring a new drug to market, and that you have to face the question of how is that going to be financed? And is it going to be financed through patents or is it going to be financed through government subsidy? That’s I think the issue at bottom, it’s not an easy issue. Don’t misunderstand me. As I say, I personally had very mixed feelings to begin with about this issue.

JKG: Dr. Friedman, did you want to comment on the issue of the government doing more negotiating on prices for drugs?

MF: If the government is buying, it ought to be free to negotiate, I have no quarrel with that. I’m not trying to protect the pharmaceutical companies, they’re plenty good at protecting themselves.

Comment by: Don McCanne

Big Pharma (PhRMA) is currently heavily promoting the concept that if Medicare is allowed to negotiate drug prices with the pharmaceutical industry, there will be inadequate funding left to develop new pharmaceutical innovations that would enable the production of new breakthrough drugs. This is not a new concept as the debate excerpts above from a generation ago demonstrate. But also not new is the counter to that, stating that much of the cost of research is borne by other entities and not the pharmaceutical firms. The outrageous pricing of new drugs is not because of the costs of research, but rather it simply reflects the greed of the pharmaceutical industry.

Why does Pharma fear negotiation of drug prices? The full answer appears in the Harvard Business Review article cited above, but their primary concern is that it could bring an end to their lucrative, egregious price gouging.

Even Milton Friedman said that bringing a new drug to market could be financed through patents or through government subsidies, and he conceded that he had mixed feelings about this. History has confirmed that reliance on government subsidies has still led to price gouging, so there should be no more mixed feelings. Price negotiation has become an imperative. As Milton Friedman said, “If the government is buying, it ought to be free to negotiate.”