The Price of Innovation
Season 1: Episode 8
January 22, 2020
The United States pays more for prescription drugs than any other country in the world. But whenever politicians propose lowering those prices, industry leaders claim it would harm innovation and the development of new breakthrough treatments. Can we lower prices and retain innovation?
Listen to the full episode below, read the transcript or scroll down for more information.
Prescription drug prices* in the United States have been rising faster than in other countries for the past two decades. While most other countries regulate drug prices in some way, the United States does not in any meaningful way.
Lowering drug prices has bipartisan support from voters and policymakers, and both Democratic and Republican leaders proposed legislative fixes in 2019.
Proposals to reduce drug prices are regularly met with a warning from the pharmaceutical industry that lowering prices would lead to less innovation* and fewer new breakthrough treatments in the future.
*Note: By prices, we mean the total revenue manufacturers make from their drugs, not just what consumers pay out of pocket. And by innovation, we mean the process of developing new drugs and bringing them to market.
By the Numbers:
Drug Prices in the U.S.
By the Numbers:
Drug Development in the U.S.
1 in 10
odds of a drug making it from clinical trials to market³
The Evidence: The Relationship Between Drug Prices and Innovation
- Margaret E. Blume-Kohout and Neeraj Sood, Market Size and Innovation: Effects of Medicare Part D on Pharmaceutical Research and Development, Journal of Public Economics, 2013
- David Dranove, Craig Garthwaite and Manuel Hermosilla; Pharmaceutical Profits and the Social Value of Innovation; National Bureau of Economic Research; 2014
- PitchBook analysis
- Congressional Budget Office Analysis of H.R. 3, 2019
- House Drug Pricing Bill Could Keep 100 Lifesaving Drugs from American Patients, White House, 2019
The Tradeoffs: Price Regulation vs. Innovation
Lowering drug prices would increase people’s ability to access medications today, but it will likely also reduce the number of new drugs introduced over the next few decades.
However, it is impossible to know how innovative and life-changing those drugs would be. Previous moments of increased investment in drug development produced some breakthrough treatments along with many that did not offer significant improvements over existing options.
Some argue that regulating drug prices based on their value — how much clinical benefit they offer relative to existing treatments — could lower prices while retaining the financial incentive for truly innovative treatments. While this would likely lead to mostly lower prices in the U.S., it could result in some drugs becoming more expensive and others potentially not being covered at all even though they could help some patients.
From Lab Bench to Bedside: How an Idea Becomes a Drug
At the core of the argument over how drug prices will impact innovation is the process of researching and developing new treatments. The graphic below demonstrates a common (though not universal) path that an idea must follow to become a prescription drug. Estimates of the cost of the complete process range from several hundred millions to billions of dollars, and many drug ideas fail at every step of the process.
Drug Price-Innovation Relationship:
Pharmaceutical Profits and the Social Value of Innovation; David Dranove, Craig Garthwaite and Manuel Hermosilla; National Bureau of Economic Research; 2014
Market Size and Innovation: Effects of Medicare Part D on Pharmaceutical Research and Development, Margaret E. Blume-Kohout and Neeraj Sood, Journal of Public Economics, 2013
Role of Venture Capital in Drug Development
The Changing Landscape of Research and Development, IQVIA, 2019
U.S. Drug Prices Compared to Other Countries
“The True Story of America’s Sky-High Prescription Drug Prices,” Sarah Kliff, Vox, 2018
Paying for Prescription Drugs Around the World: Why Is the U.S. an Outlier? Dana O. Sarnak, David Squires and Shawn Bishop; The Commonwealth Fund; 2017
Guests: Chaitan Khosla, Director of Stanford ChEM-H
Craig Garthwaite, Associate Professor of Strategy, Kellogg School of Management at Northwestern University
Stacie Dusetzina, Associate Professor of Health Policy, Vanderbilt University
Original music composed by Ty Citerman; additional music by Blue Dot Sessions, Bacon and OnlyMeith
Additional thanks to:
Rachel Sachs, Dan Paterson, Paul Hastings, Sarah Dykstra, Michelle Arkin, Michael Carrier, Nicholas Bagley, Richard Frank, Ariel Dora Stern, Brian Smokler, Bill Edwards, Kristen Samuelson, Paul Ruest, the Tradeoffs Advisory Board…
…and our stellar staff!