Prescription price controls induce shortages and hamper innovation

Lately, stakeholders in the health economy have been playing the “blame game” over rising healthcare expenses. Price controls have taken center stage in state and federal proposals as a tactic to arbitrarily lower prescription drug costs.

While this may seem like a reasonable solution to an issue we all face, price controls wherever and whenever they have been tried always have undesirable short- and long-term economic consequences. Misguided and ill-informed policies like these will harm patients here in Connecticut and across the nation.

Paul Pescatello

Despite the political rhetoric to the contrary, prescription price controls won’t solve the healthcare industry’s cost problem. They would only make it worse. These unsound economic initiatives decrease supply and therefore patient access to innovative medicines. They also disincentivize biopharmaceutical innovation, further curtailing access to potential therapies and cures which actually has the effect of increasing medical costs.

Price controls nearly always result in adverse effects for the individual. In countries that set price controls, shortages occur regularly, and fewer drugs are available to patients. The same is true for any industry or good: price controls trigger less production of the given product. Beyond the impact at the consumer level, capping prices curbs innovation—especially within the biopharma industry.

In 2017, prescription drug costs made up 10 to 15% of total healthcare costs. They have stayed in proportion with overall costs for nearly 75 years. Most of the spending consists of hospital visits, surgery, doctor visits, and administration.

Instead of entertaining the prospect of price controls, regulators should turn their attention to the middlemen in the drug supply chain, such as Pharmacy Benefit Managers (PBMs). They skim profits from the difference between the listing price of drugs and the discounted price received for wholesale purchasing. Instead of passing the savings to the public at the pharmacy counter or back to R&D, these middlemen retain the profits, adding minimal value in the process.

Price controls and the other actors in the supply chain stifle medical innovation by limiting returns to the biopharma industry, which are essential to fund R&D efforts to cure and treat a wide range of diseases and conditions. This lack of funding inhibits companies’ ability to invest in high-risk biomedical research and development. This hobbling of investment harms both consumers and the broader healthcare sector.

With nearly 550 million doses of vaccines administered nationally and over seven million in Connecticut alone, the enormous impact and value of risk-laden biopharma R&D  should be self-evident. The industry’s contributions during COVID-19—including vaccines and antibody treatments—make clear that innovation and proper funding are essential for developing breakthrough medical advances.

Biopharma R&D efforts to develop vaccines and remedies have largely brought us out of the pandemic, allowing society to return to some level of pre-COVID normalcy. One would think that this success would make clear to everyone the value of pharmaceutical innovation. Unfortunately, that hasn’t been the case—as the continued push for healthcare price controls aptly demonstrates.

The biopharmaceutical industry has incredibly high barriers to entry. On average, a firm requires $2.7 billion and 10 to 13 years to develop a medicine from the lab to FDA approval. Most lab concepts fail. The few drugs that succeed financially support the massive R&D expenditures for overall biopharma investments. Only one in 1,000 research projects result in FDA approval. Only 12% of drugs in clinical trials clear the hurdle of achieving safe and effective status necessary for FDA approval. Price controls would cap the potential for returns on investment for biopharma companies, crippling innovative R&D efforts. PBMs and other middlemen create similar effects to price controls.

Lack of profits to fund R&D efforts hampers innovation but significantly hurts state economies. In Connecticut, biopharma companies retain nearly 10,000 workers. Indirectly, prescription drug innovation supports tens of thousands more jobs state-wide. The biopharma industry requires a high-skilled, well-educated labor market that is inherently beneficial to Connecticut. Price controls would likely result in layoffs and decreased output, hurting these key innovators and the firms that employ them.

Prescription drug price controls will decrease access to medicines and derail biopharma innovation. Most importantly, this will hurt Connecticut’s most vulnerable: seniors, the immunocompromised, and anyone who relies on reliable access to innovative treatments. For the sake of these individuals, it’s due time we reject healthcare price controls in whatever form and embrace the value of biopharmaceutical innovation.

Paul Pescatello is the Chair of We Work for Health Connecticut.

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