DRUG PRICE CONTROLS TOO COSTLY
January 14, 2005
Critics of the pharmaceutical industry often argue that less research spending would not be so bad if it enabled Americans to better afford today's prescription medications. Unfortunately, the costs of doing so would be unbearably large, both today and for future generations, says John Vernon of the Cato Institute.
In his study of the impact of prices on research and development, Vernon finds:
- For every 10 percent decline in pharmaceutical prices, R&D investment will fall by 5.8 percent.
- With lower investment breeding fewer breakthrough drugs, it is estimated that a 10 percent decline in drug prices would result in 40.1 million life-years lost.
- Assuming a year of life is worth $100,000, a 10 percent reduction in drug prices would cost $4 trillion over the long-run.
These results suggest that it is unlikely that the benefits of price controls will outweigh the long-term costs of reduced future drug innovation.
Source: John A. Vernon, "New Evidence on Drug Price Controls," Regulation, Fall 2004.
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