NCPA - National Center for Policy Analysis

Patients Can't Afford Drug Price Controls

April 1, 1999

Pharmaceutical drugs are typically produced for a fraction of their sales price, say experts, and therefore are a tempting target for price regulators. Some advocate traditional price controls, where a government board sets prices. But a backdoor way to establish price controls is by setting up a dominant buyer or single purchaser for a whole class of patients -- such as the health purchasing alliances in the 1994 Clinton health plan, or a single buyer for all Medicare patients, as would happen under a poorly conceived drug benefit plan.

Making drug prices "affordable" by forcing manufacturers to sell them at prices that only cover production costs would harm patients by reducing the development of new drugs, say experts.

  • The difference between drug prices and production costs is the cost of research and development and information dissemination, most of which is incurred by a manufacturer long before the drug is on the market.
  • The Pharmaceutical Research and Manufacturers of America reports its members' total research expenditures about tripled between 1990 ($8.4 billion) and 1999 (estimated at $24 billion), while the annual rate of inflation was approximately 3 percent.
  • Estimates of total development costs for each new drug approved by the Food and Drug Administration range up to a half billion dollars.

Even setting controlled prices high enough to recoup development costs would be harmful, since drug companies continue to study products after they are approved. For example, clinical trials after approval of tPA, a biotechnology clot-busting drug, have revolutionized the treatment of heart attacks and strokes.

Furthermore, drug price controls may not even reduce prices -- although they would create economic inefficiencies. For example, after Medicare began setting reimbursement levels for so-called "diagnostic related groups," a new industry of "DRG consultants" sprang up to help hospitals and physicians carefully divide standard medical procedures into numerous separately reimbursable components. Consequently, it is debatable whether this attempt to control health care costs actually reduced total Medicare payments.

Source: John E. Calfee, "Why Pharmaceutical Price Controls Are Bad for Patients," On the Issues, March 1999, American Enterprise Institute, 1150 Seventeenth Street, N.W., Washington, D.C. 20036, (202) 862-5800.


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