NCPA - National Center for Policy Analysis


December 17, 2008

The U.S. Food and Drug Administration is suffering from two decades of cultural, organizational and management problems that have depressed drug approvals to historic lows while pushing drug developing costs to stratospheric levels.  In fact, at a time when drug development should have been spurred by innovative new technologies and a decade of steady increase in R&D expenditures -- which tripled to more than $45 billion between 1995 and 2007 -- drug approvals have steadily declined, say Henry Miller, a physician and fellow at the Hoover Institution and the Competitive Enterprise Institute, and Dave Gershon, a physician and attorney.

Worst of all for the developers of small-molecule drugs and biopharmaceuticals is the prospect of top-down price controls.  Although for the most part this approach has been avoided in the United States, some researchers have argued that the impact of price control efforts has been significant.  According to the University of Connecticut's Center for Health Care and Insurance Studies:

  • Prices fall as the government's share of spending on drugs increases, negatively affecting innovation and public health.
  • From 1992-2001, a 10 percent increase in the growth of government's share of total spending on pharmaceuticals was associated with a 6.7 percent annual reduction in the growth of pharmaceutical prices.
  • When the government increases its share of spending, pharmaceutical companies considering an investment in the development of new drugs can look forward to lower revenues, reducing their incentive to innovate.

Under the current program, competing insurance companies individually negotiate the deals and offer coverage to the retired and disabled.  Inevitably, the government will muscle drug prices to submarket levels, which will inhibit drug companies' ability and willingness to develop new drugs.

Furthermore, it is likely that the Democratic congressional leadership will change the Medicare drug benefit to require government officials to negotiate drug prices with the pharmaceutical companies, which would represent de facto price controls, say Miller and Gershon.

Source: Henry L. Miller and Dave Gershon, "Dr. Daschle's Dubious Cure," Weekly Standard, Vol. 014, No. 13, December 15, 2008.

For text:


Browse more articles on Health Issues