Regulation of pharmaceutical company profits results in the leveling of pricing standards in public and private research, however, regulation is possible only at the expense of innovative drug development.
Regulation of pharmaceutical company profits results in the leveling of pricing standards in public and private research, however, regulation is possible only at the expense of innovative drug development. Regulation may also be deemed an onerous task for policymakers, as evidenced in various foreign countries where public and private research have been supervised by equal integrity, review, protocol, and fiscal standards. The problems to be addressed in this paper present a challenge to price control advocates to control short-term and long-term prescription drug prices, while preserving the resources necessary for innovative drug development.
Recently, there has been a growing discussion of the possible effects of government price controls on drugs and vaccines. There is no doubt that for Americans with limited incomes, many necessities of life are relatively expensive. However, focusing only on the price of pharmaceuticals ignores their value. Many lives have been saved and many individuals have avoided the pain and loss of independence associated with being ill, yet price control advocates are often too quick to dismiss these benefits.
Pharmaceuticals have provided a substantial benefit to the world, through the saving of money by cutting costs for medical care and surgeries, and through the preservation and saving of lives. Polio, smallpox, and influenza have nearly been eradicated through the development of vaccines, while drugs for ulcers, high cholesterol and arthritis have prolonged millions of lives and reduced the need for expensive and painful surgery in the process. Even more pertinent, cancer patients are able to prolong life, and HIV patients can live more productive lives by taking a combination of AZT and new, more powerful antibiotics (Michaels 2004, 123).
Analysis of America's health care cost crisis indicates that the problem is not high drug costs, and thus government control of prices and profits is not a formidable solution. Drug costs are only eight percent of all health care spending in the United States. Additionally, while “60 percent of Americans have no insurance coverage for drugs, for most the average out-of-pocket cost of pharmaceuticals is less than the cost of one year of cable television” (Goldberg 1993, 5).
The pharmaceutical industry is in transition as the surge of generic products and managed-care groups have led to price competition and cuts in the cost of pharmaceuticals. Under tremendous pressure from consumers and declining investor confidence, pharmaceutical companies are being forced to forgo incremental drug developments in favor of drugs that significantly improve medical problems. As a result, drug companies are investing billions of dollars to develop temporary treatments (as opposed to cures) for more devastating medical problems such as cancer, Alzheimer’s disease, multiple sclerosis, AIDS, and cystic fibrosis (Michaels 2004, 120).
The incentive to make a profit in pharmaceutical companies for investors is stifled by competition, but can be further exacerbated by price controls. The immediate benefits of saving money will be offset by denying or delaying millions of people access to life-saving drugs. The prescription drug business has “an average unit growth rate of only two to three percent a year” (Goldberg 1993, 5). In the future, revenue growth by drug companies will have to come from new product introductions, however, the funds needed for this innovative research will be insufficient. This riskier environment has led to company layoffs in a generally secure industry for jobholders in an effort to allocate more funding to innovative drug development (Goldberg 1993, 5). Job losses in such companies as Syntex, Merck, and Bristol-Myers Squibb total about 10,000, while “concern about the future profitability of drug companies in a more competitive and regulated environment has resulted in the loss of $90 billion in the market value of pharmaceutical stocks since 1991” (Levy 1992, 49).
In the new pharmaceutical marketplace, price controls are not only redundant, but they could inhibit the industry’s drive towards innovation in high-risk areas. While pharmaceutical companies need to innovate to survive, incentives are also needed to stimulate innovation. If significant medical progress is dependent upon pharmaceutical and biotechnology advancements, the profits that drive research and development cannot be ignored. Generic drug competition and a growing managed-care network has resulted in a recent decline in profits and the potential for reinvesting profits into R&D (Goldberg 1993, 6). Price controls would further discourage R&D, as well as outside investment. Both would curtail the development of new drugs and postpone life-saving and life-enhancing cures.
The history of price controls exhibits their flaws and failures. People and companies have wasted time and resources dealing with the established system rather than responding to consumer preferences and needs. As an example, during World War II, instituted price controls led to "inferior off brands, some made by brand name producers who did not want to damage the long-run reputation of their regular label. In this way price controls change the character of products by degrading them" (Stanton 2000, 149).
The limiting returns people get from risky investments of capital in new industry ventures also is a direct result of price control. Lower rates of investment have historically lead to a reduction in innovate development. Price control advocates deride the notion that such controls will hurt pharmaceutical R&D, however, research on price regulation efforts in Europe have yielded some startling findings. In the U. K., where price controls are in effect, 80 percent of all prescribed medications are 20 years old or older (Stanton 2000, 151).
The relatively open pharmaceutical market in the U. S. has fostered innovation and rapid developments. In 1991, a report presented by the U. S. International Trade Commission (ITC) to the Senate Finance Committee stated that "national cost containment policies and price controls were found to be the key determinant of the level of industry research and innovation since they can reduce the revenues which fund the R&D necessary to remain competitive" (Levy 1992, 50). This is the basis for the belief that pharmaceutical companies have established themselves as the dominant force in pharmaceutical and biotechnology markets.
The impact of price controls on R&D and global health is the greatest example of the impact of price controls taking place in the vaccine industry (Goldberg 1993, 7). Historically, the vaccine business has languished as an unprofitable part of the pharmaceutical industry. Only two American companies were able to withstand the effects of low prices, a largely public market, and high liability (Goldberg 1993, 7). The government’s proposal to replace the private market for vaccines with a free-distribution has forced companies to halt many innovative R&D projects. As a result, vaccine companies have begun to prepare a list of projects to be cut if the proposed restrictions are solidified. A survey of the four companies operating in the U. S. market, including SmithKline Beecham, Merck, Connaught, and Lederle-Praxis, found that in every case companies are preparing to cut or have already cut R&D in vaccines (Goldberg 1993, 7).
There is a massive revolution in health care that has been fueled by the profits made by pharmaceutical companies. The way that we treat disease will undergo an immense transmogrification as the many investments made in biotechnology and drug development result in new developments. Post-symptom intervention to try to forestall a life-threatening event is the preferred method of medical treatment today, however, earlier intervention to evaluate the inherited disease risks and periodically monitor those risks will be the mode (Goldberg 1993, 8). This will enable clinicians and family members to work together to manage the emerging risks and eradicate them before they become symptomatic.
The field of predictive genetics will aid in treating diseases like diabetes, cancer, schizophrenia, and heart disease pre-symptomatically (Stanton 2000, 153). The technology used for these treatments will likely be the most defining characteristic of this future therapeutic advancement.
Development of the technology and treatments necessary to achieve these advances are going to require continuous investment in pharmaceutical research. With the imposition of price controls on all drugs, which will ultimately cap current profits and limit prices and patent life for future drugs, we will undoubtedly save money today, but at the expense of future cures.
The direct decline in medical innovation due to price controls can be thoroughly explained through competition effects from generic producers and managed-care groups, as well as the effect of historical price control efforts in foreign countries on drug development. The unfeasibility of price controls based on problems incurred in governmental regulation of ethical standards in private research and the effect that proposed price control has had on drug development can also serve as viable reasons for opposing profit regulation.
In outlining the possible consequences of a stringent price control policy, it was delineated that price controls will cripple innovation and R&D, thereby delaying the realization of a disease-free society. Taking the commonly proposed price-control scheme, limiting price increases to the inflation rate plus one percent would yield $1.2 billion a year in savings, or less than 75 cents a prescription (Stanton 2000, 154). The goal for price control advocates will be to explain how to limit prices while simultaneously preserving the capital markets and entrepreneurship within pharmaceutical companies that have resulted in countless life-saving innovations.
Goldberg, Robert M. 1993. "Pharmaceutical Price Controls: Saving Money Today or Lives Tomorrow?," Institute for Policy Innovation Journal 17:1-13.
Levy, Richard and Menander, Kerstin. 1992. Research in the Pharmaceutical Industry: Major Contributions to Biomedical Science and Implications for Public Policy, 49-58. Washington: National Pharmaceutical Council Press.
Michaels, David and Wagner, Wendy. 2004. "Equal Treatment for Regulatory Science: Extending the Controls Governing the Quality of Public Research to Private Research," American Journal of Law and Medicine 30:119-129.
Stanton, Jerry. 2000. "Lesson for the United States from Foreign Price Controls on Pharmaceuticals," Conneticut Journal of International Law 16: 149-157.
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