It's Time for the Federal Government to Negotiate Drug Prices

One of the central concepts of economics is the trade-off: a consumer decides if a product is worth purchasing based on the benefit it gives them and the product’s price. If Apple releases a new iPhone, consumers don’t need to buy it — even if it has brilliant new features. As a result, Apple must set a price that is low enough such that consumers will choose to spend the money. This force helps set prices across the economy.

It is trade-offs, or rather the lack thereof, that make prices in America’s pharmaceutical market so high. Unlike the new iPhone, a new pair of shoes, or the organic option in a grocery store, patients have to purchase their prescriptions. It can sometimes quite literally be a matter of life or death. Furthermore, the market lacks healthy competition. If the new iPhone is priced too high, consumers walk across the street to the Samsung store. On the contrary, lengthy exclusivity times — the period during which legal protections keep any company other than the one that invented a drug from producing it — make it difficult — and sometimes impossible — for consumers to buy a competitor’s similar and generally cheaper product, known as the generic version of a drug.

Some policymakers argue that in order to reduce the prices of prescription drugs, our country needs to shorten the exclusivity period for new ones, which lasts on average 12.5 years, and thus introducing generics into the market sooner. However,  patent and exclusivity laws play an important role in incentivizing pharmaceutical research and development in our country. Without them, companies would be unable to make a profit to cover their high research and development costs. America has long been on the forefront of pharmaceutical research, and that is no less true today, as our biotech firms account for almost half of the world’s pharmaceutical R&D. Such high levels of research have had a profound impact on the healthcare possibilities for Americans and the world, and maintaining high levels of research and development should be a priority in any policy change. Unfortunately, due to the lack of a trade-off in this market, the high cost of research and development has been passed on in dangerous levels to the American consumer. To combat this, America must follow the lead of other countries such as Britain, Australia, and Switzerland, and negotiate the prices of drugs with companies before they enter the market.

The United States has a history of negotiation and subsidization to influence prices of public utilities, such as electricity, water, gas, and, most recently, broadband. These goods are similar to prescription drugs in that consumers are not offered a true trade-off. Often times only one or two providers operate in an area. If prices are too high, a household won’t have access to basic necessities like running water or gas to heat the house. It is hard to argue that prescription drugs do not play the same crucial role in maintaining our citizens’ standard of living. Over half of Americans take prescription drugs, and those that do take an average of four different prescriptions. For many — especially older Americans — pharmaceuticals are essential to maintaining good health. The federal government has a responsibility to keep these life-saving or life-altering medicines comfortably available to all citizens. This means making prices lower.

Government negotiation of drug prices would happen before a drug enters the open market. In the United States, it would fit best after the clinical trial process and FDA approval. To start, pharmaceutical companies must prove to the government that their drug will improve the healthcare possibilities in the nation. If a different firm is already producing a drug that is a cheap and effective therapeutic equivalent (meaning a drug with a different chemical formula but that achieves the same effect on the body), the government’s price negotiators are likely to reject the new drug. If the novelty of the drug and its effect is proven, the government would then weigh the benefits of the drug against its research, development, marketing, and production costs and ultimately offer a price to the pharmaceutical company. The company then has a choice: either enter the market at that price, or reject it, become blocked from the market, and get no return on investment in research and development. This regulatory process creates the same cost-benefit weighing that the availability of trade-offs and competition in other consumer markets have, thus driving down prices.

These negotiation institutions have clearly been successful at keeping drug prices low in other countries. Compared to nations with robust negotiating agencies, Americans pay more for drugs. In Britain, which has the hardest regulatory process, the highest-selling drugs sell for a third of what they do in America. In a broader sense, centuries of economic research have proven that competition and trade-off are crucial to lowering prices. In America, one of the few healthcare providers that is actually allowed to negotiate drug prices — the Veterans Health Administration — purchases drugs at 40% less than other providers. In a market as important and unconventional as that for prescription drugs, greater government intervention to establish these economic forces is clearly necessary.

This is not to say that our legislators should rush to construct a British-level regulatory process. While this may be a reasonable end goal, strong policy requires small steps to avoid creating a shock of large changes in the pharmaceutical industry. A good place to start is Medicare. Medicare covers 55 million Americans all over the age of 65. Due to their age, they are important consumers in the pharmaceutical market. By allowing Medicare to negotiate drug prices, the federal government will not only help our most helpless citizens but also create a testing ground for large-scale regulations that could be broadly implemented later. Furthermore, instituting price negotiation will undoubtedly lower levels of investment in research and development in America. This will not only limit future healthcare advancements but will also hurt a quickly growing biotech industry. Any policy must find the proper balance between lower prices and research and development investment. Testing out regulations with Medicare negotiation would provide a sample of how much negotiation might hurt our pharmaceutical industry.

When looking at this issue in economic terms, it is easy to lose sight of the fact that the impact of exorbitant drug prices plays out on a personal level. For some families, an unexpected illness means choosing between paying the mortgage or putting food on the table and treating their loved one. This is a choice that no family in the richest country on earth should have to make. In regards to a more recent and horrific development, high prices for pain relief drugs have contributed greatly to the opioid crisis, as some patients are forced to choose between the cheap but addictive OxyContin and other safer but monetarily out-of-reach painkillers.

Vice President Hubert Humphrey once said that “the moral test of government is how that government treats those who are in the dawn of life, the children; those who are in the twilight of life, the elderly; and those who are in the shadows of life, the sick, the needy, and the handicapped.” A moral federal government will get further involved in the pharmaceutical market in order to make this necessary public good accessible to all, thereby helping the sick and the elderly and ensuring that the futures of our children aren’t hurt by the cost of life saving treatments.