Today President Trump announced price controls on prescription drugs. Like every other economist worthy of the title, I reflexively oppose deisarming the price signal mechanism. A high price signals that a product is relatively scarce. A low price indicates relative abundance. The problem with drug pricing is not that US prices are too high. It’s that other countries’ prices are too low.
The Wall Street Journal’s Tevi Troy wrote about this today, echoing many of my points.
The US does most of the pharmaceutical research for the rest of the world. Countries with government-run healthcare then negotiate their domestic drug price with the companies. Knowing they can charge a high price in the US, they agree to a low price in the other countries. We are now seeing the long-run results of that strategy.
Interactions With the Patent System
This simple model seemingly runs into trouble when it encounters the global patent system. Under this law, in most developed countries the inventor of a new product, process, or material can file a patent. Patent holders have a 20-year de facto monopoly. Like any monopoly, they charge prices higher than the perfectly competitive price.
Why allow this? We want new products, processes, and materials to be developed. Testing, both technical and economic, determines which patented products make it to market.
Patents and Drugs
This is important for prescription drugs. A company that invented a cure for pancreatic cancer would reap very high profits on that drug. What gets overlooked is the hundreds of failed attempts at creating new drugs. Those failures cost money. But without them, there would be no successes. (It’s often said that we can now cure most cancers in mice. Translating that success to our species has proved tricky.)
Inventing a new drug is followed by a testing and approval process that often takes a full decade. That’s wildly expensive, with no guarantee of success when it’s all over.
That’s why Trump’s price controls are potentially so harmful. If the US stops developing new drugs, the countries that continue this work do not have nearly our resources. Is this really the future you want?
But for some drugs, the FDA has created exceptions.
The FDA’s Fast-Track Approval
In 1992 the Food and Drug Administration created a new, faster approval process for vital drugs. Here’s how Google AI describes the process:
The FDA Fast Track designation is an expedited review process for new drugs that treat serious conditions and fill an unmet medical need. It aims to facilitate the development and expedite the review of these drugs, potentially allowing them to reach patients faster.
Here’s a more detailed explanation:
1. What it is:
- The Fast Track designation is a program designed to expedite the development and review of new drugs and biologics.
- It’s intended for drugs that treat serious or life-threatening conditions and demonstrate the potential to address unmet medical needs.
2. Eligibility Criteria:
- A drug must target a serious condition with a substantial impact on day-to-day functioning.
- The drug must fill an unmet medical need by either providing a therapy where none exists or demonstrating a significant advantage over existing therapies.
The issue here is which drugs are selected for fast-tracking. Inevitably, some high-value drugs will be overlooked. That means people will suffer debilitating diseases, possibly ending in premature death.
The Choice
Our country is facing a choice. We can give up a large part of new drug development. That will lead to a lower future quality of life. Or we can allow drug companies to continue their work. Rarely has a country been faced with such a somber decision.
