In February 2018, the White House Council of Economic Advisers released a white paper, “Reforming Biopharmaceutical Pricing at Home and Abroad,” a report that discusses the affordability of healthcare and biopharmaceutical drugs.
According to the report, federal policies that affect drug pricing should satisfy two goals. First, domestic drug prices paid by Americans should be reduced. Second, the price of better health in the future should also be reduced by spurring medical innovation. The report considers policy options to simultaneously advance these two seemingly conflicting goals.
Reducing drug prices that Americans pay means recognizing that many artificially high prices result from government policies that prevent, rather than foster, healthy price competition. Drug prices, for example, can be artificially high due to government regulations that raise prices. The report discusses changes to the Medicare and Medicaid programs that could help lower domestic prices, as well as reforms to the Food and Drug Administration (FDA) that could encourage more robust price competition.
The report notes that concerns about affordability have been magnified by the high price of newly-approved drugs. The report also notes that it is misleading to consider only the prices of these new drugs without evaluating the well-being of patients before the drug became available. It is important to separate the price of healthcare, such as drugs, from the effective price of better health, such as how costly it is to live longer. Innovations such as new drugs often reduce the price of health even when the new drug is very expensive relative to other goods. The example of HIV drugs from the mid-1990s was given to make the point that even though the price of the drug was considerable and drug spending rose, the effective price of better health declined.
The objective of government in biopharmaceutical policy is to ensure that the private sector competes and invests in meaningful innovations that lower the price of health, rather than incentivizing market exclusivity and high prices on products. The two goals of reducing American prices and stimulating innovation are consistent but can be achieved through a combined strategy that corrects government policies that hinder price-competition at home, while at the same time limiting free-riding abroad.
One topic discussed in more detail in the report is how to reduce prices that are induced by Medicare and Medicaid reimbursement policies. Other topics include: how to cut the duration of high prices induced by price manipulation and how to enhance price competition in the Pharmacy Benefit Manager (PBM) market.
Another discussion, how to raise the innovation incentives to reduce the price of better health in the future, mentioned how to limit the under-pricing of drugs in foreign countries, limit under-pricing domestically, reduce the cost of innovation through change at the FDA, and create reforms that reduce the costs of innovation and raise price competition of new innovations.
The report concludes by noting that the two “seemingly inconsistent goals” of reducing American prices and stimulating innovation can be achieved by using a combined strategy, and that preserving this industry and encouraging it to innovate while making drugs more available and affordable for all Americans is an attainable goal.