White House Analysis on Drug Prices Highlights R&D Investments and Rising Drug Prices

A new analysis conducted by the Council of Economic Advisers (a White House group that provides the president advice on economic policy) suggests that United States drug prices are not unreasonable, but instead, foreign governments are taking advantage of United States patients by systematically underpaying for drugs.

The study compared the prices of 200 top-selling branded drugs in the United States against fifteen developed countries. It found that European countries went from paying 51% of United States’ prices for many of the drugs in 2003 to only paying 32% in 2017. The report noted that governments outside of the United States tend to negotiate drug prices on behalf of their citizens, which artificially depresses the prices.

This is important because investment in medical research and development allows for the development of new treatments and cures and is supported by returns from international sales, not just domestic market sales. For example, as stated in the report, a Swedish company does not invest in R&D only for its’ residents, but for residents around the world. Reimbursements from public and private insurers provide the incentives to invest in new treatments and bring new products to market.

The report notes that according to the evidence over the last fifteen years, “stringent government underpricing in foreign countries has substantially increased foreign free-riding on the United States. Our main finding is that prices are much lower in other developed nations than would have been predicted by income differences alone and that this discrepancy is substantially widening.”

Part of that reasoning, according to the report, is that unlike in developed countries with single-payer systems, the United States drug market is less financed by the public sector and more open to market forces. This helps prices to better reflect their value as opposed to reflecting “political tradeoffs” in a more centrally controlled government system.

“These practices abroad disproportionately cost U.S. patients and taxpayers because they prevent the United States from undertaking domestic policies to lower drug prices without slowing down the pace at which new and better products enter the market,” the study noted. The authors of the study went on to write, “We find that if free-riding abroad was reduced and foreign relative drug prices reflected relative GDP per capita, total innovator revenues from those countries would have been $194 billion higher in 2017, raising global revenues by 42 percent. Reducing foreign price controls would increase profits and innovation, thereby leading to greater competition and lower prices for U.S. patients.”

The report essentially concludes that “[r]educing foreign price controls would increase profits and innovation, thereby leading to greater competition and lower prices for U.S. patients.”