This column’s headline sounds scary, but the path we are traveling – while led by misguided but sincere pied pipers – almost certainly will lead to a reduction in the incentives of our eminent drug producers to provide the capital and engage in the research and development necessary for such high-risk ventures.
Early in January, the Vermont legislature passed a law requiring drug manufacturers to justify drug price increases of 15 percent or more. In response, I wrote columns in The Augusta Chronicle (Jan. 15 and 29) explaining why it was necessary to allow entrepreneurs the flexibility to price drugs (old or new) to earn enough to finance new drug development.
Further – and this is difficult to believe – I explained why the price increases could be necessary even if the manufacturers were to raise the new-drug financing from outside sources (selling stock or bonds or engaging in bank borrowing.)
Adding fuel to the need for regulating drug prices was President Trump’s incendiary comment that drug companies, by raising prices “excessively,” get away with “murder.” And now another pricing scandal confronts the industry: Congressmen are asking if, by charging too much for so-called “orphan drugs” – rare-disease drugs that aren’t widely commercially developed because they’re not considered profitable – the industry is taking advantage of the Orphan Drug Act.
Passed by Congress in the 1980s, it sought to provide incentives for firms to develop drugs for diseases that affect only small populations. Congressmen recognized that these products were very risky to develop because, among other things, they had limited markets. Now there is public clamor for price controls on orphan products, claiming that firms are abusing the law and arguing for price restraints on their output.
As background for understanding congressional motives for passing the act, there is an ill-recognized, but largely taken-for-granted culture in the U.S. which we may label the incentive reward complex (IRC.) This culture acknowledges the importance of incentives and rewards in a free-market, competitive economy, and thus supports adequate rewards to activate incentives for fresh ventures.
These undertakings bring new products, innovations and growth in both investment spending and in our gross domestic product.
New drugs are a part of this collection, and constitute an important element of GDP growth. The mere passage of the Orphan Drug Act, with emphasis on incentives, is not only consistent with the IRC, but a tacit admission that this culture exists and warrants heeding.
Complicating matters, three U.S. senators have called for an investigation of the possibility of importing less-expensive Canadian drugs. They tend to be less costly because, under Canada’s universal health coverage system, drugs -- whether manufactured locally or imported from the U.S -- are distributed to consumers under government subsidy, and paid for by Canadian taxpayers. Ironically, some of these drugs have been made in the U.S. because Canadian authorities, exercising monopoly buying powers, have successfully negotiated lower prices with U.S. drug manufacturers.
As previously noted, the sale of such re-imported U.S. drugs is subsidized by the Canadian government, as are other portions of the Canadian health delivery system. Also, much of the European health industry is subject to some degree of government subsidy, and our senators could conduct similar investigations in these climates in search of more less-expensive U.S., or other, drugs for possible U.S. importation.
Because of a history of proper incentives, the U.S. is the world’s leading supplier of new drugs.
Important and still related is the charge that since U.S. manufacturers do the research, conduct the clinical trials, and risk the capital necessary for these ventures, they subsidize a large share of the world’s new drug needs (See Peter Pitts, “How Other Countries Freeload on U.S. Drug Research,” The Wall Street Journal, Feb 22).
As a result of these complex relationships, including the possibility of manipulation of foreign exchange rates, we learned above that Canadian-priced drugs are lower than comparable U. S. drugs. It is this relationship our senators want to investigate. In spite of powerful Canadian bureaucratic influences, the shadow of a world competitive market does exist and is reflected in the existing international drug trade.
Even these prices are subject to a great deal of doubt. Quoted prices are often subject to a range of possible discounts, returns and allowances, which become functional if numerous special conditions apply. A price analyst must possess a very sharp pencil to arrive at an effective net price.
If the senators want to maintain the flow of life-saving new drugs that our manufacturers provide, whether orphan or otherwise, they must balance this goal against satisfying the political threat. Since orphan drug makers are “abusing the system,” while others are getting away with “murder,” we must curb drug maker price increases and thus reduce their incentives for developing new drugs.
This is the crucial issue facing the country. These senators place themselves between a rock and a hard place, a formidable task, and our best wishes go with them.
(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)