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Introducing Pharmaceutical Price Controls Into U.S. Would Hurt Consumers, RAND Researchers Say

In Health Affairs Package On Prescription Drugs, Harvard Researcher Questions RAND Estimates Of Negative Effect Of Price Controls On Innovation; Aitken, Berndt, And Cutler See Slower Growth Ahead For Prescription Drug Spending; Jayadev And Stiglitz Propose Reforms

Bethesda MD -- In two papers published today on the Health Affairs Web site, researchers from the RAND Corporation warn that introducing European-style price controls on prescription drugs into the United States could have large negative effects on the revenues of pharmaceutical manufacturers and the welfare of consumers. http://content.healthaffairs.org/cgi/content/full/hlthaff.28.1.w125/DC3

The papers are part of a five-paper package on prescription drugs released today by Health Affairs. In a third article, Murray Aitken of IMS Health, Ernst Berndt of MIT, and David Cutler of Harvard argue that spending on prescription drugs has reached a turning point and that U.S. drug spending will grow more slowly in coming years than in the recent past. Cutler is a leading health policy adviser for President-Elect Barack Obama.

In a fourth paper, Arjun Jayadev of the University of Massachusetts and Nobel economics laureate Joseph Stiglitz of Columbia University make the case for value-based pricing of pharmaceuticals and public financing of clinical trials. Finally, Harvard's F.M. Scherer questions the way that one of the RAND papers estimates the extent to which declines in profits for drugmakers are likely to translate into declines in pharmaceutical innovation.

Publication of all five papers in Health Affairs was supported by a grant from Pfizer Inc. Pfizer also supported the research described in the RAND papers, as did the National Institute on Aging (NIA) and the Bing Center for Health Economics. The Merck Pharmaceutical Policy Program provided research support to Berndt, and the NIA provided research support to Cutler. The Hewlett and Ford Foundations and the Rockefeller Brothers Fund provided research support to Stiglitz. Scherer received no outside support in preparing his paper.

The Effect Of Price Controls. In the first RAND paper, Neeraj Sood and coauthors survey pharmaceutical regulations adopted in 19 industrialized countries from 1992 to 2004. The researchers report a trend toward increased regulation of pharmaceutical sales. Direct price controls were the most common regulation during this period: In 1992, 13 of the 19 countries had price controls in place; by 2004, price controls were present in 16 countries. Price controls were also the form of regulation with the greatest impact on the revenues of pharmaceutical manufacturers. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w125

Because most countries adopting new regulations during the study period already had significant cost control regulations in place, the incremental new regulations had a relatively small additional effect on the revenues of drugmakers, say Sood, an economist at RAND in Santa Monica, California, and coauthors. "However, the results also suggest that introducing new regulations such as price controls in a largely unregulated market such as the United States could greatly reduce pharmaceutical revenues," the researchers write.

In the second RAND paper, Darius Lakdawalla and coauthors model two policy interventions: price controls that would reduce the revenues of U.S. drugmakers by 20 percent, and copay reductions that would reduce consumers' out-of-pocket costs by 20 percent while holding manufacturers' revenues constant. Based on earlier research, Lakdawalla and colleagues assume that a 1 percent decline in the revenues of pharmaceutical manufacturers results in a 3 percent decline in the number of new drugs approved. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w138

The researchers conclude that adopting price controls in the United States would likely provide consumers with modest short-term cost reductions for medical care, but these short-term benefits would be dwarfed by longer-term reductions in lifespan resulting from a decrease in pharmaceutical innovation. In contrast, "by encouraging utilization at the same time that they stimulate innovation," reduced copays for consumers would make both current and future generations better off, say Lakdawalla, director of research at the Bing Center for Health Economics at RAND in Santa Monica, and his colleagues.

In his paper, Scherer, a professor emeritus of public policy and corporate management at Harvard's John F. Kennedy School of Government, questions a number of the assumptions made by Lakdawalla and colleagues. His main disagreement is with the rate at which the RAND analysts assume that reduced profits for drugmakers will translate into declines in pharmaceutical innovation. Scherer notes that the RAND analysis focuses on the five top-selling drugs in each of seven disease categories, and revenues and profits from those products are so large that 20 percent price reductions would hardly deter research and development investment in expected top sellers. Scherer says that price controls would indeed have a negative effect on R&D investment in lower-volume drugs, but even for these products, he says, the magnitude of the effect of declining revenues on innovation assumed in the RAND analysis is on the high side. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w161

A Slowdown In Drug Spending. Drug spending has reached a turning point, and spending trends of the past two and a half decades no longer apply, Aitken, Berndt, and Cutler say in their paper. Annual growth in real prescription drug spending averaged 9.9 percent from 1997 to 2007, but spending growth has slowed since 2003, falling to 1.6 percent in 2007, according to figures from IMS Health. Slower growth in prescription drug spending is likely to continue, which suggests that "for payers and consumers, the health spending prospects are more optimistic than many fear," write Aitken, senior vice president, Healthcare Insight, at IMS Health in Norwalk, Connecticut, and his colleagues. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w151

The researchers cite several factors behind the slowdown in pharmaceutical spending, such as more patent expirations, increased generic penetration, and reduced innovation. "For the large number of drugs in which there is competition across branded molecules, and especially between branded and generic drugs, out-of-pocket costs have a major influence on what patients consume, and perhaps on their health outcomes. Used judiciously, cost-sharing instruments can be employed by governments, [pharmacy benefit managers], and private payers in future attempts to limit growth in pharmaceutical spending," the researchers observe. But they also note that the loss of market exclusivity for many commonly used drugs "suggests that further efforts to limit the uptake of new therapies through extension of formulary design to tier four, switching to coinsurance rather than copayments, or reducing the effective period of exclusivity for products might not be necessary."

Value-Based Pricing & Publicly Funded Clinical Trials. Jayadev and Stiglitz cite the large social inefficiency that stems from the research effort expended to develop "me-too" drugs that are similar to existing drugs in large market niches; they point to the proliferating number of statins to treat high cholesterol as an example. "From a social viewpoint, the 'innovative' content of a discovery should reflect not simply whether it is nonobvious (and so eligible for patent protection) but whether it affords significant additional clinical benefits," say Jayadev, an assistant professor of economics at the University of Massachusetts Boston, and Stiglitz, a University Professor at Columbia. They thus endorse linking prices for prescription drugs to metrics of added clinical value, as is already done by some entities such as Britain's National Health Service. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w165

Jayadev and Stiglitz also endorse replacing the current regime of privately funded clinical trials for new drugs with a system of publicly funded trials. Drug companies have been pushing to restrict access to data generated from clinical trials, particularly information that reflects poorly on their products. Publicly funded trials could make that information freely available, increasing public confidence in the quality of research and allowing pharmaceutical firms to choose better candidates for testing in future trials, the two researchers explain.

After the embargo lifts, the article by Sood and colleagues will be available at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w125.

The article by Lakdawalla and colleagues will be available at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w138.

The article by Aitken and colleagues will be available at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w151.

The article by Scherer will be available at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w161.

The article by Jayadev and Stiglitz will be available at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w165.

 


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Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org. The full text of each Health Affairs Web Exclusive is available free of charge to all Web site visitors for a two-week period following posting, after which it will switch to pay-per-view for nonsubscribers. Web Exclusives are supported in part by a grant from the Commonwealth Fund.

 

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