Stop the presses! A new study casts a bad light on foreign price controls' effect on both drug innovation and patient care. I would say "duh!" to the first assertion (being the flowery prose-maven that I am) but the second assertion is a surprise. Citizens in the nations with price-controls not only get less effective medication (expected), but also get less value (unexpected).
Kevin Hassett writes in TCS:
Yesterday, the Department of Commerce released a detailed and shocking study of the impact of the drug purchasing practices of our OECD trading partners on U.S. citizens. While academic economists always seem to be wishy-washy about making conclusions on the effects of such practices, the authors of this economic study had no such problem. Foreign price controls discourage research and new drug development. Foreign price controls harm patients. Our OECD trading partners are free riding on U.S. innovation. What is worse, our OECD trading partners are not saving all that much money in the process. The study catches them red-handed. They are steering monies away from the best drugs towards outmoded generic drugs that are sold by local companies at inflated prices.
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The chapter describing the price controls presents a veritable rogues gallery of intrusive government practices. Foreign governments, it seems, have lots of tricks up their sleeves. They explicitly set sales prices, and prohibit sales at any other price. While lower prices might lead to increased volumes, spendthrift governments have that covered too. Explicit volume controls are also often imposed, effectively rationing prescription drugs. In order to keep spending on foreign products down, countries are often very slow in approving new drugs as well.
All of this lowers the revenue that innovative manufacturers can expect to receive for their products. The Commerce team estimates that such practices decrease revenues in OECD countries by $18 to $27 billion annually, representing a 25 to 38 percent potential increase over 2003 revenues. That is a lot of money, but it is less than the amount that governments overpay because of their protectionist generic practices.What does that lower revenue for patented medications mean? The literature is quite clear on this. When revenues drop, research does as well. Using standard industry relationships, the study shows that R&D in the U.S. would increase sharply if foreign price controls were relaxed. And the benefits to patients would be substantial. The number of new molecular entities hitting the market in the U.S. would increase in response to that R&D by about 10 percent.