If Drug Prices Forced Down, Will Research Budgets Follow?

The increasing use of price controls by other advanced nations may tempt U.S. policymakers to consider such consumer-friendly mandates; however, the move could have unintended long-term consequences, according to some researchers.

Those were among the conclusions in a series of recent research reports on pharmaceutical price controls published by Health Affairs.

One recent study of pharmaceutical regulations that were adopted from 1992 to 2004 in 19 industrialized countries found a increasing trend toward more regulation of pharmaceutical sales. The research, by Neeraj Sood, an economist at RAND Corporation in Santa Monica, Calif., and colleagues, found direct price controls were the most common regulation during the study period. The use of price controls increased from 13 nations in 1992 to 16 by 2004.

The researchers also concluded that price controls were the form of regulation with the greatest impact on the revenues of pharmaceutical manufacturers.

The study comes as some patient advocates have urged regulation of U.S. drug prices, which are higher and less-regulated than most other places in the industrialized world.

Adding price controls similar to those used in many other countries would likely result in U.S. revenues of drug manufacturers falling by as much as 20 percent, according to the study. The financial impact of such price caps on the revenues of drug companies would increase over time.

Such a move to establish price controls would be popular with U.S. consumers, Sood and his colleagues wrote, but the loss of revenue could affect future drug innovation that could ultimately hurt consumers.

“So the real question is: what is the net impact of regulations on the welfare of current and future generations,” the researchers wrote.

The future impact of lowering U.S. drug prices to levels found in most European countries—about a 20 percent reduction—was analyzed in another Health Affairs report from Rand published in December 2008 that used a “microsimulation” approach.

Darius Lakdawalla, Ph.D., director of research at the Bing Center for Health Economics at RAND, and colleagues calculated that the impact of price controls ranged under various assumptions from a “modest” consumer benefit of a lifetime reduction of a few thousand dollars per person to a“ high cost” of the years of lifetime lost—an average of 0.7 years per person. The loss in lifetime assumed a 3 percent reduction in new drugs for every 1 percent cut in drug makers' revenues.

Assumptions about reductions in pharmaceutical research stemming from drug-company revenue drops are very controversial, and their use in the recent research have their critics.

An analysis of the RAND research was also published in the December 2008 Health Affairs by F. M. Scherer, a professor emeritus of public policy and corporate management at Harvard's John F. Kennedy School of Government. Scherer's analysis led him to question the high rate at which the RAND researchers assumed that reduced revenue for drug manufacturers would translate into declines in pharmaceutical innovation.

“Even in a highly uncertain world, this seems unlikely to discourage [research and development] investment for drugs expected to be top sellers. Rather, it is the lower-selling drugs that would be hit hardest,” Scherer wrote.

But even for lower-selling drugs, he said, the magnitude of the effect of declining revenues on innovation assumed in the RAND analysis is on the high side.

The RAND researchers also analyzed broad reductions in the amount of copays required of beneficiaries in large public health plans, like Medicare Part D. They found that consumers benefited from increased access to medication and further pharmaceutical innovation, and manufacturers benefited financially, as well.

“Policymakers facing uncertainty about the structure of pharmaceutical markets may find copay reduction to be a safer strategy than price controls, and one that is extremely likely to improve welfare over the status quo,” Lakdawalla said.

The research highlights the long-standing problem of the spiraling cost of medications, and their growing share of all mental health care spending remains a serious issue that policymakers will have to address, said Anita Everett, M.D., chair of APA's Council on Healthcare Systems and Financing.

She encouraged psychiatrists to become engaged and play a role in the process of deciding how to limit future price increases, while ensuring that patients receive the medications that best treat their conditions.

TheHealth Affairsreports are posted at<http://content.healthaffairs.org/cgi/content/full/hlthaff.28.1.w125/DC3>.▪