Free Market, Better Medicine
The solution to our drug pricing problem involves less government, more transparency.
TWO THINGS HAPPENED after the FDA approved a novel new treatment for hereditary blindness in December, neither of which was surprising. First the company that makes the drug announced they would charge nearly a million dollars for it. Next, the uproar began. No one asked what the costs research and regulation were, but it didn't matter: No matter what, the price was going to be too high.
Drug prices have become so contentious, it's practically impossible to announce the price of a new drug without facing widespread public outcry. Ultimately, I think this is a good thing: It means that the American people are engaged in one of the major public policy debates of our time. More and more people are coming to realize that the system is broken and are demanding a change.
While I am glad to see this kind of citizen engagement, I am disheartened by how many people think that the way to make drugs more affordable is to increase government control of the economy. Nothing could be further from the truth. The fact is we do need to fix the way we pay for prescription drugs. But the solution to our drug pricing problem involves less government, not more – and much more transparency.
The problem with drug prices – especially for the coming wave of innovative cures and personalized, precision medicines – is not that they start out expensive, but that they stay expensive for years after they have been on the market. The main culprit here is the regulatory environment that limits the creation of a free, functioning and competitive market for prescription drugs. To illustrate this point, consider how differently things work when other high tech products come to market with a high list price.
When the first iPod was released in 2001, it cost $399 and could hold 1,000 songs. Over the next three years, as more alternatives came to market, Apple felt the competition and created an iPod that held four times as many songs as the original and cost $170 less. These days, when 77 percent of Americans own a smartphone, the idea of a $400 dollar iPod seems ridiculous. Competition spurred innovation, which drove down prices. That is what free markets do when unencumbered.
Of course, prescriptions drugs are different than iPods, and having access to portable music is much less important than having access to affordable medicine. As a patient and a physician, a father and a grandfather, I am personally interested in solving our drug pricing problem. But this kind of concern is no reason to treat drugs differently, in an economic sense, than any other product on the market.
Right now, the federal government prevents competition by impeding how many new drugs get approved, and how they are paid for when they come to market. Fortunately, there are ways to produce safe, effective and affordable drugs while decreasing government regulation.
First, we need to increase the number of generic drugs available, and be able to know their prices offered before we buy. This is called price transparency – and economical markets need price transparency. In 2016, patients paid an average of $5.54 out of pocket for generic drugs and $28.31 for branded equivalents. In addition to providing a cheap alternative for patients, generic competition is crucial to lowering prices. After multiple generics are approved, prices fall by 80 percent across the board, saving money for everyone. Fortunately, under Commissioner Scott Gottlieb, the FDA is taking steps to streamline generic drug approvals, putting us on a path to a more robust generic drug market. In fact, we have already seen the results of the efforts as the FDA approved a record number of generic drugs in 2017.
Additionally, we need to ensure that the list prices of these drugs are displayed front and center for the consumer to see at the point of sale. This kind of price transparency is crucial for the functioning of an open market, and will help encourage patients to opt for cheaper alternatives whenever they can.
Once we increase the number of new drugs on the market, we need to find new ways of paying for them. This is especially important for those new drugs that come with high price tags. I have a personal interest in ensuring that we solve the payment issues for these personalized medicines. I have stage-four prostate cancer, which is close to remission, and my doctors have already engineered a personalized medicine to give me next. This is truly a new frontier in medicine – using our own cells to cure cancer – but I am awaiting the sticker shock associated with it. This is why our real concern should be developing ways to pay for precision medicine that won't bankrupt patients.
One way, which is much talked about, is to pay for medicine based on outcomes instead of by dose or injection, which federal regulations now inhibit. If we rolled back these regulations and instead let market forces allocate the costs down and the competition up, we will see costs brought down without jeopardizing safety or efficacy. Rather than raging against a high initial price, we should accept that precision drugs will cost a lot initially, but also that they should be priced based on outcomes. With market forces restored, the initial list price won't matter, as prices fall and everyone can afford precision medicine.
The actions we take to address drug prices over the next 10 years will affect how we develop, approve and pay for medicine for a generation. Rather than doubling down on government regulation, we should rely on the free market, which is the best way to allocate these scarce resources, increase competition, lower prices and continue to foster medical innovation for years to come.
This piece originally appeared at U.S. News & World Report
Dr. Tom Coburn is the Nick Ohnell Fellow at the Manhattan Institute and a former two-term U.S. Senator from Oklahoma.
This piece originally appeared in U.S. News and World Report