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Opinion Want cheaper drugs? Increase competition.


Each week, In Theory takes on a big idea in the news and explores it from a range of perspectives. This week we’re talking about drug pricing. Need a primer? Catch up here.

David R. Henderson, a research fellow with the Hoover Institution and an economics professor at the Naval Postgraduate School, was the senior economist for health policy with President Reagan’s Council of Economic Advisers. Charles L. Hooper is president of Objective Insights, a company that consults for pharmaceutical and biotech companies.

Why are pharmaceutical prices so high while the prices of so many other items we buy are low and even falling? The difference is competition. Drug companies typically have a monopoly on the drugs they sell, and monopolists charge high prices. So to get lower drug prices, we need more competition.

Patent law gives drug companies a legal monopoly for 20 years on the drugs they create, which is an effective way of encouraging innovation. But we can get both more drug development and lower drug prices without disturbing patent law. How so? Curb the Food and Drug Administration’s power to keep drugs off the market.

How do we break open the black box of drug pricing?

The FDA has monopoly power over new drugs. It keeps new drugs off the market for years, not months. Ask people why the FDA should have such power and they will likely say they’re worried about whether drugs are safe. But the biggest holdup in getting drugs to market is not how long it takes to show that they’re safe, but rather the time and expense needed to show they are efficacious for particular uses.

Economists have shown that the cost to get one drug to market successfully is now more than $2.8 billion. Most of this cost is due to FDA regulation. Some potentially helpful drugs don’t ever make it to market because the cost the company must bear is too high. Drug companies reguarly “kill” drugs that could be effective because the potential profits, multiplied by the probability of collecting them, are less than the anticipated costs. Imagine a drug for melanoma that never got on the market due to FDA regulation. In a sense, its price is infinite because it can’t even be purchased. Reduce FDA regulation so that it gets on the market, and the price falls from “infinite” to merely “high.”

If we simply went back to pre-1962 law, the FDA could still require proof of safety, but would not be able to require evidence on efficacy. This one change would allow drugs to be developed a full 10 years faster. Market success would establish efficacy — or not. If the drugs didn’t work, usage would fall. Could there be ineffective drugs? Sure. But as doctors and patients learn, such drugs would disappear over time.

When faced with the thought of more pharmaceuticals on the market, people begin to talk disdainfully about “me-too drugs” — that is, drugs that compete with existing drugs. But Chevrolet is a “me-too Ford.” And, after Chevrolet entered the automobile market, the price of a given quality Ford fell. With more me-too drugs, prices would be lower. Far lower.

There are a few ways to go about cutting the FDA’s power. The most extreme would be to have the FDA serve as an information agency rather than a gatekeeper. Companies that wanted to sell drugs without FDA approval could do so if the label said clearly, in big letters, “This drug has not been approved by the FDA.” Then those patients and doctors who insist on only FDA-approved drugs would be no worse off and those of us who trust other information sources would, by our own standards, be better off.

Another way to cut the FDA’s power would be to end its power to require efficacy for particular uses. This would cut a decade and hundreds of millions of dollars off the development process. We could also require the FDA to approve any drug that has already been approved by one of its counterparts in developed countries.

Another way to get lower prices is to allow more over-the-counter sales. OTC drugs are typically cheaper — over-the-counter proton pump inhibitors and H2 antagonists are priced at about 10 percent of their prescription versions — because consumers are more price-conscious than health insurers.

We could also learn from other countries where pharmacists, who typically know as much about drugs as doctors do, are able to prescribe drugs. That way, even if drug prices didn’t fall, the cost of getting a drug would fall substantially, because the patient would not have to take a detour to the doctor’s office, saving time and money.

But the message should be clear: Monopoly is the problem. Competition is the solution.

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How do we break open the black box of drug pricing?