Issue Area

Balancing Innovation and Drug Pricing

Industry argues that high prices are necessary to fund innovation and to compensate for the high percentage of products that fail; however, launch prices and U.S. premiums are often out of sync with both value and R&D investment

We value innovation and acknowledge the necessity of reasonable financial returns to fuel investment in research and development. However, the powerful pharmaceutical industry and its lobbyists assert that today’s high drug prices are required to fund innovation, and that the value created justifies these ever-increasing prices. The data suggest these arguments are insufficient to justify many products' high prices.

Independent analyses by the Institute of Clinical and Economic Review (ICER) and others suggest that high launch prices are frequently not tied to value. Moreover, the profits earned through excessive price premiums in the US far exceed what’s required to fully fund global R&D. A more reasonable balance must be struck in order to ensure that patients and beneficiaries have access to the industry's medical advances.

What is at stake?
57%

Reimbursement prices in other high-income countries average 57% of US net drug prices for the largest global drug companies

130%

The WAC for many products exceeds ICER's cost-effective price by over 100%, with an average premium of 130%.

Launch prices are frequently not aligned with a drug's clinical value, and prices continue to increase over time

Unlike many other countries, the US does not require a nationally-recognized governing body to conduct health technology assessments (HTA) for drug coverage or public use. With the rise in drug spending, however, analyses from ICER–an independent and non-partisan pricing watchdog who conducts detailed and transparent cost-effectiveness reports based on clinical trial results, stakeholder interests, and price–have been recognized as a worthy source.

We conducted an analysis of the highest performing drugs for the top 15 pharmaceutical manufacturers by revenue in 2019 against ICER-recommended prices and found that most prices exceeded the $150,000 cost-per-QALY threshold.

  • Of the 40 products in our analysis, 34 had a WAC price1 that was more than 50% higher than the ICER cost-effective price at $150,000-per-QALY.
  • Only three products have net prices at or below the $150,000 threshold. None of the products’ list price came in below this target level.
  • The average premium of WAC over the ICER cost-effective price was 130%.
  • The average premium of the net price over the ICER cost-effective price was 97%.
80%

Nearly 80% of drugs we analyzed had NET prices above the $150,000-per-QALY threshold. WAC for all of the drugs exceeded this target.

97%

The average premium of the net price over the ICER cost-effective price was 97%.

Graph 1
ICER Cost-Effective Prices vs WAC Prices

Excessive pricing in the US generates outsized premiums relative to R&D investments

Many high-income countries reference drug prices abroad when deciding how much to reimburse for that product. This is commonly known as International Reference Pricing (IPI) or External Reference Pricing (ERP). Although the US does not use do this, several recent policy proposals have called for benchmarking Medicare prices against a basket of other Western countries, most notably in HR3, which was reintroduced in April 2021, and in Executive Orders on drug pricing from the Trump Administration issued in September 2020. These proposals have gained popularity as they address the fact that Americans frequently pay substantially more for the same prescription drugs than residents of other high-income countries without the logistical and safety concerns of drug importation.

In a Health Affairs Blog article published in 2017, we refuted the pharmaceutical industry’s common claim that the higher prices they charge in the US provides them with funds that are required to conduct high risk research and development programs. Even with updated 2019 data, the findings were the same.

  • In 2019, reimbursement prices in other high-income countries averaged 57% of US net drug prices for the top 13 companies.
  • Overall, the premium earned by US net prices exceeding other countries’ list prices generated $117 bn. Only 86% of that amount, or $101 bn, was spent on R&D globally.
57%

Reimbursement prices in other high-income countries averaged 57% of US net drug prices.

$117b

Premium earned by US net prices exceeding other countries' list prices generated $117 bn while only $101 bn was spent on R&D globally.

Graph 1
Premium Revenues as a Percent of Global R&D (2019)

References
1.

WAC prices from IBM Micromedex REDBOOK

2.

Net prices from SSR Health

Research & Insights

We conduct non-partisan, independent research, and make our work accessible and informative to policymakers and the general audience alike. Browse our featured research or explore our work by article type.

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NYTimes 03/15/2021
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Numerous articles and reports have trumpeted biosimilar market growth, but it's critical we do not lose sight of the sole objective for creating the biosimilar market: to reduce the cost of older biologic drugs for society and taxpayers.
Drug Pricing Lab 03/15/2021
Bottom-Up Pricing Estimate for P-quad
How much would biologic drugs cost under P-quad pricing? Two approaches to estimating fully loaded costs plus a profit (10% and 20% examined) suggest net discounts from current prices would be at least 65% to 75%
Drug Pricing Lab 03/12/2021
Modeling P-quad
The Drug Pricing Lab engaged Milliman to conduct an independent analysis of the Production Plus Profit Pricing (P-quad) policy proposal. The Milliman analysis estimates the projected spending on U.S. biologic and biosimilar drugs under a referent scenario where there is no biosimilar entry or competition, the existing ‘status quo’ scenario under the current biosimilar environment, and the Drug Pricing Lab’s P-quad policy proposal. 

This report was commissioned by Drug Pricing Lab.
Milliman 03/12/2021
Ethics of Clinical Trials to Evaluate Biosimilars
Biosimilars require extensive, expensive, and time-consuming human testing prior to market entry, a process vastly different than generics. So why are we still doing them?
MedRx IV 03/09/2021
After 4 Years of Trump, Medicare and Medicaid Badly Need…
Many promising ideas won't work as expected, and that's all the more reason for CMS to evaluate how medical care is delivered to its patients.
NYTimes 12/01/2020
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