The Trump Administration is committed to lowering prescription drug prices while encouraging medical innovation to help patients access new lifesaving drugs. H.R. 3, the Lower Drug Costs Now Act of 2019, may share the Trump Administration’s first goal of lowering prices, but the threat it poses to continued medical innovation will harm American patients in ways that far outweigh any benefits.
H.R. 3 aims to lower prices for select drugs by effectively forcing drug manufacturers to accept prices set by the Secretary of Health and Human Services—or otherwise face an excise tax of up to 95 percent of sales. This tax would not be deductible for income tax calculations, so drug manufacturers could lose money from selling the drug. Consequently, manufacturers would either have to accept the Secretary’s price for a given drug or decline to sell it in the United States.
The Council of Economic Advisers (CEA) estimates that H.R. 3 could lead to as many as 100 fewer drugs entering the United States market over the next decade, or about one-third of the total number of drugs expected to enter the market during that time. CEA also estimates that by limiting access to lifesaving drugs, H.R. 3 would reduce Americans’ average life expectancy by about four months—nearly one-quarter of the projected gains in life expectancy over the next decade.
Furthermore, the economic value of this loss of new, better drugs, and the resulting worse health outcomes, could reach $1 trillion per year over the next decade. That is far larger than H.R. 3’s projected savings.
Even supporters of the bill have conceded its potential harmful effects on drug innovation. The Congressional Budget Office acknowledges these effects, and suggests that the bill would result in 8 to 15 fewer drugs coming to market over the next decade. However, CBO does not reveal its methodology for making this assessment, and the studies it cites argue for a much larger reduction in the number of new drugs coming to market. Another study suggesting the bill would have a minor impact on innovation assumes that pharmaceutical firms and markets do not respond to profitability changes when deciding how to invest, and also ignores the role that small biotech firms play in pharmaceutical innovation.
CBO’s assessment suggests that H.R. 3 could reduce pharmaceutical company revenues by $500 billion to $1 trillion over the next decade, which would have noticeable negative effects on drug innovation. Since pharmaceutical companies typically spend 15 percent to 20 percent of their revenue on research and development, this revenue decrease would probably result in a $75 billion to $200 billion reduction in research and development expenditures over the next decade. For comparison, CEA conservatively assumes the cost of developing a new drug to be $2 billion, which explains how CEA reached the estimate that H.R. 3 could result in as many as 100 fewer drugs entering the market over the next decade.
CEA’s estimates are at the low end of the damage caused by H.R. 3. For example, in its assessment of the bill, CBO cites a study that finds that increasing the potential size of the drug market by $2.5 billion in revenue is associated with one new drug. Based on the CBO’s preliminary analysis of a projected $500 billion to $1 trillion revenue decline over the next decade, this study suggests 200 to 400 fewer drugs will enter the market, far larger than CEA’s estimate. Other studies cited by CBO suggest even larger harmful effects.
Reducing the number of new drugs by one-third over the next decade would have substantial negative effects on Americans’ health. To value the economic costs from these negative health effects, it is estimated that spending $2,000 on pharmaceutical research and development increases population health by one statistical life-year. This means that H.R. 3 would reduce population health by 37.5 million to 100 million life years over the next decade. In other words, H.R. 3 would reduce Americans’ average life expectancy by about four months.
As another way of showing the bill’s costs, H.R. 3 would save the Government an average of $34.5 billion per year over the next decade. Using standard methods of valuing health gains, CEA estimates that the economic value of the bill’s resulting reduction in health outcomes ranges from $375 billion to $1 trillion per year over the next decade. This means that H.R. 3’s long-term health costs are at least 10 times larger than the short-term savings to the Federal Government.
The Trump Administration’s commitment to reducing drug prices through market-based mechanisms, such as approving new generics and removing barriers to drug innovation, has provided Americans with the largest and longest drop in drug prices in over five decades. Lowering the price of prescription drugs is rightly a major concern for American patients and policymakers, but H.R. 3 is the wrong approach to address a pressing problem—especially when bipartisan legislative alternatives that encourage innovation while lowering prescription drug prices are gaining support in Congress.
Heavy-handed government intervention may reduce drug prices in the short term, but these savings are not worth the long-term cost of American patients losing access to new lifesaving treatments.