Reforming Drug Pricing

Paul Howard

Winter 2015

America's pharmaceutical industry is engaged in discovery and innovation that border on the unbelievable. Novartis is working with the University of Pennsylvania to reprogram cancer patients' own immune cells to attack tumors using a deactivated HIV virus. A biotech start-up in Boston, Bluebird Bio, is testing gene therapy — replacing defective or missing genes with functional versions — in rare and life-threatening pediatric disorders like beta-thalassemia, which prevents patients from producing enough hemoglobin to transport sufficient oxygen to vital organs and bones. ViaCyte and Johnson & Johnson have partnered to develop pancreatic stem cells to treat diabetes, a breakthrough that, if successful, could eliminate the need for insulin injections.

These cutting-edge technologies have the potential to end cancer, replace defective genes, and even re-grow organs and tissues to replace damaged ones. And, given the pace of progress in the pharmaceutical industry, many ideas that now seem far-fetched could come to fruition sooner than we expect. But the real question lies not in the potential of these new drugs and treatments but in whether we will pay for them.

While the technology has never been more promising, the outsized promise of these new treatments appears to come with an outsized price tag. A growing number of policymakers, insurers, and doctors have come to believe that these costs are a function of greed rather than of the enormous expense and risk involved in developing new drugs. On the left, the prices of breakthrough medicines are commonly decried as unconscionable, and indeed the very ability of companies to set their own prices within the constraints of the market is condemned as immoral. To solve this problem, opponents of market pricing are demanding that the government step in to make the system more "rational" — presumably through heavy-handed price controls.

The ongoing argument over Gilead Science's Hepatitis C drug Sovaldi (and the new, similarly priced combination therapy Harvoni) provides a good example of the debate cropping up over the cost of new pharmaceutical innovations. While critics of Gilead concede that the new drug is a breakthrough, the company has been pilloried for setting an "exorbitant" price — a full treatment course runs $84,000 — and accused of charging "whatever the market will bear." Two United States senators, Oregon Democrat Ron Wyden and Iowa Republican Chuck Grassley, have even sent a letter to Gilead demanding an unprecedented amount of information on the company's internal pricing methodology, development budgets, and marketing. The senators write that Sovaldi's price "appears to be higher than expected, given the costs of development, and production and the steep discounts offered in other countries." Sovaldi's pricing "has [also] raised serious questions about the extent to which the market for this drug is operating efficiently and rationally."

The letter appears to have been intended as a warning to the entire industry against charging "too much" for its new drugs; it threatens greater government interference in drug-pricing decisions if prices aren't reduced to a level more to the senators' liking. In their letter, however, the senators ignored some of the fundamental drivers of the high cost of many new medicines, most importantly the heavy cost of research and development and the limited time frames for recouping the initial investment. The senators and other critics also ignore the basic character of the drug marketplace and the mounting economic evidence that medicines are among the most cost-effective components of the health-care system, as treatment with drugs now can ward off more expensive hospitalization and treatment later.

There certainly are problems associated with the high cost of drugs, but reforming the regulatory path that medicines must travel to market, while preserving the free marketplace itself, is the best way to contain costs while promoting life-saving innovation.


Few experts on the left or right would argue that our health-care system is rational. Third-party payers, both public and private, cover about 90% of all health-care costs, meaning health-care consumers are not fully aware of the cost of the care they are receiving. What's more, traditional Medicare, one of the nation's largest payers for health care, encourages over-provision of health-care services by paying for each service consumed — that is, paying for volume, rather than paying for outcomes. The largely open-ended tax exclusion for employer-provided health insurance also encourages people to choose health plans with higher premiums (covered tax-free by employers) and low out-of-pocket deductibles.

The near-complete absence of real pricing signals to consumers, combined with high demand, encourages all providers not only to charge higher prices than they would in more competitive markets, but also to offer (and invest in) more expensive "bundles" of services, like proton-beam therapy for prostate cancer or CT scans instead of x-rays. This happens because consumers cannot internalize the costs of purchasing marginally more effective but significantly more expensive health-care goods and services. Demand rises for more health care, supply rises to meet it, and the necessary increase in price doesn't play its usual role in slowing further demand because of this dysfunctional market. The result is the massive health-care cost inflation we've seen over the last two decades.

Nonetheless, despite the dysfunction of the market in general, pharmaceuticals arguably represent one of the most rational components of the health-care system when it comes to pricing. The advent of blockbuster drugs for large patient populations in the 1990s led to concerns that drug costs would bankrupt the United States health-care system, but the rhetoric gave way to the reality of much slower pharmaceutical cost inflation in the 2000s. Inflation-adjusted per capita drug-spending growth was only 1% in 2013 and has stayed below 4% since 2007, according to IMS Health. The slow rate of growth belies the idea that the pharmaceutical industry is gouging the American public. What's more, data from the Centers for Medicare and Medicaid Services on total health-care and prescription-drug spending shows that, apart from a spike in the late 1990s, spending on drugs has largely tracked with overall health-care spending for the past five decades. In fact, growth in spending on prescription drugs peaked in the late 1990s and has dropped rapidly since the early 2000s. In 2012, the last year for which data are available, growth in prescription-drug spending was actually lower than the growth in overall health-care spending.

Two necessary components of a functioning market — information and competition — abound in the pharmaceutical industry, and the result is a surprisingly low rate of growth for drug spending when compared to other parts of the health-care economy.

Because all drugs marketed in the United States must pass rigorous scrutiny by the Food and Drug Administration before going on the market, reams of information on safety and effectiveness are disclosed through mandatory regulatory filings. The drugs must undergo extensive controlled testing, which yields large amounts of data on their effectiveness and uses for different kinds of patients. All of this information gives payers the opportunity to examine the effectiveness of a new drug, compare it to older ones already on the market, and then press for pricing concessions based on this comparison of the new therapy with the existing standard of care.

For example, Zaltrap, a new cancer drug, recently went to market priced twice as high as its main competitor. Memorial Sloan Kettering, a prominent cancer hospital in New York, refused to sell Zaltrap, however, because it was twice as expensive but no more effective than its older competitor. Zaltrap's manufacturer initially protested but ultimately lowered its price — all because the hospital used the publicly available information about the drug's effectiveness to force down the price. In contrast to the abundance of information on drugs, data on hospital quality and safety were much harder to come by until recently. Even now, key metrics often remain undisclosed, and information on individual physician quality is effectively non-existent.

Insurance companies and other payers also use a tiered system of favored drugs to force different name-brand drugs to compete. The payers can make some name-brand drugs cheaper to patients by putting them on a preferred drug tier, usually by lowering co-pays for the drug. In exchange, the manufacturer agrees to lower the price, assuming that the greater demand will offset the lower prices. Through such a tiered system, the payers can force the manufacturers of name-brand drugs to compete for the preferred position, helping to drive down costs. Almost two-thirds of Medicare Part D plans in 2013 used five-tier formularies to help control costs and force medicine manufacturers to compete. This tiered system, wrapped around Part D's six protected drug classes, ensures that beneficiaries purchase the most cost-effective options on the market while maintaining their access to life-saving medications.

The most important source of competition, however, is a function of the patent system. A typical drug patent expires about ten years after the drug has gone on the market, and after this point branded drugs compete directly with the cheap, generic versions. The same competitive techniques that were employed between name-brand drugs are used even more effectively with generic drugs: Pharmaceutical benefit managers and insurers use aggressive tiering and co-pay strategies to encourage consumers to opt for inexpensive but effective generic options. It is here that the pharmaceutical industry is fiercely competitive on price. Close to 90% of all drugs prescribed in America are generic, and the U.S. has some of the lowest generic-drug prices among its wealthy global competitors. Generic-drug substitution, according to the generics trade association, has saved American payers $1 trillion over the last decade. Moreover, a recent Government Accountability Office report concluded that among Part D, Medicaid (which has drug price controls), and the Department of Defense, Medicare's Part D program actually has the lowest gross drug acquisition costs, largely thanks to aggressive tiering and utilization management.

Such savings underscore an important aspect of pharmaceutical innovation rarely noticed by the industry's critics: Expensive drugs only remain expensive while under patent protection. After patents lapse, prices plummet as generics — which don't bear the enormous sunk research and development costs associated with seeking FDA approval for a new drug indication — enter the market. The slowdown in pharmaceutical costs in the mid-2000s was likely in large part a result of the increasing availability of cheap generic substitutes that emerged as the blockbuster name-brand drugs created in the 1990s came off their patents. It's also likely that an important part of the recent slowdown in health-care cost growth, much trumpeted by the Obama administration, is actually due to a significantly higher number of new generic-drug approvals.

Because of this competition, spending on drugs actually makes up a surprisingly small part of all health-care spending. Americans spent less than 10% of our nearly $3 trillion national health-care tab on prescription drugs in 2012, and that proportion has remained remarkably steady for decades. With health-care price inflation significantly higher than overall inflation, health-care costs may be bankrupting the states and federal government, but drugs are far from the primary driver of this insolvency. Hospital services are, in fact, far bigger contributors: Since 1997, overall health-care price inflation has grown about 65%, while the cost of outpatient hospital services has grown 110%. By contrast, the cost of prescription drugs has grown in line with overall health-care inflation, at about 64%. Prescription drugs are not what's bankrupting the American health-care system.

Even more surprising may be how relatively little Americans spend on cancer, an extraordinarily complex and expensive disease for which treatments are often drug intensive. Although it's difficult to come by precise numbers for Medicare oncology spending (Medicare Advantage plans don't break out cancer spending as a distinct category), traditional Medicare spent about $34 billion in 2011 on cancer services, including beneficiary cost-sharing — just 8.5% of total Medicare fee-for-service spending. IMS Health estimates that the total U.S. market for cancer drugs was just over $37 billion in 2013 — less than the $39 billion Americans spent on smartphones in the same year.

Given that cancer is a disease associated with aging, the relatively stable share of health-care costs devoted to cancer treatment (around 5% since the mid-1980s) for an aging population is surprising. This stability suggests that new treatments may be offsetting other types of care. New drugs for leukemia, for instance, can reduce the necessity for even more expensive stem-cell transplants and hospitalizations. And it turns out that this displacement is occurring far beyond the oncology world.


The price of a new medicine is bound up with the productivity of the manufacturer, the size of the treatment population, and the value of the new drug. AIDS drugs offer some of the best examples of value supporting pricing. Current AIDS treatments are costly but are also exceptionally effective, helping patients live nearly normal lifespans. This effectiveness has moved HIV patients out of hospitals and hospices and back into mainstream American life. Insurers, including Medicare and Medicaid, see lower overall costs. As a result, the debate over AIDS drug pricing, at least in developed countries, has largely disappeared.

Another great example of the value that a medicine can bring to patients and to society is Sovaldi, the new drug that drew the scrutiny of Senators Grassley and Wyden. Used to treat Hepatitis C, the drug costs approximately $84,000 for a 12-week course of therapy. But what even critics admit is that Sovaldi has, as health-care policy analyst Allan Joseph put it, "changed the hepatitis C (HCV) game." The drug's "Sustained Virologic Response" rate — meaning the rate at which the virus is absent from blood samples 24 weeks after stopping treatment, a proxy measurement for a cure — was 90% in clinical trials, making it "far and away the most efficacious [Hepatitis C virus] drug to that point, even in patients who had failed prior therapy."

Sovaldi made a huge improvement over its predecessors. Prior to 2011, the mainstay of Hepatitis C treatment was a mixture of an unspecific antiviral drug and interferon, a drug with such nasty side effects that many patients discontinued treatment. The success rate of this regimine was quite low — 50% in clinical trials, which are close to an ideal testing ground for the drug, meaning that the success rate was likely far lower in the broader population. In 2011, the FDA approved the first new drugs for Hepatitis C, telaprevir and boceprevir. These drugs increased the cure rate to 75%, but they still required interferon treatment in combination therapy, making them unappealing and an ultimately unsatisfactory solution.

Typically, Sovaldi with ribavirin can be given without interferon to patients with Hepatitis C Genotype 2 and 3 (two of the six different types of Hepatitis C), limiting the side effects and making it possible for more people to stay on the therapy. In the most difficult-to-treat patients, those with Genotype 1, Sovaldi must still be given with interferon, but it is also more effective than previous treatments. Before 2011, there was just a single cure of Genotype 1 for every 2.1 treatments, and between 2011 and the introduction of Sovaldi it took 1.3 treatments to achieve a single cure. But Sovaldi dropped that cure rate to 1.2 treatments per cure, which translates into over six more cures per 100 treatments than the pre-Sovaldi treatment and almost 36 more than the pre-2011 regimen. The result is that many patients who would have failed on prior therapy and progressed to liver cirrhosis or liver cancer can now be cured with Sovaldi.

It is true that Sovaldi is more expensive than its predecessors were, but when looking at the cost per cure, that expense seems justified. Looking again at the difficult-to-treat Genotype 1, each cure with Sovaldi costs $115,000, while the pre-2011 treatment, which was nearly half as effective, cost $102,000, according to Joseph. The post-2011 treatment using telaprevir cost $112,000 per cure. Left untreated, chronic Hepatitis C infection can lead to some very expensive outcomes: It often leads to scarring of the liver (cirrhosis), and in some cases it even causes liver cancer, which can require a complete liver transplant, costing over $500,000, to say nothing of the cost of immunosuppressant drugs for life.

A number of recent studies conclude that Sovaldi could in fact be cost saving — taking into account all the associated costs of Hepatitis C treatment, the drug could be so effective that it actually pays for itself by preventing patients from becoming sicker and more expensive to treat. An analysis conducted by the Institute for Clinical and Economic Review estimated that treating half the people with chronic Hepatitis C in California with Sovaldi would result in a 75% cost offset over 20 years. Another study found a relatively low cost per quality-adjusted life-year of about $11,255. Economists typically believe interventions that cost less than $150,000 per additional QALY are worth it.

Gilead's latest foray into Hepatitis C treatment with their combination therapy Harvoni will likely cost even less per QALY. The treatment — which lasts either eight, 12, or 24 weeks depending on the patient — can be provided without interferon to the most difficult-to-treat-patients with Genotype 1. While the new treatment is slightly more expensive — $94,500 for a 12-week treatment — it doesn't require any additional drugs and, most importantly, avoids the terrible side-effects of interferon which often make patients stop treatment early or prevent them from ever starting.

The government's own accountants seem to be slowly coming to the conclusion that increased drug spending does indeed offset other types of health-care spending. The Congressional Budget Office issued a report in November 2012 that surveyed the academic literature on the issue and estimated that a 1% increase in prescription-drug utilization reduces other non-drug spending by 0.2%. This report marked the first time that the CBO had acknowledged such an offsetting effect, as sufficient literature to support such a conclusion had not existed before.

The relative value of Sovaldi and other new medications, in their superior performance relative to past treatments and their ability to prevent costlier treatments, helps to justify their high prices. The market will bear $84,000 for a full treatment of Sovaldi because it works and without it things could be a lot worse. But because of the structure of our health-care system, we should not overstate the value, especially of the offsetting capacity, of drugs. What is in the long-run a benefit to patients and even to society isn't necessarily good for commercial insurers who might keep patients in their employer-based plans for only a few years before the employer switches coverage or the employee gets a new job. The insurer bears the full cost of treatment but won't necessarily reap the benefits. Indeed, it may take decades for a patient with a chronic Hepatitis C infection to progress to liver cancer. In such cases, Medicare, not commercial insurers, is the ultimate beneficiary of Sovaldi's effectiveness.

The result is that price still matters, and the price of these new drugs is indisputably very high, even with insurance. And as employers and insurers increasingly shift to at-risk payment models — where the insurance company pays a health-care provider a lump sum in exchange for the provider paying for all of an individual's health-care costs — there is powerful pressure to focus on the least expensive treatment options in the short term, at least for the time period when those individuals are "owned" by the carrier or employer.

Cost matters, and it should. But that does not mean that drug prices are excessive, or that they can be slashed without impacting incentives to innovate. The government can take some discrete steps to relieve the short-term pressures on insurers and other payers by making it possible to lower the price of drugs without resorting to price controls.


Perhaps the most significant step policymakers can take involves the FDA. The current drug-development and approval paradigm is fundamentally broken, creating significant problems for the operation of the industry's pricing model.

The FDA's natural tendency is to be risk-averse — to demand more data and larger clinical trials to weed out increasingly rare side-effects. The goal of these larger clinical trials is to prevent scandals like those around Vioxx and Fen-Phen, two drug treatments that the FDA approved but that were later withdrawn from the market because of their unexpected effects on some patients' hearts. The agency is chastised by Congress, the media, and the public when bad outcomes like rare or unexpected side effects occur, but it is generally ignored when good and safe drugs make it to market.

Part of the cost of FDA's caution is higher drug prices. According to the Tufts Center for the Study of Drug Development, it costs $2.6 billion on average and often takes more than ten years for a single drug to reach FDA approval. In 2011, Michael Rawlins, then-head of the U.K.'s National Institute for Health and Care Excellence and a frequent critic of industry pricing, noted that the regulatory requirements in both the U.S. and U.K. "[had] increased hugely." He pointed out that in the 1990s, the median number of patients exposed to a new drug in clinical trials was about 1,500; by 2011, that number had grown to 12,000. "It is a huge increase with not much gain, not much benefit from these increased numbers," Rawlins noted. "And of course, it puts up the cost of drug development hugely." He went on to estimate that clinical trials drove well over 50% of the cost of new drugs.

And as the FDA requires larger, more time-consuming trials for drug approval, the industry's effective patent time — the time drugs are actually on the market and protected by patents — is shrinking. As a result, all of the industry's massive sunk costs have to be recovered in a shorter period of time, further driving up prices and placing the greatest financial burden on the first patients who use an innovative drug.

The basic FDA approval process represents an enormous all-or-nothing gamble by investors and companies. This gamble exists for both novel technologies, where regulatory standards may be unclear (or non-existent), and more established treatments, such as drugs for diabetes, where the regulatory requirements for demonstrating safety have become increasingly burdensome and expensive. For instance, there is concern that some classes of diabetes drugs may increase the risks of cardiovascular disease in patients. Yet heart attacks and strokes are among the many complications of diabetes itself. Separating the risks of the drug from the underlying risks of the disease is enormously difficult and discourages drug development. Given what is known about the genetic heterogeneity of humans, it is extremely difficult to know whether it is the drug that failed, or whether reviewers failed to test it in the correct population. Complex chronic diseases are likely the result of a mélange of genetic, behavioral, and environmental factors that no single trial can ever unravel. And yet, despite these complications, the approval process ends with a yes or no — the conclusion isn't provisional or partial.

To be sure, other pressures on the pharmaceutical industry beyond the lengthy and expensive FDA approval process are also driving up the cost of drugs. Industry productivity is dismal: A 2012 article in Nature Reviews Drug Discovery found that, since 1950, the number of drugs reaching market for every $1 billion in R&D investment has fallen by 50% every nine years. Only about two out of ten marketed drugs earn enough to cover their development costs, so the industry's costs and profits must be recouped from a relatively small number of very highly priced products. And since many FDA-approved products are effective for only a fraction of patients — 20% of cancer patients, for instance — the public and private insurers are left paying high prices for patients who don't benefit from therapy (and sometimes still suffer serious side effects). But the approval process is an obvious and large problem, and federal lawmakers ought to focus on it first.

What the industry really needs is to produce more treatment-paradigm-shifting drugs like Sovaldi faster and more efficiently and with detailed guidance on which patients benefit most from their use. This is where FDA reform is particularly critical. A more rational FDA drug-development and approval framework would improve industry productivity by doing several things: spread costs and profits over more approved products and over longer effective patent times, sharply lower drug-development costs, better target medicines to those most likely to benefit, and increase the overall value proposition that new medicines deliver to the entire health-care system. Doing so would help cut the cost of drugs, and, most important, patients with serious and life-threatening diseases wouldn't have to wait in excess of a decade for access to better therapies.

Rather than sticking with the current model that offers binary, yes-or-no decisions on drug approval, Americans would be better off with a nuanced system that progressively reduces uncertainty about both safety and efficacy after a promising medicine is approved for marketing in identified populations based on "biomarkers." Gene-based biomarkers, for instance, can be used to target populations that don't respond well to current treatments for depression or high cholesterol. The FDA could approve drugs for these patients quickly, in much smaller trials, and then allow drug-makers to add indications later, as more evidence is developed for new cohorts of patients.

The greatest promise of biomarkers would involve using them as "surrogate endpoints": for instance, blood tests or imaging studies that could demonstrate that promising treatments were effective in slowing Alzheimer's progression long before clinical symptoms (like memory loss or dementia) become apparent, when the damage may already be irreversible. Surrogate biomarkers would also shave years off of clinical trials needed to test new drugs for many diseases. Cholesterol for heart disease and viral load for HIV are two biomarkers used as surrogate endpoints in drug approvals that predict future clinical outcomes — like heart attacks and progressing to full blown AIDS.

Under such a system, after a drug is approved based on surrogate markers — the FDA's rule is that surrogate endpoints must be "reasonably likely" to predict clinical outcomes — confirmatory trials would be run to prove that the surrogate marker did, indeed, correlate with the desired clinical outcome. If the drug didn't measure up, the FDA could pull it from the market.

This progressive or conditional approval process represents an inversion of the usual FDA approval process, where drugs must prove their effectiveness in large, heterogeneous populations before doctors can begin to prescribe them. More importantly, it would encourage companies to focus on customizing their therapies for highly targeted uses where the benefit-to-risk ratio is most promising. While the FDA has been slow to move toward this model, it has embraced it for HIV, cancer, and some very rare diseases. It first introduced this Accelerated Approval Program in 1992, and moving the entire drug-approval process in this direction would significantly lower the cost of approving drugs.

What the FDA needs now are explicit instructions from Congress for extending the Accelerated Approval pathway to all serious diseases with unmet medical needs, along with the necessary regulatory framework for such a shift. Congress would need to design a coherent system for holding the agency responsible for qualifying the many potential biomarkers identified by industry and academic researchers — complete with timelines, transparency, and requirements for incorporating expert input from outside groups like the National Institutes of Health, the health-care industry, academic medical experts, and patient-led organizations. Rather than act as gatekeeper, deciding what drugs sophisticated clinicians should be able to access, the FDA, using an optional conditional approval process linked to promising biomarkers that indicate the new drug could have a positive effect, would shift toward becoming a co-curator of a kind of pharmaceutical Wikipedia: collaboratively vetting and distributing information about targeted drugs to be used by physicians and informed patients, to treat, control, and hopefully even prevent complex diseases.

With the right tools, including a robust information-sharing and analysis infrastructure based on inter-operable electronic health records, this would represent a massive "de-risking" of the drug-development process; it would begin with testable biological hypotheses, match targeted therapies with the applicable patient subgroups, then continue to improve treatment and prescription decisions for the product's entire useful life.

Drug pricing would likely evolve too, as companies and payers agreed on payments based on disease response, reduced adverse events, or enhanced quality of life — basically, any milestone they agreed that patients would value. Both the payer and innovator would share the risks and benefits of more effective therapies, along with creating transparent competition metrics for future products.

While the FDA and the European Medicines Agency (the FDA's European counterpart) have both held numerous discussions with other stakeholders on piloting a provisional approval system, the EMA has already launched such a pilot program, rolled out in March 2014.

Taken together, conditional approval (even as a pilot program) and an expansion of the FDA's Accelerated Approval pathway would transform how the pharmaceutical industry develops, tests, and markets new medicines in the United States. These reforms would likely spread drug-development costs over more products and more time, reducing pricing pressures on each individual product without diminishing incentives for innovation.


Reforming the regulatory process is not the only change that federal legislators can make to affect drug prices: Reforms that focus on consumer-driven health care would further harness the power of the market to encourage the development of therapies with the highest value to patients at more affordable prices. If anything, the combination of FDA reform and a move toward consumer-driven health care would bring an increased focus on disruptive innovations and disease-prevention efforts that lower the total cost of care while increasing spending on pharmaceuticals.

The best example of the potential of such approaches is Medicare Part D, which is the poster child for how shifting to a more consumer-driven health-insurance system helps balance drug costs and the need to support continued innovation. The program has come in about 40% below initial government estimates, annually beating CBO cost projections since its inception. About 75% of the slowdown in Medicare's cost growth over the past decade can be attributed to Part D.

Nonetheless, Medicare Part D's stand-alone drug plans don't benefit from the offsets that accrue to other parts of the program. Capitated Medicare Advantage plans, on the other hand, probably do benefit from aggressive utilization of the most effective therapies. Indeed, the CBO report that highlighted the reality of prescription drugs' offsetting effect focused on Medicare. Shifting Medicare as a whole to a true premium-support system similar to that used in Part D and Medicare Advantage would produce even better incentives to use the most effective medicines, as insurers would benefit financially from improved disease management and prevention, while also ensuring robust competition between different treatment options. Insurers might flock to Sovaldi, then, rather than attack it.

Sovaldi is only one of several new drugs that could be marking the dawn of a new Golden Age of medicine. It is in our interest to encourage the many new breakthroughs that could be on their way, and we must not let alarming but misleading headlines cause us to overreact in ways that would curtail innovation. The market, properly structured with smart regulations, will best encourage innovative new treatments while constraining prices through value-based competition. Indeed, the most expensive thing we could do is block the new treatments before they even arrive.

Innovative drugs surely come with costs, and the industry and government regulators should face concerns about drug pricing directly. The solution is not, however, to use price controls, as such overbearing regulation would only discourage innovation by stifling profits. Rather, the government and industry should embrace the market that so many critics pillory and reform it to promote competition and the fast movement of new drugs from the pharmaceutical lab to the pharmacy. In drug pricing, as in so much of our economy, the market is not the problem but the solution.

Paul Howard is a senior fellow at the Manhattan Institute and director of its Center for Medical Progress.


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