Are pharmaceutical drug prices too high?

Hillary Clinton has proposed a new plan to bring down prescription drug prices, but so far the reception is cool.  Here is one comment:

But when I ran it by some health economists and other health policy experts, several strongly disliked the idea because it misunderstands the diversity of companies in the pharmaceutical industry. They say it would create perverse incentives that could raise instead of lower the costs of developing new drugs.

“This is an astonishingly naïve approach,” said Amitabh Chandra, a professor of public policy at Harvard University, in an email. He argues that the plan could encourage wasteful research spending without necessarily doing much about the prices charged for medications.

That is from Margot Sanger-Katz at the NYT, not the Heritage Foundation.

I would stress a different point, and this concerns pharmaceutical prices more generally, not just the Clinton plan.  Higher prices induce more innovation, and those innovations benefit patients in many countries.  Note that connection is true even if you think most innovations come from universities or the NIH rather than being hatched Big Pharma.  There is still a pot at the end of the rainbow for the significant innovators in this process.

OK, so how much does innovation go down if prices go down?

Here is an earlier post by Alex on Frank Lichtenberg’s estimation: “Thus, price controls or other restrictions that reduce prices are almost certainly a bad idea.”

Here is another earlier post by Alex, citing Megan, noting that Apple spends three cents of every dollar on R&D, and other inconvenient facts and that was from 2009.

If the advocate of lower drug prices does not have clear quantitative evidence for a conclusion of “lowering drug prices will not harm innovation very much,” commit the analysis to the flames, for it harbors nothing but sophistry and illusion.  And while agnosticism about elasticities might weaken the argument for keeping prices high, that’s not an argument for lowering prices, that is an argument for agnosticism.

This same point applies to most commentaries on TPP I might add, and intellectual property analysis.  Write it on the bathroom wall: “Without an elasticity, there is no answer.”  And scream it from the rooftops while you are at it.


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