Can you lower drug prices without hurting pharmaceutical innovation? : The Indicator from Planet Money Why are American consumers paying out the wazoo for drugs? Drug companies say it's because they need that money to fund the research and development that goes into making new life-saving drugs. Today we talk to a health economist who says you actually can have it all, lower prices and more innovation.

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New drugs. Cheaper drugs. Why not both?

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SYLVIE DOUGLIS, BYLINE: NPR.

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DARIAN WOODS, HOST:

In the U.S., brand-name drugs are about three times what they are in other wealthy countries - three times. This is part of why Americans spend so much more on health care. And here's how the argument sometimes goes. People might say that Americans pay for research and development for the world. Drug companies typically make up about 45% of their income from Americans, and so the other countries are free riders, so to speak.

Making a new drug is incredibly expensive. There are years of trials, failed attempts and roughly a billion dollars in costs for every new drug that we get. And drug companies are not doing this research and development out of the goodness of their hearts. They're doing it to get rewarded before their patent expires and cheap generics flood the market. So on the face of it, there does seem to be this powerful link between high drug prices in America and innovative medicines that the whole world benefits from. But are things ever really that simple?

This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods. Today on the show, I speak with two economists who changed my thinking on drug prices and innovation.

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WOODS: My first stop to understanding the link between drug prices and innovation was the Congressional Budget Office. The CBO is a federal agency that prices out government policies. The CBO tries to stay out of politics. Analysts like Chris Adams make sure to be dry and surgical with their words.

CHRIS ADAMS: We provide this information to the policymakers, to Congress. And that's their job - to think through these trade-offs.

WOODS: A big difference between the U.S. and other countries is that the U.S. government hasn't negotiated drug prices. Drug companies can effectively charge whatever they like. That started to change last year with the government announcing that Medicare would be allowed to negotiate with drug companies on a handful of select drugs. Medicare, of course, is the big government insurance program that covers mostly over-65-year-olds. So Chris and his colleagues ran the numbers, and they found that the policy would eventually save the government $25 billion a year. So it's nothing to sniff at, but there was a downside.

ADAMS: A 1% reduction in the number of new drugs entering the market.

WOODS: What you're saying is that there's no free lunch here.

ADAMS: There is no free lunch. Welcome to economics.

WOODS: There's roughly 45 new drugs approved each year. So if this estimate is true, that is nearly one fewer drug produced every two years. So the stakes are high. Like, what if this is some miracle cure for Alzheimer's that the world misses out on? And yet Chris pointed me to a solution from another CBO study. And this one found that you could make up for that 1% reduction in new drugs by funding the NIH, the National Institutes of Health, by just a billion dollars a year. So the policies together would save the government billions of dollars overall with minimal harm to innovation. And that got me thinking. When drug prices are lower, that does seem to reduce innovation. But there might be a bunch of policies that could boost the development of new drugs.

My next stop was to Fiona Scott Morton at Yale University. Fiona is an economist specializing in competition in health care. And I started with my original question about this possible trade-off to policies that reduce drug prices.

And I think about things like lifesaving cystic fibrosis drugs that are game changers that will add three decades to people's lives. And I'm...

FIONA SCOTT MORTON: Yep.

WOODS: ...Hearing all this, but I am worried about, are we going to miss out on the next cystic fibrosis miracle drug for some other disease?

SCOTT MORTON: Yes. And the pharmaceutical industry is very good at playing that tune and getting people worried about that. Look, there's very definitely a relationship between how much profit you're going to make and whether you want to innovate. The problem is we don't just pay a high price for the cystic fibrosis drug or the cure for hepatitis C. We're paying high prices for ancient, old generic drugs that are price fixing or that are the only entrant in their category. We're paying really high prices for cancer drugs that extend your life for two weeks while you're miserable in the hospital. I mean, these are not good-value products.

WOODS: The FDA approves the drug, and Medicare's administrators generally say, yeah, we'll take it.

SCOTT MORTON: And there's no ability for the government to say, well, wait a minute. There's another drug that does the same thing that's less expensive. Let's have all the Medicare recipients buy that because it's the taxpayer's dollar, and we should be careful stewards of that. There is no mechanism for that to occur.

WOODS: If you could wave a magic wand, what are some of the top policies that you would put in place?

SCOTT MORTON: I would make sure that we had centers at the federal government or at universities that are evaluating the cost effectiveness of drugs. Many other countries do this - I think the U.K. is a leader in this area - where you look at the cost of the drug, and then you look at how many life years it saves or quality-adjusted life years it saves, and you ask, is this a good deal or not? The point of having these entities is to be able to compare, be able to say, look, drug A costs a hundred thousand dollars per quality-adjusted life year, and drug B costs $2,000 per quality-adjusted life year. That kind of clear evaluation of those drugs would be very helpful to suppressing the desire of the corporation to just pick the highest price they can.

WOODS: And Fiona says putting a number on cost effectiveness isn't the only thing she'd like to tackle because today, drugmaking is completely different. In the old days, you could draw a drug molecule on a paper napkin, and it was relatively straightforward for another company to swoop in after the patent expired, make another version. And through competition, you would drive the price down to basically pennies. And while still a high bar, it was relatively easy to get federal approval for that generic drug.

Most money for drugs is now spent on what's called biologics. These are complex molecules grown from living sources. Botox, monoclonal antibodies and insulin - these are all biologics. And Fiona argues that the generic biologics for these drugs, known as biosimilars, they face too high a hurdle from the FDA to get approved.

SCOTT MORTON: We're not producing competitive outcomes there at all - partly through the procurement problems that I mentioned, but also because biosimilars, they can't get into the market. And we know that these biosimilars are safe and easy to make because there are dozens of them in Europe because the Europeans move faster on this front and didn't put as many barriers in the way. And the result of that has been very massively declining prices for biologics in Europe. And we don't have that in the United States.

WOODS: It's true that the FDA does have a reputation for being slow and bureaucratic. Speeding drug trial approvals could be another way to increase innovation without higher drug prices.

SCOTT MORTON: Sometimes people say, oh, we can't have lower drug prices 'cause it's complicated. And I think that's actually not true. We know quite well how to lower drug prices and do it in a way that preserves innovation and preserves incentives properly. But we have a political system that can't deliver us that improvement.

WOODS: So I came into this story seeing this really knotty dilemma between prices and new drugs. But after talking with Chris Adams and Fiona Scott Morton, I had kind of an optimism. There are some really sharp people out there with a lot of ideas for boosting not just the number of new drugs, but the cost effectiveness of drugs.

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WOODS: This episode was produced by Brittany Cronin with engineering by Josh Newell. Sierra Juarez is our fact-checker. Viet Le is our senior producer, and Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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