Developing new, effective drugs is staggeringly expensive, and the high prices of certain drugs on the market are directly related to this initial investment, John A. Vernon and Joseph H. Golec explain in Pharmaceutical Price Regulation: Public Perceptions, Economic Realities, and Empirical Evidence (AEI Press, January 2009). According to Vernon and Golec, "the average cost of bringing a single new drug to the marketplace--covering years or even decades of research and development, safety tests, clinical trials, and regulatory approval--is about $1 billion." Drug and biotechnology firms, they point out, can only recoup this enormous investment if a drug successfully goes to market.
Politicians and activists who want to see pharmaceutical prices controlled do not understand the crucial role of high prices in the drug development process. Vernon and Golec show that there is a direct link between price controls and reduction in drug R&D. Price controls harm pharmaceutical development by robbing firms of the incentive to conduct R&D to develop new drugs. The authors offer Europe's experiment with price controls as an example of the ill effects of this kind of regulatory tampering. Spending on drug R&D has dropped dramatically in Europe since the European Union instituted price controls. "Drug development is under siege," they warn.
"The prices set by the free market are the signals that corporations need in order to decide whether to undertake expensive, risky research into new drugs," the authors insist. They argue against tampering with the current system for drug development and pricing. "Despite its flaws, it is better than any other in existence in countries with single-payer (i.e., government) systems." Vernon and Golec caution that enacting policy based on the short-term gains that result from lower, government-controlled prices would hamper the development of life-saving drugs in the future.
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