Drug Cost Regulations Would Hurt Future Medical Innovation; Lower Copays a Better Option

For Release

December 16, 2008

Controlling prescription drug prices is one way to lower U.S. health costs, but it comes at a cost for future generations, according to a new RAND Corporation study.

While imposing European-style prescription drug price regulations in the United States would generate modest cost savings, it would impose a larger burden in the future by stifling medical innovation that can extend lives, according to two RAND Health studies published online by the journal Health Affairs.

A better policy toward prescription drugs would be to reduce or eliminate drug copayments to encourage more people to take health-improving medications. Such action would improve the public's health and spur more medical innovation, according to the RAND study.

The findings are from a project that created the first economic models to help predict the impact of what might occur if price regulations on prescription medications were imposed in the United States. Funding for the project came from the drug company Pfizer, the National Institute on Aging, and the Bing Center for Health Economics at RAND, a nonprofit research organization.

"Price regulations represent a risky policy strategy that may have a modest impact on lowering health costs in the United States, while having a longer-term cost of reducing development of new drugs that can reduce suffering and prolong life," said Darius Lakdawalla, director of research at the Bing Center for Health Economics at RAND.

Most European countries impose some type of price regulation on prescription medications, one reason that European nations spend less than two-thirds as much per person on pharmaceuticals each year as the United States.

Some policymakers have suggested that the United States adopt some form of price regulation as a way to curb rising prescription drug costs. They argue that while higher drug company revenues may benefit future generations, it comes at the expense of today's patients.

RAND researchers developed an economic model to predict how much money different forms of price controls might save and the impact lower profits might have on drug company investments in research and development. Results focused on the impacts of the policies of people aged 55 to 59 because the elderly and near elderly account for a majority of drug spending, and it is around these ages that the health benefits will first appear.

Researchers simulated what might happen if price regulations had been imposed in 2005 that reduced drug companies' revenue by 20 percent. They found that such regulations would reduce lifetime spending on prescription drugs among those aged 55-59 in 2010 by about $9,000. Lifetime savings would grow to about $14,400 for people aged 55-59 in 2060.

However, researchers say the economic cost of such a move would be even greater. Those costs would be created because lower drug company profits would discourage investment in research, slowing the pipeline of new drug treatments and shortening expected life spans.

For American who were aged 55-59 in 2010, life expectancy would decline by two-tenths of a year. The life expectancy of people aged 55-59 in 2060 would drop by 0.7 years.

The costs assigned to price regulations would be expected to reach $51,000 for Americans aged 55-59 in 2060. The costs represent the monetary value of shorter life spans caused by a slowdown in pharmaceutical innovation.

The loss of medical innovation also would affect Europeans, who benefit from drug company innovations. RAND researchers found that under their scenario Europeans would see shorter life spans similar to those experienced by people in the United States.

Researchers also used the model they constructed to simulate what the impact might be of lowering drug co-payments 20 percent. They found such a move would lengthen life expectancy over time as more patients take needed medications and higher drug company revenues stimulate more innovation.

Researchers estimated lower copays would increase life expectancy in the United States by about 0.5 years by 2060 while increasing lifetime costs for prescription medications by $7,900. Such a policy would stimulate smaller life expectancy gains and higher drug spending in Europe.

The gains in overall life expectancy from lowering copayments would be similar to those created by major medical breakthroughs such as the development of heart bypass surgery, according to the study.

The papers published in Health Affairs are titled "U.S. Pharmaceutical Policy in a Global Marketplace" and "The Effect of Regulation on Pharmaceutical Revenues: Experience in Nineteen Countries."

Other authors of the papers are Dana Goldman, Neeraj Sood, Robert Lempert and Ze Cong of RAND; Han de Vries of RAND Europe; and Italo Gutierrez of the University of Michigan.

RAND Health, a division of the RAND Corporation, is the nation's largest independent health policy research program, with a broad research portfolio that focuses on quality, costs and health services delivery, among other topics.

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