The real prescription for lower drug prices: get Europe to drop its price controlsL'EDITORiALE DI PIETRO PAGANINI PER THE WASHINGTON EXAMINER

It’s no secret that transatlantic relations have been a bit stormy recently, due in part to President Trump disparaging European countries as “freeloaders” who invest comparatively less in research and development for new medicines while suppressing drug prices through government controls.

Nor is it surprising that Europeans have taken exception to his belligerent tone. But pundits on both sides of the Atlantic should note that an altogether calmer American politician, the respected Sen. Orrin Hatch, R-Utah, is making the same point, albeit with less inflammatory language. Innovation reduces the cost of medicines by fostering competition, but price controls hinder this process.

The U.S. is the world’s primary source of research and development for new drugs. According to the European Commission, America spent €61B on pharmaceutical R&D in 2016 — about 46 percent of the global total — even though the U.S. represents just over 4 percent of the world’s population and just under a quarter of global GDP in nominal terms. The overwhelming majority of this innovation is privately funded, and research has revealed a strong correlation between drug companies’ profitability and R&D spending: The more money they take in, the more they invest in innovation.

But in Europe, innovators are subject to arbitrary price controls, instituted by national governments more interested in rationing and keeping drug prices artificially depressed than in finding new cures. Thanks to measures like price caps and compulsory rebates, on average the 31 members of the Organisation for Economic Co-operation and Development spent €474 per capita on prescription drugs in 2015, compared to €750 in the U.S. Once again, because of the strong link between income and innovation, that means less money for new cures: While the U.S. drug industry spent €199 per capita on R&D in 2014, for the European members of the OECD the figure was just €47 per capita.

Ironically, these market-distorting interventions actually help prop up drug prices in the long term, by stifling the only reliable means of lowering them through real economic forces: innovation and competition.


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