The Impact of Price Regulation on Innovation: What the Research Shows

Potential drug price controls have a range of downstream consequences for the biopharmaceutical market and, more importantly, for patients.

How pharmaceutical companies bring innovations to market is directly tied to company revenues. That’s the unmistakable conclusion one must draw from a new white paper from my National Pharmaceutical colleagues Michael Ciarametaro and Lisabeth Buelt, one that should have direct implications for our current debate about drug price regulation. 
Michael and Lisabeth reviewed qualitative and quantitative research from peer-reviewed policy white papers and other reports and government documents to understand more about what is known about price regulation and its impact on future drug development and innovation.  
It’s an important topic right now, as potential drug price controls could have a range of downstream consequences for the global biopharmaceutical market and more importantly, for patient health. Our analysis explores the evidence surrounding the relationship between biopharmaceutical revenues and market size, and the level of research and development spending or innovative output in the form of new drug approvals.  
Some key highlights: 

  • Reducing incentives to invest in R&D results in less innovation. The paper shows robust empirical evidence of a relationship between drugmakers’ expected economic returns and what we might term innovative output – such as the number of clinical trials conducted and the number of new drugs approved. Multiple studies found that reducing market size or expected economic returns, or the potential for reduction in these returns, hurts innovative output. And, as one might expect, the flip side is also true – when expected returns go up, innovative output goes up. 
  • Public policies can increase or decrease incentives for innovation. From our analysis, it is clear that government policies that lower regulatory barriers to market entry may lead to more private sector research and development spending. Policies that expanded the market, such as Medicare Part D or government-led pro-vaccination efforts, may have led to new technologies and increased innovative output. On the other hand, studies link price controls and other restrictions on expected revenue directly with fewer drug approvals and reduced R&D spending. The research shows that these revenue cuts lower incentives for developing new drugs.  
  • It is not clear exactly how much price regulations will hurt future innovation. Our review of the research showed a wide range of estimates about how much innovation would be impacted by the loss of revenue. This sounds familiar, as even the Congressional Budget Office has recently adjusted its estimates. Our review showed that using the most conservative estimates, a 1% reduction in potential market size could result in anywhere from a 0.2% to a 4%-6% reduction in the number of new drugs approved.  

Evidence-based policymaking should include acknowledging the trade-offs and risks associated with those policies. From the research, which includes material from people with varying viewpoints about drug prices, it is widely predicted that drug price regulations will result in fewer therapies coming to market. 
That could seriously impact patient health, though, as Michael and Lisabeth show, there is a lack of substantive research about how drug pricing policies will affect those patient outcomes. From the research, though, we can conclude that the smallest changes in incentives for R&D, compounded over the many years drugs are in development, could have a downstream effect on patient mortality and morbidity outcomes over time. We all agree that improving health is a priority; thus, policymakers would be wise, given the available evidence, to approach the topic of price regulation carefully.  

John M. O'Brien, PharmD, MPH, is President and Chief Executive Officer of the National Pharmaceutical Council.