Milliman Pharmaco-Actuarial Advisor

Price controls on pharmaceuticals:

Pros and cons

The disparity in drug prices between the United States and other nations has led to
political outcry that consumers in the U.S. are bearing the cost burden for the rest of the
world.
With a new presidential administration and health care
reform at the top of many political agendas, the debate
over pharmaceutical price controls may begin anew.
Health Affairs reports that real spending on
pharmaceuticals grew at an average annual rate of 9.9
percent from 1997 to 2007. According to an analysis by
the Centers for Medicare and Medicaid Services,
prescription drugs accounted for approximately 10 percent
of total health care expenditures in 2007. Many legislators
hope that by reining in drug costs through price regulation,
pharmaceuticals will become more affordable and
accessible for all Americans. However, an unintended
consequence of pharmaceutical price controls may be that
firms have less incentive to invest in research and
development.
Pricing of Prescription Drugs
At present, the United States is the only country in the
Organization for Economic Cooperation and Development
(OECD) that does not impose any price regulation on the
drug industry. Not only does this allow prescription drug
prices to respond to market forces, but this policy has
allowed pharmaceutical companies to utilize differential
pricing, or price discrimination, in the U.S. market. The
U.S. Department of Health and Human Services (HHS)
estimated that prescription charges for Americans with
insurance are 14.6 percent less than for cash-payers,
reflecting health plans’ ability to negotiate better prices in
exchange for more volume in sales.
the U.S. are bearing the cost burden for the rest of the
world. This seems a fair sentiment. To remedy the matter,
legislators have suggested either allowing the re-
importation of drugs purchased at controlled prices abroad
or implementing price regulations similar to those of other
OECD nations.
Adverse Effects of Price Controls
The U.S. Department of Commerce has reported that for
OECD countries with price controls, regulated prices have
resulted in lost revenue estimated at $18 billion to $27
billion annually for pharmaceutical companies, a loss that
has led to a reduction in global research and development
spending of $5 billion to $8 billion per year. These
sacrifices in global R&D spending have resulted in
approximately 3 to 4 fewer new molecular entities (NMEs)
being developed per annum. These NMEs would have
had an estimated benefit of $4.9 billion to $7.5 billion to
U.S. consumers, according to an analysis by the HHS.
An example of the powerful impact that price control
legislation has upon R&D spending occurred between
1992 and 1993 when the Clinton administration proposed
a healthcare plan that would have placed caps on the
prices of breakthrough drugs. During that time period, the
market value of pharmaceutical firms plunged, and a 2005
study estimated that the industry reduced overall R&D
spending by $1.6 billion. It was not until the defeat of the
plan that research spending returned to prior levels.

By way of contrast, a 2004 study by the U.S. Department
of Commerce of drug pricing policies in OECD countries
found some type of pharmaceutical price controls in place
in all 11 countries studied. These include direct price
ceilings, reference pricing, approval delays and procedural
barriers for new drugs, restrictions on prescribing, and
reimbursement limitations. As a result, aggregate
pharmaceutical prices for OECD countries are 18 percent
to 67 percent less than U.S. prices.
The disparity in drug prices between the United States and
other nations has led to political outcry that consumers in
Because of the favorable market, U.S. consumers have
access to the newest and most effective treatments on
average within 4 months of the when a drug first becomes
available anywhere in the world, while their counterparts in
other OECD countries have faced longer delays. For
instance, Germany and France both face delays of 9
months and 15 months, respectively, for new treatments to
reach their markets. In the United States (unlike in these
other countries), there are not time-consuming
negotiations with the government over how to price a new
drug.

This monthly newsletter is written by Jill Van Den Bos to provide information on timely Jill Van Den Bos
topics pertaining to the pharmaceutical market. Van Den Bos, who is part of Milliman’s Consulting Actuary
Denver Health practice, specializes in bringing an actuarial perspective to the field of Direct: 303 299.9400
pharmacoeconomics. Her interests and expertise include budget impact modeling, Jill.VanDenBos@milliman.com
benefit design, and collaborative research with other disciplines.

January 2009 milliman.com

Milliman Pharmaco-Actuarial Advisor

Price controls on pharmaceuticals:

Pros and cons

The disparity in drug prices between the United States and other nations has led to
political outcry that consumers in the U.S. are bearing the cost burden for the rest of the
world.
The Price Control Conundrum

It is a difficult choice – price control policies provide short-

term aid for individual purchasers, but at the expense of
longer-term healthcare technology innovation. In difficult
economic times and with a new balance of power in
Washington, pharmaceutical companies need to be
especially concerned about the possibility of major
changes in the structure of the prescription drug market.
Changes could include greater involvement by the
government in providing or paying for health insurance, or
Medicare beginning to use its purchasing power to
negotiate lower drug prices. It will be increasingly
important for pharmaceutical companies to be able to
demonstrate the value of their products in the face of
increasingly budget-conscious payers.

This monthly newsletter is written by Jill Van Den Bos to provide information on timely Jill Van Den Bos
topics pertaining to the pharmaceutical market. Van Den Bos, who is part of Milliman’s Consulting Actuary
Denver Health practice, specializes in bringing an actuarial perspective to the field of Direct: 303 299.9400
pharmacoeconomics. Her interests and expertise include budget impact modeling, Jill.VanDenBos@milliman.com
benefit design, and collaborative research with other disciplines.

January 2009 milliman.com