Issue Area

Balancing Innovation and Drug Pricing

The pharmaceutical industry argues that high prices are necessary to justify the enormous risks undertaken in the name of innovation and to underwrite the high cost of failures.

We value innovation and acknowledge the necessity of reasonable financial returns to fuel investment in research and development. However, the powerful pharmaceutical industry and its lobbyists assert that today’s high drug prices are required to fund innovation and that the value created justifies these ever-increasing prices. Independent analyses by the Institute of Clinical and Economic Review (ICER) and others suggest that high launch prices are frequently not tied to value. Moreover, the profits earned through excessive price premiums in the US far exceed what’s required to fully fund global R&D. A more reasonable balance must be struck in order to ensure that patients and beneficiaries have access to the industry's medical advances.

Key Facts & Figures
43%

Reimbursement prices in other high-income countries average 43% of US net drug prices for the top 15 companies, with a range from 37% in the UK to 50% in Denmark. 

130%

Across our sample, the list price (WAC) was more than double the ICER cost-effective price, with an average premium of 130%.

$112 Bn

The premium earned by US net prices exceeding other countries’ list prices generated $112 billion in 2015, while companies spent 69% of that on their global R&D.

Launch prices are frequently not aligned with the value the product generates, and they continue to increase over time.

Although the US does not have a government body that conducts health technology assessments (HTAs) like many other countries do, the high costs and increasing spending on medicines has elevated the prominence of ICER. As an independent and non-partisan drug pricing watchdog, ICER conducts detailed and transparent drug assessment reports that evaluate each new drug and publish a “value-based price benchmark” for consideration by payers, manufacturers and other stakeholders. 

  • 34 out of 40 products in our analysis had a WAC price that was more than 50% higher than the ICER cost-effective price at $150,000-per-QALY. Only three products came in at or below the $150,000-per-QALY threshold.
  • Across our sample, the average premium of WAC over the ICER cost-effective price was 130%.
  • The average premium of the NET price over the ICER cost-effective price was 97%.
80% of the drugs we analyzed have NET prices above the $150,000-per-QALY threshold.

Excessive pricing in the U.S. generates outsized premiums relative to R&D investments.

In the Executive Orders on drug pricing that President Trump issued in September 2020, he focused on the fact that Americans frequently pay substantially more for the same prescription drugs than residents of other high-income countries. This is the basis for his “Most-Favored Nation Price” benchmark for Medicare reimbursement, as well as for similar international reference pricing bills that have been introduced in Congress, including H.R.3. In a Health Affairs Blog article published in 2017, we refuted the pharmaceutical industry’s common claim that the higher prices they charge in the US provide them with funds that are required to conduct high risk research and development programs. 

  • Reimbursement prices in other high-income countries average 43% of US net drug prices for the top 15 companies, with a range from 37% in the UK to 50% in Denmark. 
  • Overall in 2015 the premium earned by US net prices exceeding other countries’ list prices generated $112 Bn, while that year the companies spent 69% of that amount, or $77 Bn, on their global R&D.
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Research & Insights

We conduct non-partisan, independent research, and make our work accessible and informative to policymakers and the general audience alike. Browse our featured research or explore our work by article type.

Pharmaceutical Products and Their Value
Steep increases in prices and spending on prescription drugs in the United States have triggered public outrage and questions about their value.
Value in Health 03/29/2020
Value-Based Pricing for Drugs: Theme and Variations
A taxonomy of the features that make a payment model truly value-based.
JAMA Viewpoint 05/02/2018
The Conflict Between QALYs and Well-Funded Patient Advocacy Groups
The goal of a QALY is to figure out how much any given drug is worth to a society so that we, as a society, have a benchmark to evaluate the price of pharmaceutical products.
Relentless Health Value 12/10/2020
Blueprints for Indication-Specific Pricing
Several approaches that rewire existing reimbursement conventions as alternatives to facilitate ISP are proposed.
Drug Pricing Lab 05/19/2020
Understanding the Rewards of Successful Drug Development: Thinking Inside the…
The ability to charge high prices is only one component of a complex system of risks and rewards that underlies pharmaceutical innovation.
NEJM 01/30/2020
Dissecting PhRMA's Opposition to H.R. 3 Lower Drug Costs Now…
Dr. Peter Bach responds to PhRMA's stance of opposition to H.R. 3 Lower Drug Costs Now Act of 2019.
STAT News 10/11/2019
Time to Throw in the Towel on Biosimilars
Peter Bach and Mark Trusheim of MIT Sloan School of Management underscore the drawbacks of Washington's preferred solution to introduce competition for biologics, the biosimilar model.
The Wall Street Journal 08/21/2019
Abandon Biosimilars as Biologics are Natural Monopolies
Biosimilars will not effectively lower the price of biologic drugs after the period of market exclusivity.
HA Blog 04/15/2019
Cardiovascular Drugs Not Price Aligned with Value in US
U.S. prices of common cardiovascular drugs are not consistent with the cost-effectiveness evidence.
Health Affairs 08/01/2018
A $475,000 price tag for a new cancer drug: crazy…
Drug Pricing Lab op-ed in STAT News discusses indication-specific pricing of Kymriah.
STAT News 08/31/2017
US Drug Prices And R&D, Take 2: A Reply To…
To answer Health Affairs responses, Peter Bach and Nancy Yu point back to the research, emphasizing the original intent of the conservative R&D cost assumptions.
Health Affairs Blog 07/27/2017
R&D Costs Do Not Explain Elevated U.S. Drug Prices
Drug prices in other high income countries for the 20 top selling drugs globally make up less than half of U.S. net drug prices.
HA Blog 03/07/2017
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