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
Medicare Must Study Unproven, Expensive Alzheimer’s Drug
Medicare cannot indiscriminately cover the cost of Aduhelm for the treatment of Alzheimer's disease without first evaluating whether it truly works.
Bloomberg Opinion 06/15/2021
Value-Based Management of Specialty Drugs: Practical Considerations and Implications for…
Not all approaches are suited to meeting policy makers and health plans’ goals of managing specialty drugs based on their value. Researchers conducted a qualitative study with Blue Cross Blue Shield plans interested in implementing value-based specialty pharmacy management to observe the plans’ objectives, strategies, and factors influencing their ability to execute on these strategies.
AJMC 05/13/2021
Pharmaceutical Products and Their Value: Lessons Learned and the Path…
Value-based pricing has emerged as an alternative to prices determined by what the market will bear. But which agreements are truly "value-based"?
Value in Health 03/29/2021
The Drugs at the Heart of Our Pricing Crisis
The US drug pricing system is broken, but not irreparable. For large-molecule biologic drugs, enter: Production Plus Profit Pricing (P-quad, pronounced like Ahab's seagoing vessel).
NYTimes 03/15/2021
Biosimilars: Market Changes do not equal policy success
Numerous articles and reports have trumpeted biosimilar market growth, but it's critical we do not lose sight of the sole objective for creating the biosimilar market: to reduce the cost of older biologic drugs for society and taxpayers.
Drug Pricing Lab 03/15/2021
Bottom-Up Pricing Estimate for P-quad
How much would biologic drugs cost under P-quad pricing? Two approaches to estimating fully loaded costs plus a profit (10% and 20% examined) suggest net discounts from current prices would be at least 65% to 75%
Drug Pricing Lab 03/12/2021
Modeling P-quad
The Drug Pricing Lab engaged Milliman to conduct an independent analysis of the Production Plus Profit Pricing (P-quad) policy proposal. The Milliman analysis estimates the projected spending on U.S. biologic and biosimilar drugs under a referent scenario where there is no biosimilar entry or competition, the existing ‘status quo’ scenario under the current biosimilar environment, and the Drug Pricing Lab’s P-quad policy proposal. 

This report was commissioned by Drug Pricing Lab.
Milliman 03/12/2021
Ethics of Clinical Trials to Evaluate Biosimilars
Biosimilars require extensive, expensive, and time-consuming human testing prior to market entry, a process vastly different than generics. So why are we still doing them?
MedRx IV 03/09/2021
After 4 Years of Trump, Medicare and Medicaid Badly Need…
Many promising ideas won't work as expected, and that's all the more reason for CMS to evaluate how medical care is delivered to its patients.
NYTimes 12/01/2020
Trump's Drug-Pricing Ideas Would Cost Taxpayers a Bundle
Meanwhile, pharmaceutical companies would stand to make a lot more money.
Bloomberg Opinion 09/29/2020
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