title: The increasing necessity for market-based pharmaceutical prices.
abstract: In most markets, research and development are driven by expected prices, and those prices are determined mainly by consumer willingness to pay for the potential benefits of new products. In the pharmaceutical market, however, the dominant role of government and tax-induced insurance has tended to create a wedge between expected prices and consumer willingness to pay to cure or prevent disease. This distorts investment decisions, tending to cause underinvestment. Recent developments have expanded this gap. The greatly enhanced efficiency of pharmaceutical research has permitted the development of products that provide long term prevention and quality-of-life improvements. While some of these new products can delay or obviate chronic conditions of old age, they do not necessarily reduce healthcare costs (at least not in the short or medium run). Most of the massive benefits of the new research streams are therefore pure consumer benefits, with little benefit for the acute care activities that are the core functions of European and American healthcare delivery or payment systems. These new products are very expensive, despite increased research efficiency, because that efficiency has permitted the industry to address difficult problems that had previously been impervious to solution. To serve consumers well, healthcare providers would have to increase expenditures and prices or taxes to cover these added pharmaceutical costs. But the new products are likely to be perceived mainly as cost increases. The effect is that healthcare entities will become less suited to serve as agents for consumers. One reason is that the most natural, reliable and widely used metrics for evaluating new drugs--healthcare savings and acute care improvements--will be increasingly irrelevant. The implication is that, to a much greater extent than in the past, only market-determined prices can provide adequate signals for future pharmaceutical research investment. The failure to use market prices could deprive consumers of very large future benefits.
authors.affiliation: American Enterprise Institute, 1150 17th Street, NW, Washington, DC 20036, USA.
authors.forename: J E
authors.initials: JE
authors.lastname: Calfee
mesh_terms: D016527:Drug Costs; D004345:Drug Industry / Q000191:economics*; D017850:Economics, Pharmaceutical; D006801:Humans; D008389:Marketing of Health Services; D011306:Prescription Fees; D012106:Research / Q000191:economics / Q000639:trends