Why Regulate Drug Prices?

On December 18, Jaume Puig-Junoy, lecturer at the Department of Economics and Business at Universitat Pompeu Fabra, gave a master class on the international drug pricing system to students from the Master of Global Health, which is run by the University of Barcelona (UB) and the Barcelona Institute for Global Health, ISGlobal. The class was held at the UB Faculty of Medicine as part of the broader Course on Health Systems, Politics and Economics.

Drug patents

To ensure continuity in research and development (R&D), the pharmaceutical industry "needs" a monopoly price to be able to deliver new drugs to the market. Based on industry data, the average cost of developing a drug has increased considerably in recent decades, rising from $138 million in 1975 to $1500 million in 2010. Patent protection allows pharmaceutical firms to recoup their R&D costs, but whether or not a new drug generates enough money to costs its costs depends on the number of patients, the price of the drug, and the duration of the patent. As Jaume Puig-Janoy explained, only 30% of drugs that reach the market generate enough revenue to cover the cost of their development. In other words, 70% of drugs fail to earn enough and their costs are covered by their more successful siblings.

Should drug prices be regulated?

Drug prices are regulated through reference pricing in almost every country in the world. Exceptions are the USA, Denmark and Germany, where prices are almost free. Reference prices are set by comparing the prices of all drugs that have the same active ingredients or are therapeutically equivalent. The price of the cheapest drug is then set as the reference price for the other drugs in the category.

Price containment is one of the main reasons for regulating drug prices. New products are expensive because they have virtually no competition. However, as Puig-Janoy explained, "if there is competition, it's better to encourage it than to regulate pricing, because in a competitive market, prices will come down naturally and the product will find its place in the market, as occurs in the USA".

Price regulation helps to cap drug prices, but with this system, prices will never drop below the minimum reference price, even if competition increases and generic or equivalent drugs appear on the market. They will only come down if the regulator lowers the reference price. In an unregulated market with competing products, however, the forces of market competition will push the prices down naturally.