Foreign countries are freeloading off American medical innovation according to a recent report by the White House Council on Economic Advisers. 

Because of foreign price controls, the prices paid by other countries for pharmaceuticals is less than what is needed to incentivize the development of innovative new medicines. This harms foreign countries through lack of access to new medicines and harms the U.S. because prices are higher than they would otherwise be.

The U.S. healthcare system largely relies on free market forces that promote competition between various stakeholders. In comparison, most foreign developed countries utilize price controls to forcefully lower costs. In many cases, these countries are able to strong arm manufacturers into accepting lower prices, as the report notes: 

“In the U.S., private insurance plans compete and make decisions that reflect the value to pharmacy benefit managers or individuals selecting plans. In contrast, if a government-run monopoly plan’s employees decide not to cover a drug, there is no risk of losing a customer because the customers cannot leave. Moreover, drug companies would often rather sell drugs at prices below the value of their products than not sell at all.”

However, this does not come without costs. By relying on price controls, these developed countries have far fewer innovative cures than the U.S. In some cases, there is a wide disparity in terms of available treatments, as the report notes:

“[M]any of the 200 top-selling drugs examined here show no quantities sold in the countries of comparison, suggesting that those drugs are not available for sale in that country. For example, in Australia, only 97 of the 200 drugs show evidence of significant sales. Similarly, Canada has only 120 of the drugs, France 109, and Germany 133.”

Where prices are artificially lower in other countries, this indirectly harms American patients and taxpayers, who shoulder a greater share of the cost of innovative medicines than they are consuming. As the report notes, this problem is increasing:

“[F]or the past 15 years, stringent government underpricing in foreign countries has substantially increased foreign free-riding on the United States. Our main finding is that prices are much lower in other developed nations than would have been predicted by income differences alone and that this discrepancy is substantially widening.”

The fact is, developing new medicines is a complex, time consuming process. A manufacturer must invest a substantial amount in research and development. In addition, the clinical development and approval times average 90.3 months for a pharmaceutical drug and 97.3 months for a biologic. Given this extensive process, there is a clear linkage between the ability of manufacturers to recoup their investment and their willingness to innovate, as the report notes:

“The gains from global sales of innovative products drive incentives for research and development, which means that the challenge of financing global biopharmaceutical R&D poses a public-goods problem.”

Some proposals, like Speaker Nancy Pelosi’s plan to impose a 95 percent excise tax on manufacturers that don’t accept government price setting, or the International Pricing Index to tie U.S. prices to prices in foreign countries, would lead to the U.S. adopting the same pricing schemes that underpay for innovation.

Not only will this harm American patients in the form of fewer treatments and worse health outcomes, it will also harm the economy because of a decline in American R&D.

Manufacturers invest over $100 billion in the U.S. economy every year, directly supporting over 800,000 jobs. When indirect jobs are included, this innovation supports 4 million jobs and $1.1 trillion in total economic impact. Pharmaceutical jobs are also high paying – the average compensation is over $126,000 – more than double the $60,000 average compensation in the U.S.

If the U.S. implements the same price controls as those utilized in other countries, these jobs will be threatened. Medical innovation will be curtailed, reducing access to medicines in the U.S. and abroad. 

Rather than adopting these proposals, lawmakers should prioritize proposals that protect the free market and medical innovation and ensure that foreign countries pay their fair share.