Research / BFI Working PaperSep 14, 2021

The Evidence Base on the Impact of Price Controls on Medical Innovation

Tomas Philipson, Troy Durie

This issue brief reviews the evidence on the impact of price controls on biopharmaceutical innovation and calibrates what this evidence implies for recent price control proposals in the US. A large academic literature estimates the effect of future drug revenues on R&D spending with a mid-range effect of a 1 percent reduction in revenue leading to a 1.5 percent reduction in R&D activity. Using the range of such effects found in the literature we find the proposed price controls of US bill HR3, the Lower Drug Costs Now Act, would lead to a 29 to 60 percent reduction in R&D from 2021 to 2039 which translates into 167 to 342 fewer new drug approvals during that period. The mid-range effect of the evidence implies a 44.6 percent decline in R&D and 254 fewer new drug approvals. As a benchmark on the large size of the adverse health effects this implies, we conservatively find the loss in life from the price controls the next 10 years is 20 times larger than the loss from COVID-19 to date in the US. We argue this is a conservatively low estimate of the impact of such proposals even though it is as much as a ten times larger reduction in new drugs compared to a recent CBO analysis.

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