Price caps would impact revenue for sure, and profits probably. The real question is whether we should care.
Pharma is consistently among the most profitable industries, regularly scoring 15–20% profit margins each year:
From Drug Industry: Profits, Research and Development Spending, and Merger and Acquisition Deals
Total industry revenues for 2015 were $775B, while R&D (mostly D) spending was $89B, or 11%.
The argument for such high profits is that they are needed to fund expensive and risky R&D which delivers amazing new cures that benefit not only the US but all of mankind.
There’s no question that drug development is a risky and expensive business. Only about 4% of development projects actually succeed [1], while the cost of bringing a drug to market is north of $2B [2] and increasing exponentially.
This situation is not sustainable. I’ve argued elsewhere that we have reached Peak Pharma and reorganization and breakup are the future of the industry. That’s without price caps, which will only hasten the day of reckoning.
Disruption of the drug business will be no tragedy. Pharma is a 20th century legacy industry. It created remarkable medicines which improve life expectancy and reduce suffering. It got very, very good at exploiting the one disease: one protein: one drug paradigm. But the number of good drug targets is finite, while R&D costs are not. The pharma clock is running out.
The recent history of pharma is one of higher and higher prices for drugs that are less and less effective. Nowhere is this dynamic clearer than in the raft of new cancer medicines that have been introduced in the last decade. Their average cost is over $100K per year [3][4] , while their median improvement in survival is a measly 3 months [5] [6] . Despite extortionate prices, progress in cancer survival has come to a halt:
Data from USCS Data Visualizations
The drug industry did a lot of good in the past, and was rewarded handsomely for its efforts. But using the ruthless “what can you do for me now” logic that corporate America applies to anyone not a shareholder or C-suite exec, we should consider downsizing pharma and parting it out. We are not going to get much more benefit out of the current arrangement.
Price caps, if applied in the form of value pricing, would be one way for society to extract what value remains in the pharma industry. And when it collapses, as it will, we can pick up the pieces and begin socializing drug development.
Socialization will no doubt cause an outbreak of the vapors among conservatives, but the rest of us will do just fine.
Footnotes
[1] How to improve R&D productivity: the pharmaceutical industry’s grand challenge.
[2] Innovation in the pharmaceutical industry: New estimates of R&D costs.
[3] American Economic Association
[4] Why are cancer drugs so expensive in the United States, and what are the solutions?
[5] Availability of evidence of benefits on overall survival and quality of life of cancer drugs approved by European Medicines Agency: retrospective c… – PubMed – NCBI
[6] Assessment of Overall Survival, Quality of Life, and Safety Benefits Associated With New Cancer Medicines.