Medical innovation doesn’t need to be so expensive

Plus: How the war in Ukraine changes the way we think about energy; continuing FREOPP’s momentum in 2023; and Avik Roy on what can go right in crypto and health care

Price hikes by large drug companies fail to drive medical innovation: Prescription drug prices in the United States are among the highest in the world, putting many cutting-edge therapies out of reach for millions of Americans. The pharmaceutical industry maintains that these high prices are essential if the U.S. is to remain the world’s leading source of medical innovation. But is that true? When FREOPP Resident Fellow Gregg Girvan investigated the idea that higher prices drive innovation, he found that the largest pharmaceutical companies with the most expensive drugs are also extremely inefficient in turning research and development spending into new FDA-approved medicines. Most new medicines—including those that are true cures, versus those that provide only modest clinical benefits—are developed at small companies. In fact, as Gregg and FREOPP President Avik Roy wrote in The Washington Post:

Had the largest companies held net prices constant on a single large drug in each of their portfolios from 2012 to 2021, Americans would have spent $139 billion less on prescription drugs. Because big companies deployed about 18 percent of their revenue on R&D, that $139 billion in savings translates to approximately $25 billion in reduced R&D spending by the majors. 

But according to our analysis, that $25 billion in R&D spending accounts for only five drugs developed in these giants’ own labs. That’s 1.2 percent of the 430 drugs approved by the Food and Drug Administration in that period.

The key insight for policymakers: Profit growth at the largest pharmaceutical companies—driven by price hikes on older, branded, monopoly drugs—rarely leads to the development of innovative new medicines. It is possible to secure significant savings with minimal impact to new drug development. 

Interested in more on the prescription drug debate? FREOPP convened a Freedom & Progress 2022 panel on drug prices and innovation, with Gregg moderating a discussion between Peter Bach of Delfi Diagnostics, Michael Cannon of the Cato Institute, and Anna Kaltenboeck of ATI Advisory. The group tackled the incentive problems in the marketplace and how to make reform work in Congress.

How war has changed the energy climate: Countries throughout Europe are facing the prospect of a winter where their citizens cannot keep the heat on, and many are abandoning plans to shutter coal-fired power plants in an effort to avert rolling blackouts. At Freedom & Progress 2022, FREOPP Visiting Fellow Grant Dever, C3 Solutions President & CEO Drew Bond, and former Federal Energy Regulatory Commission Chairman Neil Chatterjee discussed how the events of the past year have changed or affirmed the way they think about energy systems, security, and policy. The panel agreed that the war in Ukraine dramatically brought home the importance of a diversified energy supply. They warned that a rapid transition to renewables that doesn’t consider the supply chain could create a dangerous dependency on China. And they argued that removing barriers to energy-related construction—from nuclear plants to transmission lines for renewables—must be an urgent policy priority.

 → Grant made the case that nuclear power is key to cleaner, affordable, and safer energy last month in The Washington Examiner. He urged policymakers to ensure that the baseload power from decommissioned coal plants is replaced by another source that is independent of weather conditions, and he pointed to Canadian and French success in reducing dependency on coal plants through investment in nuclear power. 

Consider FREOPP in your year-end giving: Rising generations are losing faith in the idea that economic freedom can make their lives better and, most importantly, that free enterprise has been the greatest engine of progress and opportunity that the world has ever seen. We founded FREOPP to revive bipartisan support for these values by showing that individual liberty expands economic opportunity for those who least have it. 

Americans urgently need FREOPP’s work. Going into 2023, our highest institutional priority is to develop and promote policies to ensure that every working family can afford the basic necessities of life. Please include FREOPP in your 2022 giving and join hundreds of others who share our belief that equal opportunity is central to the American Dream. For a limited time, your donation of up to $10,000 will earn dollar-for-dollar matching funds thanks to a FREOPP board member’s generous matching grant.

The fix for crypto, health care, and equal opportunity: Avik joined the hosts of the “What Could Go Right?” podcast to discuss Sam Bankman-Fried and how FTX’s collapse has more in common with the kind of financial and banking failures that we have seen in previous decades than it does with the innovative side of digital assets. Avik draws distinctions between Bitcoin, banks, and other cryptocurrencies based on the problems Bitcoin exists to solve—many of which are of vital importance to those on the bottom half of the economic ladder. The podcast also covers why there isn’t an Uber for health care and whether negative economic growth is necessarily bad. 

Thanks for keeping up with FREOPP, and have a great weekend!