Price regulation stifles innovation

June 1, 1997
Pharmaceutical Representative

Pharmaceutical price regulations largely fail to control drug spending and adversely affect incentives for pharmaceutical research and development, according to a book from the American Enterprise Institute, Washington.

Pharmaceutical price regulations largely fail to control drug spending and adversely affect incentives for pharmaceutical research and development, according to a book from the American Enterprise Institute, Washington.

"Pharmaceutical Price Regulation: National Policies vs. Global Interests" (The AEI Press) examines the regulatory environment of several nations and finds that drug spending has risen faster in countries with regulated prices - such as France and Italy - than in those that have permitted greater pricing freedom, such as England, Germany and the United States. The book's author, Patricia Danzon, a University of Pennsylvania professor and adjunct scholar of the American Enterprise Institute, points out that the countries with the most stringent price regulation also have the most dismal record of developing innovative drugs.

Danzon argues that the principal policy challenge is to control the inappropriate use of drugs while guaranteeing the availability of innovative and cost-effective drugs. Policies of price regulation and drug budgeting violate the most basic incentive requirement for innovation and for the efficient use of medical resources, Danzon said.

She also said price regulations that are biased to benefit a country's own industry cause excessive and wasteful use of capital and labor, which reduces productivity.

Regulations can also cause international price comparisons and parallel trade. Countries use foreign prices depressed by regulation to set limits on their domestic prices. Importers purchase drugs from countries with regulated low prices and resell them in countries with higher prices. The result is parallel trade, which reduces the incentive to invest in research and development.

Danzon argues that the absence of price regulation yields more cost-effective health care. Integrated health care systems that bear financial risk for the entire range of patient care tend to adopt the most cost-effective mix of services, which often means substituting drug treatment for expensive hospital care. PR