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Restricting drug company profits could kill innovation

(Rennett Stowe/Flickr)

(Rennett Stowe/Flickr)

In healthcare, the desire for more affordable and accessible drug treatments could threaten the innovation that drives new, better drugs.

In the New York Times, Vice Provost at the University of Pennsylvania Ezekiel Emanuel makes a case for price controls to curb the high costs to patients.

“Despite representing about 1 percent of prescriptions in 2014, these types of high-cost [specialty] drugs accounted for some 32 percent of all spending on pharmaceuticals,” Emanuel writes.

That is true. Emanuel highlights some grave problems within the pharmaceutical industry and healthcare in general.

However, his proposed solutions could make matters worse. As Megan McArdle suggests in her rebuttal, “Those high profits provide strong incentive for pharmaceutical innovation.”

Investments for new drugs have high fixed costs. They’re risky. Above all, they’re difficult.

McArdle notes that only looking at successful drug companies obscures the reality of the industry. Only the successful survived:

You forget that when the money was initially invested, no one knew which companies were going to make it, and which were going to crash and burn. Investors needed to be well compensated for taking that risk, because biotech is close to an all-or-nothing proposition: Either you get a drug approved, or you vaporize millions of dollars with absolutely nothing to show for it except some secondhand lab equipment.

Emanuel isn’t wrong to criticize the healthcare system. Crafting reform, however, must be well thought-out and based on empirical evidence. The conservative nature of the Food and Drug Administration, for instance, could be a worthy target for reform that could lower drug prices.

When confronting the high cost of something as emotionally powerful as healthcare, keeping an eye to innovation and improvement in the future is as necessary as controlling costs in the present.


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