Pharmaceuticals: Health Benefits That Pay for Themselves

Montreal, February 5, 2020 – Ottawa has the prices of drugs in its sights. On the one hand, it has made changes to the calculation method for the price ceilings imposed on drugs sold in Canada. On the other, the idea of national government pharmacare to replace the provinces’ mixed plans is still in the air. These ill-advised public policies could actually raise total health care spending, while threatening Canadians’ access to the best available treatments, shows a publication launched today by the MEI.

Studies carried out in Canada and the United States have shown that the sums spent on new drugs lead to savings four or five times higher in other medical expenses. “Greater drug spending actually reduces total health spending compared to what it would have been given other reasons like the aging of the population,” notes Peter St. Onge, author of the publication and Senior Economist at the MEI. “However, the price of the drug is more visible, and becomes an easy target for bureaucrats or politicians.”

“The contribution of pharmaceutical innovation to health and well-being in the modern world is considerable,” says Peter St. Onge. “A study of 30 countries covering the period 2000-2009 found that pharmaceutical innovation is responsible for 73% of the increase in life expectancy during this period, or a gain of 1.27 years in just a decade. That’s huge!”

The high prices of new drugs, moreover, is explained by the enormous cost of research. According to a recent study, developing and bringing a new drug to market can take fifteen years and cost nearly US$3 billion. Moreover, many drugs submitted to clinical trials never make it to market: Only 12% of them are approved for marketing, or one in eight.

“If seven out of eight drugs don’t make it to market, those seven failures must be paid for by the profits of the single drug that does make it. This creates an obvious target as alleged price-gouging, but these drugs are highly valuable for patients who use them and see their quality of life improve,” points out Germain Belzile, Senior Fellow at the MEI and collaborator on the publication.

Pharmaceutical R&D is particularly sensitive to lower prices. One recent study estimates a $100 drop in the revenues of drug manufacturers is associated with a $58 drop in R&D spending. Given that R&D makes up 18.7% of pharmaceutical revenue, such a relationship suggests that pushing prices down just 16% could halve pharmaceutical R&D, while a one-third reduction in prices could, conceivably, wipe it out.

“Instead of intervening even more in the drug market, the government should scale back the overregulation that needlessly inflates research costs. At the very least, Ottawa should refrain from making things worse by nationalizing drug insurance and further constraining Canadian prices from reflecting the reality of this market that is so important to everyone’s well-being,” concludes Peter St. Onge.

The Economic Note entitled “Pharmaceuticals: Life-Saving Benefits That Pay for Themselves” was prepared by Peter St. Onge, Senior Economist at the MEI, with the collaboration of Germain Belzile, Senior Fellow at the MEI. This publication is available on our website.

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The MEI is an independent public policy think tank with offices in Montreal, Calgary, and Paris. Through its publications, media appearances, and advisory services to policy-makers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.

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