President Trump pledged to lower prescription drug prices in the U.S. in his State of the Union speech, and explained lower prices in several different nations for identical drugs as “very, very unfair.”

We don’t know precisely how the Trump government will proceed. But it’s necessary to understand what opportunities exist, and what’s at stake for the development of new medicines, in rebalancing international drug prices.

High drug costs in the U.S. help pharmaceutical innovators cover the high cost of bringing a new drug to market — more than $2 billion each based on several independent estimates. While Americans carry that load at pharmacy stations and pay high insurance premiums and deductibles, Europeans get access to new drugs at deeply discounted rates. Trump is right that it is that time for that discriminatory practice to stop.

U.S. Consumers pay around three times as much on prescription medications as consumers in Germany, Italy, Spain, France, and the U.K. Some of this is because of more increased use of newer and higher strength drugs in the U.S., but a lot of the gap arises due to lower costs for identical drugs.

For example, Abbvie’s ABBV, -0.71% Humira, arthritis, and colitis medicine that’s the world’s top-selling medication, cost an estimated $2,500 per month in the U.S. after discounts. In Germany, it’s about 30 percent less ($1,750), according to Bloomberg. In other countries, the discounts relative to the U.S. market are even higher.

Our calculations imply that the U.S. market accounts for up to 78% of all worldwide drug profits. These are the profits that encourage innovation, and they’re coming from American wallets.

Why Does This Happen?

Branded prescription medications are 20% to 40% cheaper in Europe in large part because the federal health programs there drive hard bargains. The state-run buyers may impose price caps, or even refuse to allow a drug on a national formulary if they believe it’s not worth the price.

Bargaining does happen in the free-market U.S., but almost in such draconian terms. Medicare was explicitly prohibited from bargaining when the Part-D drug plan benefit was added at the time of the George W. Bush Administration. If the Food and Drug Administration allows a drug and a doctor prescribes it, Medicare will mostly cover it. Pharmacy-benefit managers and private insurers can usually negotiate down from sticker prices, but they generally do not possess the European-style ability to deny access, that’s the significant bargaining chip.

Americans should be examining what would happen if other nations picked up more of the cost of drug discovery. With the Future Elderly Model at the University of Southern California — a simulation produced with assistance from the National Institutes on Aging — we find that raising prices in Europe by 20% would lead to roughly $30 billion in extra worldwide pharmaceutical revenue each year in the five largest European markets.

Some of the new money will undoubtedly go to workers and investors at pharmaceutical companies around the globe. It may even reduce pressure on U.S. prices. Most of all, however, the evidence conclusively demonstrates that higher earnings will find their way to the R&D department. And that added R&D spending finally means more drugs find their way to market on the order of one new drug permission for each $2.5 billion in additional revenue.

The bump in drug discovery involves better results for patients, both concerning the quality and duration of life. As time passes, we discover that European cost increases would lead to $10 trillion in welfare gains for Americans during the following 50 years, and $7.5 trillion in Europe.

So What Can The U.S. Do to Achieve These Gains?

First, we have to press other nations to pay their reasonable share. As we re-analyze trade agreements, foreign drug-pricing plans should have scrutiny, and methods to make up innovation financing shortfalls should be on the table. Countries that agree to increase prices for publication and effective drugs should be rewarded with more favourable trade accords.

Other measures can also help. We can reduce drug development costs by balancing the international patchwork of regulatory companies and patent systems. Nowadays, producers need to seek approval from dozens of different jurisdictions, although biology is pretty much the same all around the planet. Data sharing and common standards (as an instance, agreeing on conventional measures of clinical efficacy) are only common sense.

Too many nations have been free-riding on the generosity of the United States for too long. Reduced costs in Europe mean Americans are adequately paying a premium to finance research to treat ailments like diabetes, cardiovascular disease, and dementia. These diseases do not recognize boundaries, and neither should the tools required to fight them.

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