The White House announced that it had reached a deal with the United Kingdom that would increase what Britain pays for medicines and make it easier for U.S. medicines to be considered “cost-effective” for Britain’s National Health Service.
U.S. pharmaceutical companies have been at a considerable disadvantage in getting fair prices for their drugs in developed nations. According to a 2014 study by the Tufts University Center for Drug Development, the cost to bring a new drug to market is $2.6 billion. A 2021 study by the National Institutes of Health estimated a cost range of between $161 million and $4.54 billion.
These enormous upfront costs disadvantage pharmaceutical companies in price negotiations with wealthy nations. Other developed countries know that pharmaceutical companies are seeking to recoup these investments and will likely accept below-market prices as long as they bring in revenue. Since manufacturing most pills is inexpensive, pharmaceutical companies will not technically “lose” money on these transactions.
Under the agreement between the United States and the United Kingdom, Britain will pay 25 percent more for new medicines in exchange for an exemption from U.S. pharmaceutical tariffs. Since the UK still has a large life sciences industry, this exemption will help companies such as AstraZeneca and GlaxoSmithKline maintain access to the U.S.’s unrivaled pharmaceutical market.
A crucial component of the deal involves the Quality Adjusted Life Year (QALY), a calculation done by the National Health Service to determine if a drug is “cost effective” and should be covered. The QALY puts monetary value on a year of life lived in good health and compares that number with the price of a drug. The problem, of course, is that if the value of life threshold is set too low, many drugs will not be rated as cost-effective. The QALY threshold can be gamed by bureaucrats to lower their drug spending. For this reason, British patients have lagged far behind their American counterparts in access to new drugs.
British bureaucrats have not raised the threshold on the value of life in decades as drug prices have risen, meaning many new drugs are not rated as “cost-effective” and are not available to British patients. Under the new agreement, the UK agreed to allow an increase in the threshold financial value of human life from $40,000 to $47,000, which may allow Britons to access to three to five new drugs.
There is little doubt that developed nations such as the UK have been freeloading on the pharmaceutical research and development that is largely paid by Americans. The solution to this policy problem is not for the government to use its power to artificially lower American drug prices, because American drug prices are generally market-based. The solution has always been to use U.S. leverage in trade to persuade other nations to pay prices that are closer to market prices, and that is what the new deal has done.
This policy is unlikely to lower prices in the United States as US prices are based on market value. However, the Trump administration’s recent domestic dealmaking efforts with pharmaceutical manufacturers will bring down the cost of numerous high-use medicines for American patients. The TrumpRx website brings the benefits of direct negotiations with manufacturers to patients. Ironically, the health plans and middlemen who negotiate drug prices and rebates with manufacturers have been absent from the table in efforts to reduce patient costs meaningfully.
On top of these realities, the additional revenue secured by trade deals will likely be invested in new research projects that will lead to new cures.
One can surmise that the American people would be happy with these outcomes. In numerous polls over the years, strong majorities support lower U.S. drug prices, yet support slips considerably if people are told that lower prices will lead to less research.