“Germany has the fiscal and economic capacity to contribute far more to the cost of innovation,” says health expert Sally Pipes. “Instead, it is choosing to contribute less—and sticking Americans with the bill.”
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What does a new healthcare reform effort in Germany have to do with American patients? Quite a lot, actually.
The German government is looking to cut healthcare spending by tens of billions of euros. To that end, it is pushing pharmaceutical companies to accept significantly lower prices for new medicines.
That may help Germany balance its books. But it comes at a cost to American patients and pharmaceutical innovation. It’s also fundamentally unfair to the United States.
Germany’s approach to drug pricing is a textbook example of how developed nations shift the cost of medical progress onto American patients.
At the heart of the problem is a basic economic reality. Drug development is extraordinarily expensive. It takes roughly $2.7 billion, on average, to successfully bring a drug to market. It’s also risky, as roughly 90% of drugs that enter clinical trials never make it to patients.
This system only works when drug companies are free to sell the few drugs that successfully make it at prices that reflect this enormous risk and upfront cost.
Foreign price controls make that impossible.
When wealthy countries like Germany impose strict price controls on medicines developed in the United States, they still gain access to cutting-edge treatments—but at a steep, unearned discount.
Drug companies still need to recoup their investments in research and development and earn a return on the capital they’ve deployed. They can’t get it in Germany. So they look for it in America.
That’s why U.S. prices for brand-name drugs are more than three times higher than those paid in other advanced economies, according to an analysis by the RAND Corporation.
That price gap is often treated as a flaw in American health policy—a giveaway to industry. But it’s actually the result of other countries’ price controls.
For years, Germany has relied on a complex system of policies to keep a lid on drug prices. After a short period on the market, the government steps in and tells drug companies what it will pay—often by comparing the latest medicines to older or cheaper options. Drugmakers are also required to give steep, mandatory rebates to German payers.
The country’s latest healthcare reform package demands even deeper price concessions.
The most immediate impact will be on medical innovation. When governments force prices down, they shrink the revenues companies can expect from a successful new drug. A lower potential return reduces the incentive to invest in high-risk medical research.
Less research leads to fewer breakthroughs, fewer new therapies and slower progress against serious health challenges.
What makes Germany’s price controls especially hard to justify is that the country is well off. It’s one of the world’s largest and wealthiest economies. It has the fiscal and economic capacity to contribute far more to the cost of innovation. Instead, it is choosing to contribute less—and sticking Americans with the bill.
That is not fiscal prudence. It’s free-riding.
Addressing this blatant unfairness will require sustained pressure on the part of American policymakers, especially our trade officials.
There is already a model for how this might work. In a trade deal struck earlier this year, the United Kingdom agreed to spend more of its GDP on novel medicines. Britain will also increase the prices it’s willing to pay for new medicines. And it will increase the value it places on an additional year of life—a change that will render more medicines cost-effective under the country’s byzantine scheme for approving drugs.
Germany’s new pricing policies demand a similar response. Through targeted trade and diplomatic efforts, including a Section 301 investigation, U.S. policymakers must impress upon Berlin that it can no longer underpay for life-saving medical technologies.
The United States has both the leverage and the responsibility to ensure that our wealthiest peer nations don’t get unearned discounts on medical advances disproportionately funded by American dollars.