The Roots and Realities of the Debate on Pharmaceutical Prices

The pharmaceutical industry in the United States is not a public relations success story. Brand name prescription drug makers are the targets of considerable negative public sentiment, not ranking far behind that of the tobacco industry in opinion polls. Firms within the industry receive considerable blame for rising healthcare costs and for wielding their monopolistically competitive powers in order to achieve levels of profits that are high and unfair in the eyes of many. According to a 2005 study by the Kaiser Family Foundation, approximately one half of Americans have an unfavorable view of drug companies. And they are indeed right to be concerned about the role of prescription drug prices and their relation to rising health care costs. Drug expenditures rose from an 8.6% share of the annual increase in total personal health care expenditures in 1990 to a 25.9% share by the end of the decade. Yet at the same time, nearly 80% of the people in the same survey maintain that prescription drugs have had a net positive impact on the lives of Americans, if not for the resulting improvements in health, for the time and money saved when medications replace costly and lengthy medical treatments.

Due to lack of government regulations, the prices of drugs in the US are the highest in the world. This calls for an investigation into the margin by which those freely set prices cover the costs of different inputs in the production process. As relatively few people seem to doubt that prescription drugs are beneficial to society, this paper will not delve into a cost-benefit analysis of prescription drugs. Instead, it analyses the microeconomics of drug pricing. It also explores the basis of the political controversy surrounding the pharmaceutical industry’s pricing system. Then we will see how the specific method of measuring costs is the key in determining the levels of profitability afforded to pharmaceuticals. A careful analysis of the prescription drugs production indicates that the returns yielded by high priced brand name drugs are not as generous as commonly argued. In fact, it is very difficult to merely cover the costs incurred while developing drugs. High prices are deceptively misleading in the profits they appear to yield to prescription drug companies. It takes an economic understanding of costs to reveal that the profits reaped as a reward for innovation are not as lavish as many opponents of the industry may think.

The enormous attention received by the prices and profitability of prescription drugs, one could argue, traces back to a tax policy enacted in 1981. This was the year that congressional policymakers officially befriended the pharmaceutical industry with a tax concession known as the Research and Experimentation Tax Credit program. The R&D Tax Credit is an incentive program that was established to encourage spending on research and development of drugs through government subsidization in the form of tax deductions. Implicit in this program was the understanding on the part of policymakers in the United States that R&D expenditures by pharmaceuticals are beneficial for society yet very costly for the private sector. The program has expired and been reenacted several times since its introduction in 1981, continually reaffirming the view among politicians that research and development is worthy of being subsidized by our tax dollars. Information readily available to financial market investors lists the effective tax rate on the major drug industry over the most recent five years to be 27.18%, compared to a rate of 33.41% for the S&P 500. This gap is even wider according to a study by the Congressional Research Service in 1999, which takes into account a variety of tax breaks in order to arrive at the effective tax rate of 16% compared to the all-industry average of 27% percent. Although that figure does not reflect the foreign tax liabilities from the considerable overseas activities of US pharmaceutical companies, it conveys the message that US policymakers recognize the social benefits of prescription drugs and have accordingly rewarded drug makers with a friendly tax policy.

The more conspicuous reward for the social value of these drugs are the intellectual property rights, or patents, granted to pharmaceutical companies that give them exclusive rights to sell their drug for a limited period of time. The system of awarding patents to new drugs makes the brand name pharmaceutical industry a monopolistically competitive market. That is, each firm in the industry has a monopoly on its own form of a treatment, but competes with similar but differentiated products that target the same need on the part of the consumer. Consider the pricing power exhibited by firms in such an exclusive market in comparison to that of a perfectly competitive market, as shown in the figure below:

The reward of a patent makes earning profits viable since it boosts the price from Pc to Pm. The size of that jump depends on the elasticity of the demand for a drug, or the responsiveness of quantity demanded to a change in price. Fewer means of substituting for a prescription drug mean a more inelastic and steeply sloped demand curve, and thus an even higher jump from the perfectly competitive market price to the on-patent price. Ely Lilly’s medicine Xigris, for example, used to treat septic shock, is priced at $6000 per treatment, in big part due to the lack of substitute drugs or treatments. The drug entered a market in which the differential between the marginal cost and the willingness to pay (demand) was high, thus allowing an enormous price to be charged. If the firm suddenly lost patent power, the market price would be driven further and further down to the perfectly competitive level. The gray zone of profit would dwindle down the demand curve as more firms enter to sell a generic form of the drug, and the profit would eventually vanish. Consider the example of Prozac, another drug produced by Ely Lily, to get an idea of the enormous pricing power imparted by patents. Some six months after the antidepressant’s patent had expired in 2001, its wholesale price had fallen from $240 to less than $5 per bottle. Given such a huge price wedge set by patents, it is not surprising that high prescription drug prices stir controversy. But from a public policy standpoint, pharmaceutical prices should not merely be set at the marginal cost of production, because that does not reflect medication’s value in replacing costly, invasive and time-consuming treatments. From 1986-1998, for example, the money saved by new drugs that had substituted medical treatments was 7.2 times the increase in drug expenditures themselves. Due to the money and time saved by prescription medication, generous returns have been created on pharmaceutical innovation, both through tax breaks and through elevated pricing power.

But the idea of substantial tax credits and profits being enjoyed by makers of vital medicines is anathema to the groups who lobby to impose price regulations on brand name prescription drugs. The average brand name drug prescribed in the US rose from $27.16 in 1990 to $65.29 in 2000. This is a rate 8.3% above the annual rate of inflation over the same period. If this was not enough to arouse the ire of those critical of the pharmaceutical industry’s prices, the prices brandished by US drug makers at home were 78% higher than those of a seven-nation average comprised of Canada and six wealthy western European nations. These alarming pricing trends have increasingly made price regulation in the drug industry a policy consideration. Much lobbying comes from the elderly, who account for nearly 1/3 of prescription drug consumption in the US. Their complaints are laden with a host of financial statistics, such as the 18.6% profit margins exhibited by the pharmaceutical industry in 2000, when Fortune 500 listed it as the most profitable industry in the economy. Also a target of criticism is the aggressive direct-to-consumer advertising advanced in the last 10 years, perceived by many as a means of luring as many consumers as possible into a market for a high-priced drug rather than informing those to whom the drug is relevant of its health benefits. This form of advertising increased by 44.9% annually from 1994-2000, raising concerns that revenues from higher prices have been reinvested into marketing drugs and inducing sales more so than into developing new medications.

The most promising course of action for these those seeking price regulation in the US started in the state of Maine with a group of uninsured seniors who scheduled regular bus trips to Canada to purchase cheaper drugs. One senior activist on those bus trips brought the suggestion to a conscientious senator to pass a law not allowing prescription drugs to be sold at prices higher than those in Canada. Subsequently, on May 11th, 2000, the Maine state legislature voted for a bill that enabled the state to bargain for cheaper drugs. Under the program passed in Maine, known as Maine Rx, drug companies would be shut out from selling in Maine if they could not be swayed to provide similar prescription drug discounts for uninsured seniors as those secured by the state Medicaid program. After Maine Rx was put into effect, the pharmaceutical industry swiftly won an injunction barring Maine from bargaining for the uninsured. This lawsuit by the trade association known as Pharmaceutical Research and Manufacturers of America, or PhRMA, led to a 3-year appeal process by Maine lawmakers. This culminated in the 6-3 decision by the Supreme Court on January 22nd, 2003, to allow for Maine Rx’s price regulation to formally be implemented. Maine residents without prescription drug coverage who meet certain income criteria are now eligible for discounts on all prescription drugs. This dramatic policy development certainly has large implications for a nation that, up until that point, had been free of price regulation or such large scale bargaining by the government even at the state level. But on a more basic level, this episode reflected how much of a public concern prescription drug prices have become. The relentless push of pricing controls to the domain of public policy raises the question of what factors are contributing to the rapid price increases of brand name drugs. Are these controversial prices better explained as a function of rising costs or a push for greater profitability?

Consumer groups such as Ralph Nader's Public Citizen would argue that prices of brand name drugs are set in order to maximize the margin between revenue and costs. Representatives from PhRMA would argue that rapidly rising R&D costs are the major determinant of rising prices. To assess the first argument, one must begin by looking at recent trends in profit margins. To assess the validity of blaming rising costs, one must look at trends among the three types of costs incurred by pharmaceutical firms: R&D, sales and marketing, general and administrative (G&A).

Representatives of the pharmaceutical industry almost always place the blame on R&D when explaining prescription retail prices. This makes intuitive sense, as there are no unusual differences between the post-approval costs of pharmaceutical companies relative to other industries to establish any correlation with the substantial increases in price. Administrative activities for pharmaceuticals are similar to multi-product firms in other industries, and production costs, as we have noted above, are almost negligible at a marginal level. In terms of marketing activities, direct-to-consumer marketing has increased rapidly ever since 1997, when the Food and Drug Administration (FDA) made clear guidelines as to the provision of information on benefits and risks required in order to advertise on television or radio. This was essentially a legislative “go-ahead” for pharmaceuticals to dramatically increase their direct-to-consumer marketing efforts and thus marketing spending. Spending on this form of marketing in the industry shot up from $1.069 billion in 1997 to $2.467 billion in 2000. Direct-to-consumer promotion, however, represented only a 15.7% portion of aggregate marketing costs in 2000. Aggregate marketing trends are the more relevant way of assessing marketing costs as a potential engine of rising prices. These costs have remained fairly constant at approximately 14% of revenues in the first four years after the FDA announced its marketing guidelines. Marketing, G&A, and production expenses are either a fairly static proportion of annual drug sales or are structurally similar to their counterparts in other industries. Thus it is hard to use trends or characteristics of any of these costs to challenge the assertion that higher prices are merely rising to preserve or even increase profit margins for the pharmaceutical industry.

This process of elimination leads us to R&D as the remaining suspect in the quest to shed light on a cost that can explain the high prices of pharmaceuticals. Compared to the two other types of costs incurred by pharmaceuticals, R&D’s share of overall revenue ballooned from 1990-2000 while the cost of sales, marketing, and G&A went through notable declines, as shown in the chart below:

Thus, based on the changing dynamics of each cost, the category of cost most likely to be scrutinized for causing rising prices in that decade is R&D, for it is the only cost that went through significant increases in absolute and relative terms. Moreover, pharmaceutical R&D is structurally different from that of other industries because of the tremendous amounts of time and legal procedures required to make R&D fruitful for brand name drug makers. R&D is thus unique in its growth trends and its structure as a cost, making it a good candidate for the “cost culprit,” or the type of cost most worthy of scrutiny relative to the pricing trends. Now, the role of that cost in pushing up pharmaceutical prices must be compared to the effect of higher profit margins. The clearest way to begin assessing the validity of R&D and profit margins as price determinants is to run a multiple linear regression analysis of both variables on brand name drug prices. Consider the findings below:

The regression analysis above shows us that the independent variable R&D is the best predictor of prescription prices in the industry data examined from 1990 to 2000. According to the coefficient established in the regression, when expressed as a function of R&D, profit margins and time, prescription drug prices go up $1 for every additional $2.87 billion of additional R&D costs incurred by the industry that year. Time is included in the regression to allow for trending, so that inflation and other time-dependent variables are regressed separately and the effects of profit and R&D are isolated. The regression yields the highest t-value for R&D costs. That is, the standard error of R&D in predicting price is the smallest relative to its coefficient given by the regression. Thus, it is this variable that is providing us with the close-fitting R2 value of 0.9945, which reflects its high accuracy in predicting the dependent variable. The coefficient constructed for R&D costs has a 0.01% probability of hitting 5.744, the t-value that would indicate that R&D is an insignificant predictor of price. This means that the coefficient value attached to R&D is an extremely reliable figure for predicting changes in the average price of pharmaceutical drugs as a result of R&D changes. Profit margins, on the other hand, have a 45.5% chance of confirming the null hypothesis that profits will sway above the extreme value of 0.790, thus making it too likely that profit margins will not predict drug prices accurately in any given year by the coefficient that this regression was able to find. And finally, R&D is the only variable whose coefficient is positively correlated with prescription prices throughout all of its 95% confidence interval. These observations lend credence to R&D’s validity in being a reliable and consistent determinant of prices more so than profit margins are.

The graph below shows the two trends that we just tied together with our regression analysis:

By examining the data, the correlation between the cost of research and the price of prescription drugs proves to be both visually alarming and statistically significant. What we have just established supports the assertions of those who lobby in defense of the drug industry by arguing that the relationship between the two variables is strongly correlated. The former CEO of Merck, P. Roy Vagelos, described the relationship formulaically: “In general, the more expensive the research project, the more expensive should be the price of the resultant medicine.” This principle certainly holds true in the evidence that we have examined, which has shown that research projects have become more expensive for the industry relative to anything else, and that the resultant prices of medicines have reacted quite predictably to the growth of that industry-unique expense. The next logical question is what aspect of R&D makes it such a consideration in setting the price for a drug? The way in which the cost of R&D is measured sheds light on its true weight on drug prices.

As linear regression reveals drug prices to be rising in statistically reliable relation with R&D costs, the cost of getting a drug approved for sale on the market appears to play a much stronger role in rising prices than does profitability. But one cannot help but wonder how a cost that amounted to less than 14% of revenue in 2000 could play a large role in determining the price of the average bottle of prescription drugs. It seemed so simple: the patent-wielding drug maker merely prices drugs comfortably high above marginal cost until the marginal revenue gives the signal to stop producing. Would it not seem that production according to economies of scale would render this small 13.7% R&D expense relatively inconsequential to how mass-produced drugs are priced? After all, the average burden of R&D costs per unit diminishes towards the marginal cost levels as it is shared over an increased number of goods. In the short-run, this is certainly true, and when pricing is examined in the context of short-run costs, it appears that the drug industry is sitting comfortably on top of some of the best margins in the US economy.

Profitability is measured with this short-term mindset due to a set of legal guidelines known as Generally Accepted Accounting Principles (GAAP) that is used by publicly traded firms. These commonly practiced accounting measures classify the cost of bringing a drug to market as sunk costs, confined and applicable only to past accounting periods. But when employing economic measures of profitability, the long-run cost of time and foregone opportunities comes into play. R&D in turn becomes a dynamic cost and no longer a sunk cost. The cost of R&D is dynamic in the sense that it continually presents the opportunity cost of having money tied up in a long drug development project. A continual burden of this type must be captured by distributing it across the costs of the entire post-approval production process in order to capture the impact of lost time. That is, R&D costs, while seemingly inapplicable to the post-approval revenue of drugs, emerge from the grave of the pre-approval process in order to erode future income streams. Measuring profitability through a non-economic lens leads to a gross underestimate of weight of the costs incurred by R&D, as time costs are completely ignored in favor of the short-run focus of profitability: marginal production costs.

The 18.6% profit margin that is used as a buzz figure among critics of the drug industry is calculated using the simple accounting ratio of annual earnings to annual sales. Implicit in this 18.6% margin is the idea that firms stop producing once their short-run production costs make one more pill unprofitable. But the pharmaceutical industry warrants an alternative, long-term outlook for measuring profits, because long lag-structure that characterizes the returns on investment is unlike that of any other industry. Production costs, as discussed, are quite low at the marginal level, so revenues earned on a drug, say 3 decades after the initial investment in R&D, would appear to be profitable to the average accountant. To the economist, however, the profitability of those revenues would be undermined by 3 decades worth of opportunities lost by engaging in an enterprise with such a long delay between R&D costs and their resulting benefits. In other words, having funds tied up during the 12-year period of development of the average drug means that years of opportunities to engage in other investment mediums are sacrificed. Given the uniquely long time horizon of pharmaceutical R&D and its ensuing revenue timeline, the time costs are a much bigger consideration in determining how profitable drugs are than are the production costs incurred in the same fiscal year as the corresponding profits. Time must be looked at as a pre-approval cost that must be recouped along the course of a drug’s market life with high drug prices. This forms a new estimate of the industry’s profit margins by assigning a dollar value to the opportunity costs incurred throughout R&D. But before seeing what the time-adjusted profit margins are, a background into R&D is necessary to see why it is such, lengthy, risky, and therefore costly process to begin with.

The process of R&D is inherently risky on several levels. It begins once researchers have surveyed tens of thousands of compounds and have found one that will hit a new disease target. That discovery, followed by an animal testing phase and the application to proceed to human testing, constitutes the 3.5-year pre-clinical phase process. Only one in fifty new chemical entities make it past this initial hurdle. Then come three phases of clinical testing followed by the filing the application for new-drug investigation (IND). That period spans approximately 8 years and 9 months on average, and one out of every five in that span end up being approved. Clearly, the odds are stacked against pharmaceutical companies in terms of finding a unique, effective, and non-toxic compound, and then making it through stage after stage of lengthy testing. Then comes the tall task of the approved drugs recouping the years of R&D costs it took to bring them to the market, a task only 3 out of 10 are able to do. That creates a need for the successful minority of drugs to cover the costs of the unprofitable majority of those approved, as well as the products that failed to get approval along the way. This burden on the rare “blockbuster drugs” to compensate for product failures underscores how getting approval is only the beginning of research and development’s risk as a venture. The time that these blockbusters have to cover for the losses of failed drugs is limited because the applications for a 20-year patent must be filed at the very beginning of the R&D process, leaving only a 12-year the effective patent life of drugs on average. Finally and most importantly comes the need to compensate for time lost in the lengthy R&D process. Put differently, there comes the need to continually defray research and development costs from previous time periods, and this constitutes the most expensive and most overlooked aspect of the long research and development journey.

The lengthiness of the R&D process makes the profits reaped by the pharmaceutical industry prone to being eroded by opportunity costs in a way that standard accounting procedures would not have considered. This warrants a measure of profitability known as quasi-rents, a measure used by economists to gauge profitability after factoring in the research and development costs from past periods. Unlike many firms that merely recoup the costs of what they produce by the sales in that same fiscal year, sales of patented prescription drugs are stuck with the additional task of recouping the costs of the trailing 12 years of R&D once a drug hits the market. Two key studies show how profitability is measured when fully acknowledging R&D’s cost of capital throughout the life of a new drug’s income.

Investors face opportunity costs by financing pharmaceutical R&D. Deciding exactly what opportunities are lost allows us to construct a discount rate at which we can capitalize the costs incurred over a 12 year R&D process. Those who have a stake in this extremely lengthy process expect a return on their investment at least in the amount of the income that they forego by not making comparable investments elsewhere. In a 2003 study by Dimasi, Hansen and Grabowski, the authors determined that 11% was the capital asset pricing model’s (CAPM) expected rate of return on a portfolio of financial securities that bore equal risk to their sample of pharmaceutical firms in terms of levels of debt and equity financing. Thus the costs are compounded at 11% annually to include what opportunities investors are not exploiting as they watch their money be eaten up for 12 years by laboratory experiments and governmental and legal processes. They applied this discount rate to their sample of over 68 drugs that were approved from 1990-2001, as well as to the drugs that failed to make it through the R&D process. This exercise dramatically increased the cost of bringing a new drug to the market. The average out-of-pocket pre-clinical and clinical costs amounted to $403 million per drug in this study. Yet when each drug’s yearly R&D outlay was capitalized at an 11% annual discount rate along the entire R&D lifespan, the total cost per drug was no longer $403 million, but $802 million. They discovered that the time lost by an investor who has his or her money tied up in pharmaceutical research represents an additional $399 million cost! Time costs, as the authors show, account for a staggering 50% of total costs.

Grabowski, Vernon, and Dimasi discuss the effect of this delayed revenue structure on the industry’s profit margins in a 2002 study on new drug introductions launched from 1990-1994. To adjust for the lag structure between expenditures on R&D and there future returns, they aligned the capitalized R&D costs of 118 brand name drugs with the net value of each drug’s after-tax stream of profit along a 20-year expected market life. Their method of cost-to-revenue alignment first involved capitalizing each year’s R&D costs per drug up to the present with an 11% discount rate and adding up these costs to form a single baseline measure of the cost of R&D incurred by one drug. The sample of drugs they examined in their study was based on less recent data than the 2003 study, and thus amounted to a capitalized cost of $480.3 million. Then they calculated a cumulative figure for profit by adding up 20 years of revenue made by the average drug in their sample, less the marketing and other variable expenses incurred along the way. This created a lump-sum figure that encapsulated total future profits generated by the drug, amounting to $4.23 billion. Their methodology was quite simple; isolate the economic costs of R&D against the total value derived from its market life to determine the internal rate of return:

480 million(1 + r)^20 = 4.23 billion --> 11.5% internal rate of return on R&D

Gathering R&D outlays and the 20-year cumulative future income into a single snapshot of time shows that the annual rate of return enjoyed by investors in pharmaceutical research is 11.5%. In effect, the study created a microcosm of the true profit margins realized by the pharmaceutical industry as a whole by assigning a mean value to the cost of the risky undertaking of R&D, and comparing that to the profits reaped by the average approved drug. Such a figure is barely higher than the 11% cost of capital that they used to compute the minimal return to make investments in R&D worthwhile. The 11.5% return estimate was also very much comparable trends in the average net profit margins exhibited by S&P 500 companies, which in the last five years have exhibited an 11.46% level. Profit levels determined by accounting measures are thus exaggerated when they ignore R&D expenses incurred before the fiscal year under question. That is, accurate rates of return are impossible to gauge when the costs of previous periods are viewed as sunk costs that are not capitalized up until the date of marketing approval. Costs cannot be left alone on past income statements, because in the business of making prescription drugs, the costs from previous periods are dynamic and alive. The pharmaceutical industry is unique in that it exhibits an unusual delay in returns on its most crucial investment, R&D. Therefore, the reality of this lag-structure is that costs are prone to being underestimated relative to their corresponding returns. Incorporating opportunity costs via an opportunity-weighted discount rate that scoops up relevant sunk R&D costs is the only way to correct this flaw in measurement.

If the reason behind exaggerated pharmaceutical profit margins can be summed up in one pithy statement, it is the following: R&D is expensive because of how long it forces investors to wait, and Fortune 500 listings overlooks the wait period when calculating profitability. We have concluded that once time costs are put into consideration alongside out-of-pocket costs, the controversial 18.6% profit margin of the pharmaceutical industry is shaved down to neighborhood of other industries. If risk-adjusted returns reaped by pharmaceutical firms were better than those of other industries, then there would be more mergers and acquisitions by non-drug firms than is currently the case.

The less than stellar rate of return enjoyed by brand name drug makers in the US has dangerous implications for the effect of potential price controls on the levels of pharmaceutical innovation, for such controls would further erode the rate of return. The recent developments in Maine have shown that price regulation may very well creep into public policy at the national level, perhaps through Part D in Medicare’s new prescription drug coverage or through separate legislation. If the US joins the global community in imposing price ceilings on drugs, this would entail massive losses in revenue for the drug industry. While it is difficult to estimate the financial loss to the pharmaceutical industry caused by price controls in the US, which represents half the global market for drugs, it is easy to say with confidence that such regulation would undermine the US’s role as the world’s leading pharmaceutical innovator. The US consistently tops the charts of countries with the most initial launches of drugs, notching up 50% of world’s first launches in 2003, a far greater portion of launches than that of its closest rival, Europe, which is responsible for 27% of total first launches. Regulating the drug prices would erode the industry’s profitability, R&D investments would dry up and the subsequent trend in US drug launches would decline. Whether cheaper prescription drug prices for consumers is worth losing society’s ability to rely on a stream of new prescription medicines in the future is a public policy question open for debate. Seeing that pharmaceuticals save the time, money and the hassle of complex medical treatments, dampening innovation in this industry is a big sacrifice.

But there is still hope for those who long for cheaper prescription drug prices. As patents on brand name drugs expire each year, competitively priced generic drugs will take up an increasingly large share of the drugs prescribed to patients. In 2000 generic drugs constituted 43% of all prescriptions dispensed. This means that groundbreaking drugs that lower cholesterol, fight osteoporosis, or relieve heartburn are slowly but surely being swallowed up by the generic market. The list of generic drugs that are affordable by even those who are uninsured can only grow with time. Unfortunately, prices for breakthrough drugs that are patent protected will always be high since R&D is so inherently expensive, risky, and time consuming. How to address the price burden of the brand name segment of the drug market remains is a difficult question. The state of Oregon tackled this problem based on the realization that many of today’s best selling brand name drugs that eat up its Medicaid budget are similar to generic drugs that are already available on the market. The Oregon Drug bill, passed by the state legislature in 2003, stipulated that its Medicaid dollars could only be allocated to prescription drugs if they were approved by Oregon’s Health Resources Commission. Oregon’s panel of scientific experts began actively intervening and publishing guidelines to help doctors and consumers make wiser choices of medications based on the value and efficacy drugs. The bill was essentially the offshoot of the belief that drug prices need not be controlled, but that making consumers more informed about effective generic alternatives would save millions of dollars on prescription drug expenditures. Such alternative policy measures offer the possibility that price controls are not the only option.

Only time will tell whether the US government will continue to accommodate the high drug prices that receive such attention in the political economy of our healthcare system. Any policy that comes into play must be careful not to excessively distort the financial incentives of pharmaceutical companies to innovate. Drug makers are indeed motivated by profits, but they are undoubtedly making a positive contribution to society’s health and well-being.

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