The 'price hikes fuel innovation' argument is invalid, researchers say

A new study published in Health Affairs disproves the drug industry's most popular response to criticism over the high cost of medications in America: Drug prices support innovation for new medicines.

For the study, researchers analyzed research and development expenses and information on drug prices and sales for 15 drug companies that produced the 20 best-selling drugs in the world for 2015. They used this data to assess the relationship between premiums companies earned from higher drug prices in the U.S. and how much they spent on research.

Here are three study findings.

1. Net list prices in the U.S. generated $116 billion in premiums for drug companies in 2015.

2. That same year, the drug companies spent $76 billion — or 66 percent of the total $116 billion — on research and development costs.

3. While the relationship between the amount of global research spending and the extra revenue from premiums varied by company, researchers found these U.S. revenues on average represented 163 percent of global research and development spending.

"[T]he premiums pharmaceutical companies earn from charging substantially higher prices for their medications in the US compared to other Western countries generates substantially more than the companies spend globally on their research and development," the researchers concluded. "This finding counters the claim that the higher prices paid by US patients and taxpayers are necessary to fund research and development. Rather, there are billions of dollars left over even after worldwide research budgets are covered.

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