Prescription Drug Pricing: An Overview of the Legal, Regulatory, and Market Environment

By Antos, Joseph; Capretta, James C. | AEI Paper & Studies, July 2018 | Go to article overview

Prescription Drug Pricing: An Overview of the Legal, Regulatory, and Market Environment


Antos, Joseph, Capretta, James C., AEI Paper & Studies


American consumers and policymakers are increasingly concerned about the high cost of prescription drugs. In a recent survey, 40 percent of respondents said that lowering prescription drug prices should be Congress' top priority (Demko 2017). Lower prescription prices paid in other advanced economies are frequently cited as evidence that new policies are needed to address this issue (Council of Economic Advisers 2018).

Policies to moderate the cost of prescription drugs should be based on an understanding of the complex web of federal and state laws and regulations that govern the manufacture, sale, distribution, and pricing of pharmaceuticals. The interaction of governmental rules, payment regulations, and industry practices is complex and often opaque, making it difficult for policymakers to develop proposals to promote lower costs while maintaining incentives for scientific research that leads to new, more effective treatments.

This report provides an overview of the major factors that affect the prescription drug prices paid by purchasers and patients.

The issues addressed are complex, involve a long history of legal and commercial precedents, and interact with each other in ways that complicate the policy process. This report introduces a topic that can sometimes attract solutions that sound straightforward but that may have serious unintended consequences.

The Starting Point: Patent Law, the Food and Drug Administration, and Hatch-Waxman

There is an ongoing tension between promoting pharmaceutical innovation and maintaining access to affordable, safe, and effective medical treatments. Pharmaceutical research is a high-cost, high-risk venture that can take years of work with no guarantee that the process will end with a product that a company can sell in the marketplace. Intellectual property protection through the patent system and other regulations is needed to foster that kind of research. But such protection also gives the innovator significant market power to set prices and reduces competition that can result in lower prices. The policy challenge is where to set the balance between promoting innovation and ensuring affordable access to effective medical therapies.

The US Constitution established intellectual property protection as a core responsibility of government. Article I, Section 8 of the Constitution grants Congress the power "to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries" (United States Senate 2017). President George Washington signed the first patent law in 1790, and Thomas Jefferson, then secretary of state, sat on the original board vested with the authority to grant patents (Patent and Trademark Office 2002).

The Constitution made patent protection temporary to ensure there would be incentives for continuous progress and to prevent inventions that would be broadly beneficial to society from being held back permanently from widespread use (Walterscheid 2002).

Companies that develop new drugs or biologic products typically secure patents protecting the intellectual property associated with the potential therapies. Patents are granted by the Patent and Trademark Office to applicants who discover any new, useful, and novel "process, machine, manufacture, or composition of matter." Patents last for 20 years from the date of the application and prohibit competitors from making and selling products that infringe on the inventor's property rights (Congressional Research Service 2016).

The Food and Drug Administration (FDA) regulates the sale and use of all pharmaceutical products, including those with patent protection. In 1962, amendments to the Federal Food, Drug, and Cosmetic Act codified the requirement that all new drugs must be deemed "safe and effective" to be marketed and used in treating patients. …

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