Traditional economic theory predicts that competition will counteract growth in drug prices. Surprisingly, success of competitor’s clinical trials and new drug application (NDA) submissions seem to represent exogeneous “pipeline shocks” that cause incumbent drug manufacturers to raise prices before rival candidates appear on the market.
From 2007 to 2015, pharmaceutical companies raised the price of existing insulin about $2.35/mL upon a new entrant’s clearance of stage 3 FDA trials; companies then raised prices about $2.28/mL upon clearance of stage 4 FDA trial. Furthermore, even adjusted for inflation, the price of insulin increased from $14.67 to $61.22 over the same period. As new drugs clear clinical trials, originators adjust their expectations about their future competitions and subsequently raise the price to offset the revenue loss. Consequently, the new candidate has the incentive to set the price no lower than the existing price.
As the Biden administration calls on federal health officials to intensify efforts to lower prescription drug prices, it would require an aggressive federal approach from policymakers and stakeholders across the chain to figure out how to ensure adequate financial protection for patients. Increased drug prices have made access to insulin more difficult for low-income people, but it also has a toll on the healthcare system. It impacts all patients by increasing premiums and spending on taxpayer-funded healthcare programs such as Medicare. It will be important to strike a balance between promoting pharmaceutical research and while keeping prices affordable.