Note to Margot Sanger-Katz: Public Funding Can be a Substitute for High Drug Prices for Incentivizing Innovation

November 06, 2021

Margot Sanger-Katz had an Upshot piece praising the Democrats for pursuing a path on lowering drug prices, which she argues will have a relatively small impact on innovation. It also will have a relatively small impact in reducing drug prices.

Sanger argues that high drug prices are necessary for innovation, since most important new drugs come from small start-upstarts. These start-ups rely on venture capitalists to put up big money in the hope that they might have a big payoff if a new drug or vaccine proves successful. By reducing the size of the potential payoff, there is a risk that these venture capitalists will be less willing to put up the money these start-ups need.

Incredibly, Sanger-Katz never mentions the possibility that public funding could be a substitute for some or all of the money from venture capitalists. This is bizarre not only because the federal government already spends around $50 billion a year on bio-medical research, but also because we just saw the government make large-scale expenditures to support the development of vaccines, treatments, and tests for Covid through Operation Warp Speed.

If we are seriously concerned that reduced drug prices will lead to less incentive for venture capitalists to finance innovation, we can look to offset any reduction in incentive with more direct funding. (The $50 billion the government now spends compares to roughly $100 billion that the industry currently spends, according to the Commerce Department.) In addition to lowering drug prices, the spending from the government has the advantage that all research can be fully open as a condition of funding. This would mean that researchers all around the world could learn and build on new findings as soon as they are made.

Lower drug prices also have the benefit of reducing the perverse incentives created by government-granted patent monopolies. The high prices resulting from these monopolies give drug companies a huge incentive to lie about the safety and effectiveness of their drugs. This is a widely recognized problem among public health professionals. Deceptive marketing by drug companies happens all the time, with the most dramatic instance being the opioid crisis, where major manufacturers allegedly misled doctors about the addictiveness of the new generation of opioids in order to boost sales.


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