Progress & Prosperity

Can We Get Innovation On The Cheap?

The cost of new cancer medicines is always in the news. Most of these news accounts focus on the price of a new treatment but ignore the value.

Instead, we hear about the price of new medicines and how, on average, they provide little or no benefit to patients. In fact, with all the talk about prices, we always hear that they are the reason health care spending is skyrocketing. So it's not surprising that many people want the government or some other group to cut or cap the price of new therapies.

The Cost Of Cancer Drugs In Context

Before we look at price controls, let's look at a couple of other, frequently unreported facts about new cancer medicines:

  • For all the talk about spiraling health care costs, all cancer medicines combined account for only about 10% to 15% of cancer treatment costs, and only 2% of everything we spend on healthcare.
  • New targeted therapies developed and used since 2000 account for about 1% of total health care spending.

Image showing the relation among investment, innovation, longevity and increased prosperity.

Reference 1

Why Are We Focusing On The 1%?

Bearing The Burden

Robert Adler's multiple myeloma returned after his chemotherapy, and his doctor recommended the pill Revlimid. While his insurer had paid all but a few hundred dollars of his previous treatment, it saddled him with out-of-pocket costs of $42,000 because Revlimid counts as a pharmacy benefit.

This 1% of total health care spending is the source of a lot of news stories. Why aren’t journalists focusing on the other 99% of all spending or the 85% to 90% of cancer spending that goes to surgery, doctors, and other procedures? The short answer is that insurance plans make cancer patients pay a much bigger share of the cost of a new, targeted treatment than they do for other services or medicines.

Here’s an example: The cost of getting an infusion of chemotherapy for lung cancer and using a cancer pill for lung cancer is about the same ($20,000). Insurers will cover 80% of the infusion cost, but 100% after out-of-pocket spending exceeds $1,500. Meanwhile, the same health plan will make someone pay up 25% to 50% of the cost of the oral medicine with no out-of-pocket limit.

Shouldn't We Focus On The Big Picture?

It's not the 1% spent on new, targeted cancer medicines that is bankrupting health care systems or our country. Insurance companies often make decisions that force patients to pay a larger share of innovative therapies. Meanwhile, they will cover a higher share of other, less-effective treatments that are just as costly.

  • We spend about $40 billion a year on new cancer medicines.
  • We spend $2.8 trillion on all health care.
  • Our Gross Domestic Product (the national income) is $15.7 trillion.

Previously, we discussed the contribution of new cancer medicines to our economy and health care system since 1990. In one year alone, here's what the 1% we invest in new cancer medicines has returned to us:

Graph showing how the 1% invested in cancer research leads to so much savings.

Reference 2

Should We Spend More Or Less On Personalized Cancer Care?

The chart below indicates that we should be spending more on new cancer medicines that make this kind of difference, not less. During the past 50 years, investment in new medicines has been the driving force for reducing deaths from heart disease, HIV, and cancer. Despite the hurdles, time, and cost, new cancer medicines are now yielding and sustaining progress. In the United States, investment in innovative medicines has increased from $100 million in 1961 to $70 billion last year. During this same time, death from major diseases declined by nearly 50%.

R&D Increases: Death Rates Decline

Graph showing the correlation between increased R&D spending and reduced mortality.

Reference 3

Cancer Drug Development:
Funding Future Innovation

Some claim that the price of a new cancer drug should be based on what it costs to develop and produce the drug. Others are calling for strict price control. The problem is that every new cancer medicine approved has to cover the cost of other treatments that never make it to market. In reality, just 1 in 10 medicines ever generates a profit. Therefore, a successful new medicine must ensure that effective, less-profitable medicines can remain available and that the new treatment can also pay forward to fund future innovation.

Even After Approval,
Few Medicines Recover Their R&D Costs

Graph showing how much money all medicines make, not just successful ones.

Reference 4

We have tried price controls, both here in the United States and around the world. The European Commission concluded that policies designed to reduce the price of new medicines also reduced investment in innovation. In 2003, the U.S. Congress passed legislation that cut the price of cancer medicines, mandated discounts, and then capped how much the price could rise each year. The result? We saw shortages in 58 cancer medicines in 2004, and that figure increased to 250 in 2011.

Price Controls Create Drug Shortages

Graph showing the increase in drug shortages because of regulation.

Reference 5

Regulating Cost: Impact On Investment

Price controls of any form scare off private investors. In 1993, Congress was considering a health reform bill that would give government the power to set the price of “breakthrough” medicines. But a recent survey of biotech firms found that nearly 70% of all companies developing new products for treating AIDs, cancer, and Alzheimer’s had trouble raising R&D capital because of investor concerns about future price controls. Another study determined that just the threat of such regulations reduced R&D investment by $1.6 billion.

Today, concerns about price controls, approval times, and delays from reimbursement reviews are linked to the leveling off and decline of venture capital investment in biotech innovation. Since 2009, there has been a 23% decrease in the number of investments in biotechnology startups. At a time when new investments should be increasing, fewer medical startups are being funded resulting in less innovation.

It takes more time and money to develop and gain approval for a new, targeted cancer medicine than ever before. Rather than price controls, let’s find faster, more cost-effective ways to develop personalized medicine. That would not only stimulate investment, it also would put us on a pathway to a world free from cancer.

  • 1. Current estimates based on “Has Medical Innovation Reduced Cancer Mortality Frank R. Lichtenberg, Columbia University and National Bureau of Economic Research, Revised 12 April 2013
  • 2. The impact of pharmaceutical innovation on disability days and the use of medical services in the United States, 1997-2010 Frank R. Lichtenberg. Columbia University and National Bureau of Economic Research
  • 3. Centers for Disease and Prevention’s National Center for Health Statistics. Health, United States, 2011: With Special Feature on Socioeconomic Status and Health. Available at . Accessed 11/16/12. PhRMA Annual Reports 1960-2010. Available at . Accessed 11/16/12.
  • 4. DiMasi JA, Hansen RW, and Grabowski HG. The Price of Innovation: New Estimates of Drug Development Costs. J Health Economics. 2003 (22); 151–185. Note: Data for early 2000s is adjusted to 2000 dollars based on correspondence with study author. DiMasi JA and Grabowski H. The Cost of Biopharmaceutical R&D: Is Biotech Different? Managerial and Decision Economics. 2007 (28): 469–79.
  • 5. University of Utah Drug Information Service accessed at

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