U.S. companies succeed and maintain their success by engaging in research & development (R&D) that results in innovative products and services reaching customers around the world. But U.S. policies that create tax or regulatory penalties, such as the drug pricing and excise tax proposal lawmakers are considering in the reconciliation package, can curtail R&D spending and the resulting innovation.
That story has played out before in Europe, as many countries pursued drug pricing policies in the 1990s that led to an exodus of R&D activity and other negative effects. U.S. policymakers should learn from that experience before pursuing similar policies in the reconciliation package that could chill U.S. R&D spending and medical innovation.
Today, the United States leads the world on almost every measure of pharmaceutical R&D and innovation. But that has not always been the case, and it will not necessarily continue if lawmakers pursue harmful tax and regulatory policies.
Until the 1990s, biopharmaceutical R&D in Europe was consistently higher than in the United States. Research by Nam D. Pham and Mary Donovan of ndp analytics explains how the diverging policy approaches of Europe and the U.S. in the 1990s reversed that trend:
Price controls and other interventions in the European medicines market decades ago—and the adoption in the U.S. of more market-friendly drug policies—corresponded with the shift to the U.S. as the world leader in biopharmaceutical R&D. … In the 1980s and 1990s, as European governments adopted stringent drug price control policies, the U.S. took the opposite tack to maintain and enhance its market-based system. As a result, the biopharmaceutical industry in the U.S. gained momentum, increased R&D investment, jobs and drug innovation, while European biopharmaceutical innovation began to lag. By the late 1990s, the total amount of biopharmaceutical R&D investment in the U.S. surpassed Europe, and the U.S. benefited from significant job expansion in the sector.
Europe pursued “suppressive public policies to control medicine prices,” and since then, its R&D investments have lagged the United States. Over the past two decades, the U.S. has been the leader in funding biomedical R&D, accounting for an estimated 70 to 80 percent of global funding. The same report highlights that as a share of GDP, U.S. pharmaceutical companies invest more than three times as much as European companies. It also explains that the U.S. excels at developing and introducing new drugs: “from 2004 to 2018, U.S.-headquartered enterprises produced almost twice as many new chemical or biological entities (NCEs and NBEs) as did European ones.”
In a 2006 report, the European Commission (EC) noted:
Europe is lagging behind the US in its ability to generate, organise, and sustain innovation processes and productivity growth in pharmaceuticals. Moreover, a disproportionate share of pharmaceutical R&D is performed in the US, with negative consequences in terms of both high value-added employment and complementary investments in clinical research. Cost policies on behalf of European Social Security institutions can explain to a certain extent the different dynamics characterising the EU pharmaceutical industry vis-à-vis the US.
While the EC noted other policies that hold back Europe, the net effect of drug pricing policies was to slow R&D spending and the resulting innovation. For example, Golec and Vernon estimated that by 2004, the real costs of the European Union drug pricing policies were “about $5 billion in forgone R&D spending, 1680 fewer research jobs and 46 forgone new medicines. Prospective long-horizon costs for the EU are estimated at between ten and 20 times these costs. … These policies essentially trade off the health and employment opportunities of future generations for cost savings for current pharmaceutical consumers.”
While current consumers enjoy lower prices after drug pricing legislation is implemented, studies also show the policies lead to limited or delayed access to new drugs for consumers. A U.S. Department of Commerce report notes that such delays “can have a direct impact on health outcomes by limiting early access to the most effective new drugs or slowing adoption of new medical advance.”
Another concern that arises as the U.S. considers drug pricing policies is where R&D activity might go in response. A 2020 report notes, “The United States was once a global also-ran in biomedical innovation, but it’s become the world leader thanks to the adoption of a broad set of public policies.” It also explains that a number of competitors have implemented strategies to attract life-sciences innovation, including China, Singapore, Japan, and Sweden.
Rather than pursuing policies that have demonstrably reduced R&D and innovation elsewhere, and that would disincentivize R&D in the U.S., lawmakers should continue to ensure an ecosystem that encourages risk-taking and R&D.
Was this page helpful to you?
The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work?
Share This Article!
Let us know how we can better serve you!
We work hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better?