[New Wave] The Correlation Between Pharmaceutical Prices and Research and Development

Recently, the United States appears to be changing in recognition of the excessive burden of drug prices. In September last year, pharmaceutical companies were required to disclose drug prices in TV advertisements, and the U.S. Congress passed the "Lowest Price Disclosure Act and the Patient's Right to Know Drug Prices Act" to increase transparency in drug pricing.

In response, the U.S. industrial think tank Information Technology and Innovation Foundation (ITIF) argued in a paper that "public policies considered when setting drug prices should be judged with a balanced perspective." The paper presents at least three compromises regarding drug prices. First, policymakers should evaluate the benefits of investing more resources in healthcare in contrast to social needs such as infrastructure, education, and income support. Second, when assessing the value of treatments in healthcare, the balance between medical services and drug expenditures should be considered. Lastly, a choice must be made between the needs of current patients and future patients.

Dr. Joseph Kennedy, who authored the paper, argues that drug prices require a balance between short-term economic efficiency and long-term innovation. While low drug prices facilitate drug purchases, sacrificing pharmaceutical companies' profits inevitably reduces incentives for new drug development. Conversely, high drug prices increase corporate profits but impose a financial burden on many patients. In other words, the ripple effects of current drug price regulations must be considered, but excessive control of drug prices could undermine long-term welfare in the future.

As a complementary measure, Dr. Kennedy advises that regulatory authorities such as the U.S. Food and Drug Administration (FDA) need to continuously rationalize the drug approval process based on safety and efficacy. He also emphasizes the importance of creating a market that smoothly operates by linking appropriate innovation rewards and prices with social benefits, which is the goal of public policy.

South Korea has the fastest-growing elderly population aged 65 and over among OECD countries. According to the National Health Insurance Service and Statistics Korea, the proportion of elderly medical expenses, which was 28.1% in 2010, is expected to expand to 50% by 2026. Furthermore, considering policies such as "Moon Jae-in Care," which strengthens health insurance coverage, uncertainty about the sustainability of South Korea's health insurance finances is increasing.

Despite some recent changes in U.S. public drug policies, doubts remain about the innovation of new drug development. There are significant differences between the U.S. public policy environment and the intensity of drug price regulation in South Korea. South Korea's drug pricing system establishes mechanisms for price reductions through economic evaluations by the Health Insurance Review and Assessment Service, weighted average prices, risk-sharing schemes, and price negotiations by the National Health Insurance Service before insurance reimbursement after approval by the Ministry of Food and Drug Safety. After listing, regulations include price reductions through additional indications (up to 5%), volume-based pricing (up to 10%), and price adjustments after patent expiration (53.55% of the initial listing price).

From the perspective of South Korea's health insurance finances, drug price regulation is understandable, but excessively low pricing of new drugs could stifle innovative activities in new drug development. Currently, most domestic companies develop new drugs by taking risks from the outset in the U.S. and Europe rather than using South Korea as a stepping stone to enter the risky global market. One reason is that if a drug is first approved in Korea, it becomes a reference country for drug prices, preventing the new drug from receiving an appropriate price that reflects its innovative value. Like the U.S., South Korea's drug pricing policy needs consideration and care to enable companies to engage more actively and challengingly in research and development (R&D) for future generations.

Jung Yuntaek, Director of the Pharmaceutical Industry Strategy Research Institute

This content was produced with the assistance of AI translation services.