Lower drug prices can improve innovation

An often made claim is that high drug prices are necessary for innovation. We qualify the innovation claim. Drug prices can be too high when the price exceeds the value of the drug to society. Such prices lead to investment distortions. We propose a benchmark for identifying these cases in practice. Using the Netherlands as an example, we show that when innovation incentives are distorted. In these instances high prices crowd out other health investments and distort innovation. We subsequently discuss how competition law can be applied in this area. We conclude that in the case that a country pays more for a drug under patent protection than the proper willingness to pay, competition authorities can use this feature not only to counteract the argument that such prices are needed for innovation but also as an additional way to operationalize the United Brands test for excessive prices.