New PRI analysis challenges case for drug price controls

SACRAMENTO — A new issue brief from the Pacific Research Institute claims that innovative biopharmaceutical companies are not the most profitable in the U.S. healthcare system, challenging a key reason used to justify government drug price controls.

Click to download the brief or handy one-page synopsis.

The brief, released by PRI’s Center for Medical Economics and Innovation, examines financial data from over 1,200 publicly traded U.S.-based companies across five major health care sectors from 2022 to 2024. Using economic value added (EVA)—a risk-adjusted measure that considers the cost of capital—the study finds that biopharmaceutical manufacturers earned an average EVA of 1.1%, well below the overall U.S. industry average of 6.3%.

In contrast, health insurers, pharmacy benefit managers, and other healthcare support services reported average EVA returns of 33.1%, according to the brief reports.

Despite those lower returns, drug manufacturers allocated 33.2% of their revenues to research and development during the period studied—more than any other health care sector and nearly ten times the broader U.S. industry average.

“These findings directly contradict the narrative that drug manufacturers are price gouging,” said Dr. Wayne Winegarden, director of PRI’s Center for Medical Economics and Innovation. “Once you properly account for risk and capital costs, innovative drug manufacturers are among the least profitable participants in the health care system, while taking on by far the greatest financial risk.”

The brief concludes that calls for drug price controls fail on their own terms, noting that risk-adjusted returns in the biopharmaceutical sector are modest compared with other parts of health care. It warns that further compressing returns could reduce investment, slow medical innovation, and limit the development of new treatments.

“Drug affordability is a legitimate concern, but price controls are the wrong solution,” said Sally C. Pipes, PRI president and CEO. “Blunt government price setting threatens future medical innovation while leaving untouched the distorted pricing system that actually drives higher costs for patients.”

Instead, the authors suggest reforms focused on increasing pricing transparency and addressing incentives within the drug supply chain, rather than setting government price caps.