Are Government Grants an Effective Public Good?
Reforming research funding to lower drug prices and foster innovation
The rising cost of prescription drugs has become an increasingly heavy financial burden, both for individuals and for government healthcare budgets. Over the past few decades, prescription drug prices in the United States have surged, with spending per capita on retail prescription drugs increasing from $783 in 2007 to $1,025 in 2017, and it is projected to reach $1,635 by 2027 (The Peter G. Peterson Foundation) (Health System Tracker). This sharp increase in drug prices not only strains household budgets but also places a significant burden on public healthcare programs like Medicare, which has seen its share of prescription drug spending rise dramatically.
To combat this escalating financial strain, the Biden-Harris administration implemented measures like the Inflation Reduction Act, which includes provisions for capping out-of-pocket costs for Medicare recipients and initiating government negotiations for drug prices. In a significant recent development, the administration announced the first 10 drugs that will be subject to price negotiations under Medicare—a move that is expected to save billions in healthcare costs for seniors. This initiative marks a crucial step toward reining in drug prices, but it also underscores the necessity for broader systemic changes to address the underlying factors that drive up costs (Association of Health Care Journalists), and the ongoing need for more comprehensive reforms to tackle the root causes of high drug prices (Health System Tracker, 2024).
One of the most commonly cited reasons for the high cost of prescription drugs is the significant expense associated with research and development (R&D). Pharmaceutical companies argue that the high cost of bringing new drugs to market, often cited as ranging from $1.3 billion to $2.8 billion per drug, justifies the high prices consumers pay. But this is changing as the pharmaceutical industry has increasingly turned to mergers & acquisitions (M&A) as a key strategy for growth. In 2020, global pharmaceutical M&A deals totaled more than $152 billion, highlighting a shift away from internal R&D toward acquiring external innovations (Health System Tracker, 2023).
A potential solution that has begun to emerge organically within the industry—and could be further promoted through policy—is the disentanglement of R&D costs from drug pricing. By increasing the role of targeted government and philanthropic grants in funding early-stage research, the burden of these costs could be shifted away from private companies. This would allow pharmaceutical companies to focus their resources on the later stages of development, such as large-scale testing and distribution—effectively transforming Big Pharma into a utility-like entity.
The National Institutes of Health (NIH) budget, for example, grew from around $13 billion in 1998 to nearly $42 billion in 2023 (Association of Health Care Journalists). This increase reflects a broader commitment to advancing healthcare research, though funding growth has been uneven, with certain periods of stagnation due to budget constraints or economic downturns. There has also been a significant push towards open science, where the results of grant-funded research are made publicly available. Policies like the 2013 White House memo and the more recent 2022 memo under the Biden administration have mandated that federally funded research be freely accessible.
The existing grant methodology is likely not fit for the purpose of becoming the primary driver of new research. Critics of the current system argue that it is plagued by inefficiencies, biases and misallocation of resources. The complex and bureaucratic process of securing grants can delay critical research and discourage innovative approaches. Additionally, the distribution of funds often favors well-established institutions, which may perpetuate inequities and stifle novel ideas from smaller or less conventional sources.
Moreover, the focus on theoretical research over applied science has been criticized for failing to address immediate healthcare needs, while the shift towards open access—though beneficial in many ways—raises concerns about the financial sustainability of scientific journals (Association of Health Care Journalists) (Read by QxMD).
In response to these challenges, there have been concerted efforts to reform how research grants are allocated and managed. NIH, for instance, is working on overhauling its grant review process to reduce biases and ensure a more equitable distribution of funds. This includes initiatives to diversify the pool of reviewers and to prioritize research with clear, practical applications that can directly benefit public health. Such reforms aim to make the grant system more efficient and aligned with the broader goals of healthcare reform, potentially easing the burden of drug prices by fostering innovation through better-targeted funding (Association of Health Care Journalists).
As the current and future administrations continue their efforts to lower drug prices, considering how research funding is allocated could play a crucial role in achieving lasting reform. By shifting more early-stage research to public funding and focusing Big Pharma’s role on distribution and large-scale production, we could see a future where life-saving drugs are both innovative and affordable.
