In an an article under the heading U.S. Consumers Foot the Bill for Cheap Drugs in Europe and Canada Megan McArdle
wrote in the Bloomberg View. "
A few days ago, when I remarked that U.S. pharmaceutical prices
subsidize much of the research that benefits the rest of the world, I
got various forms of push back, so it seems worth running, briefly,
through the logic:
1. Both critics and boosters of pharma agree that prices are higher here than elsewhere.
2. Therefore, the U.S. accounts for a disproportionate share of pharmaceutical profits for companies that develop new drugs.*
3. Profits provide both incentive to develop new drugs and the cash with which to do so.
4. Drug companies
are, in fact, needed to bring large numbers of drugs to market.
5. New drugs are valuable.
That’s
not a very interesting argument, though it is one we’ll surely be
having over and over again. But there was an interesting question asked
in the comments: How do we make Europe and Canada and Japan bear part of
the costs of drug development? I’m going to sound like a Negative
Nellie here, but the answer is, we don’t.
Let’s start by pointing
out that the problem is not that we’re paying Canada’s “share” of
development for the drugs we get. This is not how markets work. Drug
companies charge what the market will bear for the drugs they make, both
here and abroad. Here, where the market is largely private, that share
is small. Abroad, where the “negotiation” consists of governments
telling you what they are willing to pay, even as you know that they can
always change the law to shorten your patent term so that other
countries can manufacture your product, using your research for free.
There’s
more to it than that, to be fair. Yet when negotiating with other
governments, pharmaceutical companies operate at a severe disadvantage,
not because the governments’ buying power is so vast (the national
health-care systems of Canada and many European countries cover fewer
people than
Aetna),
but because the people you’re negotiating with can change the rules
under which your product gets sold. At any point they can say, like
Lord Vader, “I am altering the deal. Pray that I do not alter it any further.”
But
if Canada started paying more, that wouldn’t mean we’d pay less. Drug
companies are charging what they think we will pay. The result of
Canadians and Europeans paying less is not that we pay more for drugs;
it’s that fewer drugs get developed. To the extent that they are harming
us, it is in hindering the development of cures or better treatments
that we are missing, and don’t even know about.
Unfortunately, this is a classic case of
Bastiat’s dilemma.
It is easy for each country’s government to see the high prices that
people are paying and intervene to lower them. It is hard for each
country’s government, much less its citizens, to envision the new
medical treatments that they might get if they paid more for drugs. So
their incentives are heavily skewed toward controlling the price here
and now, even if that means losing future cures.
Drug development is essentially a giant international
collective-action problem. The U.S. has kept it from being a total
disaster because we don’t have good centralized control of our insurance
market, and our political system is pretty disorganized and easy to
lobby. If that changes -- and maybe we just changed it! -- we’ll knock
down the prices of drugs to near the marginal cost using government
fiat, and I expect that innovation in this sector will grind to a halt.
Stuff will still be coming out of academic labs, but no one is going to
take those promising targets and turn them into actual drugs.
I
don’t expect this to happen right away, but if the Affordable Care Act
does result in some form of pharmaceutical price controls, I think we’ll
see the death of Big Pharma, after which we will realize, much to the
surprise of folks such as Marcia Angell, the former editor of the New
England Journal of Medicine, that they did a bit more than just printing
pretty labels and inventing new cures for baldness.
There are
some promising alternatives. The main two that have been suggested are
prizes and having the U.S. government get into the business of
developing actual drugs, rather than just funding basic research. I’m in
favor of trying both of these approaches. But so far, prizes have not
proved themselves as ways to fund what is essentially commercial product
development -- at least, not at the same level that patents do. Nor has
the government. As we’ve just seen from
the government’s attempt to develop a Travelocity-like site for health insurance,
there are reasons to think that government might not be very good at
that sort of thing. I don’t mean to slur the government -- governments
absolutely have developed drugs in the past. But these are not the
majority, and government processes often make it hard to do things that
companies do easily."
Our take on this editorial in Bloomberg by
Megan McArdle
is that the headline and the facts in the story at
times somewhat confusing because it gives the impression that all
research is done in the US by US companies and institutions. Fact is
that among the 10 top global pharmaceutical companies 5 come from the
US and 5 from Europe.
These are: 1) Pfizer, USA 2) Novartis, Switzerland 3) Sanofi, France 4) Roche
Holding, Switzerland 5) Merck & Co., USA 6) GlaxoSmithKline, UK,
7) AstraZeneca, UK 8) Eli Lilly & Co., USA, 9) Abbott Laboratories,
USA 10) McKesson, USA
On the other hand one can fully agree with the statement on the Affordable Care Act, which notes "that if the Affordable Care Act result in some form of
pharmaceutical price controls, I think we’ll see the death of Big
Pharma, after which we will realize, much to the surprise of folks such
as Marcia Angell, the former editor of the New England Journal of
Medicine, that they did a bit more than just printing pretty labels and
inventing new cures for baldness".
Anyway,at present, whatever way you look at it, the pricing
structure differences between the US, Canada and Europe are abnormal,
to say the least.
EU-Digest
