Reader B.C. noted this on Ezra Klein’s blog over at The American Prospect, talking about Mark Warner’s Senate candidacy in Virginia. He quotes Warner as saying:
” We need to rationalize drug costs. I won't stand up here and bash pharma. But it's not fair that Americans pay for research and development of the whole world, as other countries all have some pricing constraints."
And Klein then adds:
As readers of this site know, our decision to forgo national bargaining (or even Medicare bargaining) while every other country does use their size to drive down costs has led to a situation in which we pay far more so that Canadians and the French can pay far less. That's what Canadian Drug Reimportation is all about: Buying the same drugs we buy here, but at the prices negotiated by the Canadian government. It's galling, and I'm glad to hear Warner giving voice to it.
It is galling, I have to admit, and Warner’s correct that the US market must be paying for the majority of the R&D expenses of the pharmaceutical industry (since this is where the majority of the money is made, in most cases). My reply was, though, that I was worried that Klein (and Warner?) might think that the solution was to run US prices down to those of the other countries, presenting my industry quite a shortfall on its hands. Here's B.C.’s reply to that (this is him, not Ezra Klein or Mark Warner):
”I disagree with your conclusion. If you have three people bargaining to buy goods and one is willing to pay much more than the others without regard to what the other two will pay, you will sell to him at the higher price and sell excess supply to the others at the lower price, if you are so inclined.
But if all three bidders have the same market clout, then something will have to give. The market will probably reset pricing for all bidders. It might mean reductions in monies available for R&D, it might not. If the bidders are on a more or less even playing field, the market will determine that. I think that is what Klein is saying.
As things stand now, one of the buyers has given the drug companies have a massive put. That's not fair to the (involuntary) stakeholders of that buyer. If that put is removed, there is a much higher likelihood of a more equitable distribution of the burden of R&D. OTOH, as long as that put exists, there is zero likelihood that the current inequitable distribution will be corrected.”
My take on this is that health care spending is in a different category than many other things, for reasons both psychological and political. You’d expect some ordinary economic good to be divided up among three bidders in this way, but I wouldn’t expect medicine to be. It would be politically popular to see prescription drug prices go down here in the US, but it would be (almost certainly) politically impossible to see them go up by the the corresponding amount in Canada, France, Germany, etc.
Of course, I’ve made an assumption there, that the current revenues of the drug companies would remain roughly constant, and just be divided up in a different way. That's probably not how it would work. If you somehow put that idea to a vote across all the countries involved, I’m sure it wouldn’t pass. The majority of consumers, and probably the majority of politicians, would be glad to set the price of drugs by fiat, and that setting would be dialed down to “nice and cheap”. The time lag involved in drug discovery would let you do this and not notice many problems, at least on the pharmacy shelves, for several years.
And that’s the problem with setting prices that way: the temptation is for whoever is on the thick end of the whip – that is, whoever can determine prices by force of law – to set them and be damned. It’s not just drugs: I’m sure that people would, if they thought they could, vote themselves cheaper cars, not to mention the gasoline that runs them. But oil’s a commodity that trades freely, and there’s a constantly changing market price for it. A new medication, on the other hand, has just one supplier. There's just one neck presenting itself.
That turns negotiations between drug companies and governments into a rough business. Very quickly, things can come down to their ultimate positions: “We won’t let you sell in this country” versus “We won’t let you have this drug”. Note that both of these end up with the citizens involved being denied a chance at medical care. It’s as if rug-merchant transactions tended to escalate into threats to set the bazaar on fire.
Governments have another weapon when things get to that point: compulsory licensing. This has already come up with Brazil and Thailand, and will no doubt be threatened again in other places. And that brings me to my depressing point: this playing field will never be level.
Ideally, I would like to see drugs, and drug companies, compete strictly on price and on effectiveness. And I’d like to see that happen around the world, and let supply and demand sort things out. I think that prescription prices would go down a bit here, and up in many other countries. At the same time, generic drug prices would probably drop outside the US. But it won’t happen. The more I think about it, the more I fear that drugs and other health care will never trade on a free market. The temptations to do otherwise are just too great.