Filed under: Business, Health, Politics | Tags: Business, Health, Health care, Health insurance, Medicare, pharmaceuticals, United States, US
Essay question: The US’s drug market is at least as artificial and overregulated as the European one. But in the US, the regulations create higher drug prices, while in Europe they create lower ones. Discuss.
Here’s the deal. In European countries, national drug price regulating bodies set the maximum price at which pharmaceuticals can be sold. They do so based on the average price at which the drug sells in other European countries. (For new drugs, the regulations are looser and based on cost-benefit analyses, to promote innovation.) Is this some kind of Soviet-style non-capitalist system? Of course not. There are still lots of different buyers of drugs; it’s just that these buyers have all banded together into cooperatives at the country level to leverage their purchasing power. And they all insist that they get the same price the other cooperatives (countries) get. That’s the same thing you do at the supermarket when you assume that you’ll pay the same price for a tube of toothpaste as the next guy in line, rather than have the cashier look you over and say “You look richer than him — for you, the price is ten bucks.” There are lots of markets in which the only buyers are a few large cooperative organizations. Iron ore, say. And the steel companies that buy iron ore presumably negotiate pretty hard to ensure they pay the same price as the other steel companies, without anybody accusing them of restricting the actions of the free market. The European market for pharmaceuticals is basically the same thing, but at the level of countries. It’s not an unfree market; it’s a free market with 25 large, powerful buyers (the EU countries) who each insist they get roughly the same price as the others.
Now, an iron ore miner could look at one steel company and say, wait, we’re not going to sell you ore at that price. You had much higher profits than the other guys last year, so we’re going to charge you more because we know you can afford it. But this obviously wouldn’t work. The steel company could just turn around and buy the iron ore from a middleman, another steel company perhaps, at a tiny markup from their low price. Similarly, if the cashier at the supermarket told you they were going to charge you $10 for a tube of toothpaste, you’d just ask somebody else in line to buy one for you for $1.50. And so you’d figure it would be impossible for pharmaceutical companies to charge Country A more than Country B — Country A would just start buying its drugs from Country B.
So how is it possible that pharmaceutical companies can charge more for their drugs in the US than they can in Canada, or France, or Germany? We all know the answer: because the US bars retailers or health care providers by law from reimporting drugs from other countries. That is a completely artificial market restriction that wildly distorts the prices of drugs in the US. No other commodity or manufactured good is restricted in this fashion in the US — it would be illegal under WTO rules. And the effect is to artificially jack up drug prices in the US, at the expense of US consumers and taxpayers, by allowing pharmaceuticals companies to price-discriminate against Americans.
Many people (not just Megan McArdle) argue that only the US still has a free market for pharmaceuticals, which is why pharmaceuticals companies can make such high profits here, and that the US market is thus underwriting all the R+D in new medicines. Whether the US actually is underwriting all the R+D is still something of a debatable question, but it’s absolutely false that the US has a free market in pharmaceuticals. The US prohibits anyone from buying drugs at low world prices. Meanwhile it pumps government money into buying drugs in the US, through Medicare (which is not allowed to negotiate for lower drug prices with manufacturers) and through the employer health insurance tax exclusion. The natural effect is to drive up drug prices in the US at consumer and taxpayer expense. It may be true that Americans are subsidizing R+D in the pharmaceuticals industry. But that’s because the government forces Americans to pay artificially high drug prices. If you believe free markets are the answer to high health care costs, you have to, at a minimum, allow US retailers to reimport equivalent drugs and medical equipment from Canada and Europe, where prices are lower. Then we can talk.
*Add: Megan points out in comments that this is the way it works for all IP. And she’s right. Good point. I should probably not think up posts on a Sunday while swimming laps. The market in pharmaceuticals isn’t as free as the market in, oh, apples, but it’s as free as the market in DVDs. This is in fact an unavoidable feature of an IP market and if the US went for David Vitter’s proposal to allow reimportation of drugs from Canada, you’d probably just end up with a lot of companies putting clauses in their distribution contracts with Canadian distributors that they’re not allowed to resell back into the US.
I remain somewhat baffled as to why large American drug purchasers are unable to negotiate prices at levels close to those in Europe. Kaiser Permanente says it has over 8 million members. That’s larger than the populations of Belgium or Denmark. Maybe drug manufacturers figure a decision by Kaiser not to buy their drugs would result in Kaiser clients switching to other insurers, which means Kaiser has less bargaining power than Denmark, whose citizens are unlikely to move to Germany just because a few drugs are unavailable. Also, while Kaiser actually might get good prices because it’s an integrated HMO, I would imagine that more traditional insurers would have the problem of separation between the docs who are prescribing the medication and the insurance company deciding whether or not to reimburse it; the insurer, who would be most interested in negotiating the low price, would not actually be the one purchasing the medicine, and that mean there’s no one bargaining agent who has both the client numbers and the strong interest in bargaining down the price.
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