Prices Prices Prices
The U.S. Health Care System: The Global Sugar Daddy
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  • David Zacharisen

    I’m not sure why the government in it’s Medicare and Medicaid program wouldn’t take a “Best Nation” approach in negotiating for drug purchases, i.e. that it would not pay more than the lowest price of the drug sold in any other location. That puts the decision squarely on the drug producer–if they want to sell the pill in Egypt for $11, then Medicare/Medicaid won’t pay more than the same $11. If they believe they need to market the pill at $84K for a 12 week course, then Eqypt will need to spend the same.

    The problem with having the government negotiate or set absolute drug prices is that there will be a lot less drug innovation–that innovation being the primary mover of better health outcomes in the last 50 years (at least since the time basic water and sewage was addressed)–since there will be a lot less revenue for drug products. Modern drug innovation costs lots and lots, especially when you factor in the cost of drugs which fail during the various stages of animal and human clinical trials.

    Also having huge disparities in pricing (between the US and Canada and Europe primarily) has a corrosive effect on the public’s mode to pay prices which will continue to support profitable drug development.

    • Andrew Allison

      Medicare doesn’t negotiate drug prices. Part D is private insurance and, ultimately, the insured pay for the drugs via premiums. Here’s thought: patients should insist on generics and doctors be required to certify that there’s clinical evidence that a proprietary drug is more effective than generic alternatives. Pretty simple to implement: no insurance reimbursement for proprietary drugs that don’t meet the criterion. Just another example of the perverse effect of private insurance on health care costs.

      • Boritz

        Insurance companies often include only generics (when they exist) on their approved list. &nbspSometimes the doctor will insist on prescribing the name brand anyway (because it’s the only name he has memorized?) and the patient is on the hook for the full cost.

        • Andrew Allison

          A doctor who insists on a proprietary Rx when there’s a generic version is a charlatan. I’m pretty sure that in most, if not all, states, it’s the patient’s decision, not the doctors. The pharmacies have a financial incentive to dispense the proprietary drug. It’s up to the patient to insist on generics, and making them responsible for the difference in cost is probably the best incentive. They should also ask their doctor whether there’s an alternative the the brand name drug that has a generic version (the are numerous different drugs for most conditions). The “we need high prices to fund research” canard should be shot down once and for all — why should US consumers pay for the World’s drug R&D?

          • f1b0nacc1

            You say that “we need high prices to fund research” is a canard, but you don’t really explain why. Perhaps it is unfortunate that the US gets stuck with the tab for drug R&D, but the truth of the matter is that if we refuse to pay it, it simply will not get done. We are the unlucky ones stuck with the check, and as much as I dislike it, this is the downside of being in a free(ish) market.
            If you have some solution to this other than ‘get used to low rates of innovation’, let me know…

          • Andrew Allison

            I thought “why should US consumers pay for the World’s drug R&D?” was self-explanatory. The R&D costs should be spread over the world-wide market, not paid exclusively by US consumers.

          • f1b0nacc1

            And the supply of compliant supermodels should be distributed equally as well, but in the real world they end up with the rich successful.
            The fact of life is that if we do not do it, it isn’t going to happen. This may not be fun, it may not be fair, but it is real. We have the choice of the research and development being underwritten by high prices in our marketplace or not having the R&D, and the benefits thereof. I don’t like it any more than you do, but lets not pretend that somehow pharma is just going to fund more R&D out of the goodness of their hearts without some way to recoup the costs.
            Either way, it isn’t a canard, it is a statement of fact…dislike it all you want, but it isn’t a lie.

          • Andrew Allison

            Wrong. The facts are that pharmaceutical companies have to develop new products or go out of business when the patents on the old ones expire, and that if the US weren’t picking up the tab for the R&D, the companies would demand more from the rest of the world.

          • f1b0nacc1

            Evidence? Nice conspiratorial assertion, but no evidence…
            As for the companies demanding more from the rest of the world, why do you think that the world would pay more? Most of the rest of the world lives under systems that prevent them from paying directly (by controlling either direct payments or reimbursements), and thus have managed to limit the demand quite effectively. Now one might consider this a good thing (a debateable point), but certainly it has its costs.
            Full confession: I am kept alive by medication that didn’t exist 5 years ago, and new ‘fixes’ have substantially reduced the side effects. I have seen how medical advanced save and improve lives. It isn’t cheap, it may not even be fair, but it is real.

          • Andrew Allison

            It’s self-evident. And the fact that you are benefitting from medical advances is irrelevant to a discussion of how they should be paid for.

          • f1b0nacc1

            So in other words, you have no evidence at all?
            Drug companies, like everyone else, respond to incentives. Create disincentives to developing new drugs, they will stop doing so. What could possibly go wrong?

          • Andrew Allison

            None so blind! The price differential between proprietary and generic drugs makes it self-evident that pharmaceutical companies have to develop new products or go out of business when the patents on the old ones expire. Furthermore, nobody is suggesting disincentives to the development of new drugs. What is being suggested is that the cost of doing so should be more equitably distributed between the US and the ROW.

          • f1b0nacc1

            When drugs become generic (a result of the IP laws, not anything internal to the pharma companies), high prices cannot be sustained because there is no longer a monopoly on production. This, if anything, provides a huge incentive to keep prices high at the beginning of the product cycle, if for no other reason than to recoup overhead costs. It proves absolutely nothing about how and why products are developed, and everything about the incentives built into the IP laws.
            As for how the R&D costs should be distributed, in the real world they are distributed by who can be compelled to pay for them. If they cannot be recouped, the expenditures will not be made in the first place, to the enormous disadvantage of everyone. Might I suggest that you look at vaccines and antibiotics (both very heavily regulated, and thus under extremely restrictive price regimes) as superb examples of this process in the real world. The rate of innovation (a direct outgrowth of R&D) in these areas is almost nil, despite the significant need for these vital medicines. This is a direct result of the incentive process at work.
            As for the pharma companies and their motivations, about 70% of their profit (according to their SEC filings) are tied to so-called ‘lifestyle drugs’ (an example is the now genericized Viagrara), not medicines. Given the very small number of users of the more expensive drugs (and the extremely expensive testing and certification regimes necessary to develop and produce them, not to mention the large number of ‘failed’ drugs, which never make any profits), it isn’t difficult to see how these drugs have to be expensive to have any chance of recoupling their costs.
            If you are suggesting that the drug companies are engaged in some secret conspiracy to sell unnecessary medicines at inflated prices, offer some evidence… Note: certainly drug companies do attempt to milk every nickel of income out of a drug under IP, but that is hardly evidence of nefarious fraud.

    • keith12345

      The problem with the Best Nation approach is that a.) the people in many poorer nations (e.g. Egypt) can’t afford pay the true market value of the drug, or b.) many wealthier nations have legal price caps on drugs that won’t allow a pharmaceutical company to sell drugs for their true market value, and c.) it would cause an international humanitarian and political outcry if pharmaceutical companies refused to provide affordable drugs to the majority of the world “simply” because they couldn’t sell them at fair market prices. You think pharma companies are seen as evil now…?

    • Andrew Allison

      The government doesn’t buy drugs. It should, and utilize the resulting purchasing power.

  • Kevin

    David’s idea is good. Mine would be to tie patents to it: the US

  • Andrew Allison

    Oh, so because pharmaceutical costs account for just one out of every ten dollars spent on health care (when they should account for maybe one out of a hundred), we should ignore it and look elsewhere for cost savings???

  • Breif2

    OK, so differential pricing is highly irritating, unsustainable, we’re being played for patsies, etc. So we adopt David’s appealing solution (“Medicare/Medicaid … would not pay more than the lowest price of the drug sold in any other location”). What happens when other countries simply steal the relevant intellectual property? How much of a trade war are we willing to sustain? Especially when many will be assailing single-pricing as condemning the poor of the Third World to death, and causing the spread of pandemics?

    (To avoid misunderstandings: I used the word “appealing” sincerely. I simply wish to see the consequences carefully weighed.)

    • Andrew Allison

      Medicare doesn’t buy drugs. Part D is (private) insurance, so the cost of the drug plus the usual exorbitant overhead is paid by the insured (in the form of deductible, co-pays and premiums. Medicaid is welfare, and the cost of the drugs is paid by the taxpayer. The problem in both cases is that there’s limited negotiating power. You’re correct, of course, that single-pricing would result in “many . . . assailing single-pricing as condemning the poor of the Third World to death, and causing the spread of pandemics”. Big Pharma would be at the front of the line. However, there would be nothing to stop developed countries from directly subsidizing the poor of the Third World. The problem today is that the US healthcare system is paying the entire bill.

  • Duperray

    I would never believe that drug industry works only to improve Human health ! They work for money and patents.
    How many new drugs – promoted by labs as “having cost a lot to develop” s- ubstituting existing low cost drugs, have been demonstrated 10 years later to not have any better statistical result?
    Health Industry is essentially a mafia, more damaging in some countries than others.

    • Brian Wachs

      So much ignorance, so little space to refute. Yes, they work for money and patents… ones that improve human health.

      Also, the FDA does not approve drugs that look like they will not have a better result… if you think the FDA is bad at it’s job, direct your criticism to them, but be aware that they’ve already admitted that aspirin would not have gotten through the approval process for being duplicitive, so if anything the problem is the FDA is too hard on duplication, not too easy.

      If you’ve heard of drugs getting through that process and still not being better? Them’s the breaks when doing research. If we already knew what statistical result we’d have, the FDA wouldn’t be needed in the first place.

      It always amuses me to see how many people compare private industry to mafia while oblivious to the fact that government is a much closer approximation. How many enforcers from Merck have visited your house this year, buddy?

  • Boritz

    “None of these measures will address the ethical problem of other rich
    countries (like France, Switzerland and the UK) free-riding off of
    innovation financed by the more dynamic American marketplace for

    ACA addresses this handily starting with dynamic marketplace fueled innovation. &nbspJust as there is no political leadership in the West there will be no R&D leadership. &nbspWe’re all Belgium now.

    • Andrew Allison

      Isn’t the ethical problem that the US is not making the same demands of drug companies that the (single-payer) countries you mention are? You don’t suppose the campaign contributions to the drug companies’ representatives in Congress has anything to do with this?

      • Like_wow

        If the US made the same demands of the drug companies as the single payer countries innovation would almost stop. Someone has to pay for the existence of organized teams of highly trained scientists, production facilities, clinical trials, specialized information technology, etc. At the moment, that is the US consumer. It’s where innovation starts. The ethical issue is whether other rich countries should pay their fair share for the cost of the creative process. They don’t because single payer governments are monopsonists that buy at the lowest price the drug companies will accept… after the US customer paid for the creative work. US prices could be lower if others shared the creative cost. If no one pays for creative work, it stops. This has nothing to do with campaign contributions to congress, not that there isn’t a lot of that too.

        • Andrew Allison

          Another Big Pharma canard. If creative work stops, they go out of business as the patents on their cash-cows expire. Not gonna happen. The reason that the drug companies are willing to accept lower prices from the rest of the world is that their soaking the US consumer. If that were not the case, they’d hold out for more.

          • Brian Wachs

            Marginal Cost is not a Big Pharma canard. It is a basic economic concept that everyone should know before commenting on medical policies or technologies.

          • Andrew Allison

            Your comment is both offensive and irrelevant. Put in a way which you might be able to grasp, the US consumer pays for the R&D but does not benefit from the marginal cost, which is the same whether the drug is sold in the US, Europe or the Third World. What’s different is the gross margin.

  • Pete

    It’s not just health care where the U.S. is the sugar daddy for the rest of the world.

    Look at computers, the internet, cell phones, agriculture technology, etc. etc. The world rides on American technology and leadership. .

    • Andrew Allison

      We’re talking drugs, not healthcare, and In the case of electronics, agriculture, etc, the price differences are insignificant.

      • Pete

        The point I was making was that the U.S. is the center of creativity in the world.

        • Andrew Allison

          Technological innovation perhaps; creativity is a step too far.

      • ipencil

        What does your comment even mean? And how can you claim the “price differences are insignificant” when comparing electronics and agriculture?

        • Rick Caird

          The point Andrew is making is well known. The same drug costs significantly more in the US than it does in other countries. That is because the R&D costs are essentially only allocated to the US.

          The situation on electronics and agriculture is the prices are about the same world wide. There may be some differences, but they are not major.

    • ThomasA

      In those cases, the companies still make a profit on what they sell. But drugs are different. The companies take a loss on new drugs on their overseas sales. This loss is compensated for by charging Americans more.

  • How about a law saying that drug companies can’t sell at prices abroad that are lower than US prices? This would probably increase profits of drug companies and reduce prices for US citizens both.

    • ipencil

      How about a law saying that drug companies can’t sell at prices abroad that are lower than US prices?

      Government intervention is the problem and your solution is more government intervention?

      This would probably increase profits of drug companies

      This is incorrect, for the same reason it’s incorrect to claim that the minimum wage increases take home pay of low skill workers.

      and reduce prices for US citizens both

      Again, this is incorrect.

      • Brian Wachs

        Since the government intervention we’re talking about is from a foreign government, it is not necessarily the case that government intervention from our own government won’t be a suitable counter. I happen to think that we don’t have any productive recourse for action in this case, but unconditionally treating government intervention as an evil risks alienating anyone who isn’t already part of the choir.

        • Right ipencil. You should be more modest. I am an economics professor, so I have some authority to assert things without giving reasons, but you don’t.
          First of all, government intervention is not the problem. If the government didn’t actively support patent rights, American companies would get zero from abroad.
          Second, the purpose of uniform prices would be to give the drug companies leverage in negotiating prices with European and other governments. If the drug company needs to reduce US prices if it ever reduces, say, the Italian price, the Italian government has little leverage. I expect the drug companies would mostly bring up their foreign prices but also reduce their US prices slightly if they were forced to price uniformly, thus having higher profits but with lower prices for US consumers.

          • ipencil

            I have some authority to assert things without giving reasons

            Ah, appeals to authority. Totally valid logic. My mistake.

            First of all, government intervention is not the problem.

            So Merck can sell any drug it wants to willing customers without first checking with a government official? And if that customer is foreign, your claim is that no foreign government official gets involved?

            Second, the purpose of uniform prices would be to give the drug companies leverage in negotiating prices with European and other governments.

            And as we all know the intention of price fixing is always the result. Despite price fixing generally speaking being flops pretty much every time, this time it’s different, right?

            I expect the drug companies would mostly bring up their foreign prices but also reduce their US prices slightly

            I like how your expectation of how other people will spend their money automatically means that’s how people will spend their money.

        • ipencil

          Since the government intervention we’re talking about is from a foreign government, it is not necessarily the case that government intervention from our own government won’t be a suitable counter.

          Because nothing says consumer protection like TWO bureaucrats preventing you from trading as you want?

          unconditionally treating government intervention as an evil risks alienating anyone who isn’t already part of the choir

          Right. My argument is invalid because FEEEELLLIIIIINGGGGSSS!!

  • Brian Wachs

    Egypt will not pay more for its drugs, nor will the rest of the world. Their socialized medical systems can’t afford more american-like drug prices, and therefore they will refuse to pay. They will also not go without: all the governments need to do is put forth sob stories about cruel American profiteers robbing needy, sick Egyptians and the government will simply break the patents and the pharma companies will get 0$ per dose instead of 11$. What will America do about that? Most of the world has heavy government involvement in drug price-fixing. Can America wage a world-wide trade war with all the governments who are so used to riding this gravy train that they will not start paying their fair share?

  • FriendlyGoat

    Information is key. First of all, we should not allow advertisements for prescription drugs in America which do not clearly state the retail price for a course of treatment. Tired of watching drug ads with dogs catching frisbees—-when what you should be seeing is the eye-popping prices?

    Secondly, the more we see examples like Solvadi, the “NOISIER” we all would become.

  • teapartydoc

    A moratorium on copyright and patent for just five years with a return to the old 14 years and out rule would work wonders for our economy.

  • richard40

    The price difference is galling. But anybody advocating gov action to stop it needs to realize the likely effect will be to only slightly lower prices here, while greatly raising them elsewhere, or for very poor nations stopping sales completely, and possibly also leading to a lot of intellectual property theft. Maybe that is what should happen, I am sick of the rest of the world free riding on US drug research. But any leftist advocating legislation needs to realize what actually will happen, not what they wish would happen.

    • Brett Champion

      No, you could bring down drug prices substantially here in the US. The result of that would more likely be less innovation instead of rising prices overseas. Pharmaceutical firms are already risk-averse when it comes to drugs research. Any step towards bringing down prices in the US would only make them more risk-averse in where they focus their research budgets. In other words, we would just see minor improvements to existing drugs, rather than major improvements or the introduction of entirely new treatments. The US patent system already encourages too much of this.

      • richard40

        True, that could be the other option for the drug companies, cut back on research to keep US prices lower, which in the long run would be even worse.

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