The Wall Street Journal ran a long look yesterday at drug pricing in the US, and it’s hard to argue with this summary:
The upshot is Americans fund much of the global drug industry’s earnings, and its efforts to find new medicines. . .The reasons the U.S. pays more are rooted in philosophical and practical differences in the way its health system provides benefits, in the drug industry’s political clout and in many Americans’ deep aversion to the notion of rationing.
The fact that US prescription drug prices are higher than the rest of the world isn’t exactly news. The article compares US prices to Canada, England, Norway and other countries, and also goes into detail about how Norway’s national health care system negotiates prices. It’s a good example: the Norwegian authorities and the various drug companies fight it out over cost/benefit arguments until a price is reached (which is sometimes not disclosed).
So the natural assumption is to wonder why the US doesn’t do the same. One reason the industry fights so hard to keep that from happening is that the reason that drug companies are willing to get less for their products in the rest of the world is because they’re getting more for them in the largest single market, the US. It’s worth restating that point: people look at the lower prices in Canada and Europe and say therefore drug companies should charge the same prices in the US. They’re not thinking it through: prices are lower there because the prices are higher here.
Prices would rise in other countries if (say) Medicare were to be able to negotiate prices, a fact that many European governments are well aware of. They’re not going to publicly cheer on the position of the drug industry in the US, but economically, it’s clear that that’s what allows their own pricing levels. (That’s not to say that this would be a complete zero-sum situation: drug industry profits would surely go down overall if the US suddenly became more Norwegian. But Norwegian prices, and others, would see pressure that they certainly don’t now).
Those profits are what drive the industry in its current form – the funding of new drug projects, the incentive for many smaller companies to keep up their own programs (in the hopes that larger firms will use some of those profits to buy them out), and the incentives for startups to get venture capital in the first place. As it stands, these various gears and pulleys all go back to the main drive wheel of US-based drug pricing. It’s fine to think of ways in which this could be different, but any plans in this line have to begin with an understanding of just what the current system is and how it works, rather than (say) “Wouldn’t it be great if we could stick it to those evil drug companies?”, which is a common starting point.
One thing that the article doesn’t go on the mention, though, is that things change greatly once a drug goes off-patent. Generic drug prices are generally quite a bit lower in the US than the rest of the world; that’s the flip side of our higher prescription drug prices. (And that’s one of the things that upsets me about the Valeants and T*rings of the world, who are finding ways to make even those older drugs more expensive). I’ve said this before, but this is a good place to say it again: I think that pricing power should belong to the companies that are taking the risks and spending the money to discover and develop new drugs. That’s what patents are for; a reward system for just that risk-taking. In return, you disclose your inventions to the public, and you agree that after a set time period that temporary monopoly will expire, and prices should, at that point, be up to whoever can deliver the compound most cheaply and efficiently.
If instead we allow generic prices to ratchet upwards, the whole system we have now (like it or hate it) is in danger of collapsing. It’s not the firmest edifice in sight even as it stands. If we’re going to replace it, I’d rather we do so by thinking hard about it, rather than watching it disintegrate for reasons that we didn’t intend and didn’t expect.