Import Prices, Not Drugs
So Illinois will be creating a state program to get Canadian-priced drugs to its citizens. Again, we’re willing to support another country’s single-payer system, but not one at home. Again, we’re willing to send our state tax dollars across the border, into Canadian pharmacies, instead of keeping our dollars here. (Aside: who wants to take bets on when some big drug scare occurs from a tampered medication coming from Canada? I wouldn’t put it past PhRMA to sabotage a few cases of a diabetes med to scare the public into buying American.)
Matthew Holt points out the obvious buying power hypocrisy:
bq. IPI’s latest press-release claims that prices in Canada ought to be 82% of the US level but in fact they’re only 59%. So they think of course that Canadians should voluntarily increase their payments by some 35%. I assume the IPI also thinks that WalMart should start paying its suppliers a ton more every year, or is using your purchasing power only OK if you’re in the private sector? For that matter I don’t think WalMart lets its suppliers get away without innovating, but they certainly don’t let them raise prices to do it!
We could easily have cheaper drugs in this country, if the government was allowed to use its purchasing power, just like Wal-Mart has done. But the new Medicare legislation strictly forbids this. Even if you *want* the government to run more like a business, its own laws (written by pharma interests) prevent it from doing so.
Your narrow view on the subject is sad, quite frankly. I don’t want to attack you personally for your views, but I think its a bit of a lunacy to assume drug companies will sabotage drugs. If there is any reaction from the drug companies, it will be to curb the number of prescriptions sold to countries like Canada every year. (Following the economic truth: price controls result in shortages)
Concerning drug prices, it is very shortsighted attack the drug companies for the higher domestic prices. Foreign countries extort lower prices by threatening to invalidate the patents of pharmaceutical companies. (In turn, no patent rights would mean any chemist could decipher a prescription and sell their generic brand without any legal action). As a result of this widespread price control practice, Americans assume the financial burden of funneling money into drug development. (BTW, “buying power” in this case is a euphemism for the more socialism-reminding phrase “price control”)
I know your initial reaction is to say that drug companies wouldn’t lose money for R&D if price controls were imposed, the loss in income would cut into advertising. This logic is flawed though. It assumes that companies “waste” money on advertising. However, in any business, every dollar spent on advertising is spent with the understanding that it will bring in over 1 dollar in profits. Its the nature of advertising, nobody spends money advertising while only receiving 75 cents back. The CEOs of drug companies are businessmen as well. They are not as concerned with money funneled into R&D as they are with current profits. Cutting into their profits in turn cuts into R&D. They have boards and shareholders to answer to. It is in their best interests to keep current profits up, rather than shifting money into something that will not show profits for 10 years.
So the answer to lower drug prices in the US does not lie in attacking the drug companies. Attacking the drug companies is like killing the golden goose. Sure, you’ll get lower prices right now, but don’t be surprised when pipelines shrink to developing 2 new drugs every 15 years. Instead, it lies in holding foreign countries accountable in the free-market. Perhaps the WTO could do away with price controls, that would be the fairest system across the board. However, you are faced with the problem of poorer countries not able to afford the drugs. One could say “such is the nature of the beast”, and as cold a view as it is, it is true.
I think a prudent solution would be to offer lower prices to poorer countries, but on the understanding that they are only able to buy as many perscriptions as they need, and not run a surplus that could be used fraudulently against the drug companies.
It would behoove your credibility to examine issues like this before attacking anyone based on a solitary view.
I continue to be amazed at how well Big Pharma propaganda has so thoroughly permeated the thinking of reasonable persons, as I’m sure ck is.
The reason that Americans pay so much for their drugs is not because “foreign countries” have “price controls”. This is naïve and dishonest propaganda.
Drug company CEOs will price a drug as high as people are willing to buy it, no matter how unreasonable that price may be when viewed against the cost of producing the drug – and of course they would, because that is the nature of business. But if you price your product out of reach of your customers, you suffer losses when they don’t buy it. This feedback mechanism gives the customer his say in the process, the demand part of the supply-demand equation. But in American medicine, that is taken away.
To make this clearer, lets compare this to another industry, say selling SUVs. The voice of the customer is directly factored in – if manufacturers make SUVs too pricey, the customers won’t buy it. After all, the money comes directly from their pocket. But in health care, people don’t directly shoulder the burden of paying for the product. The government and the insurance companies do. This removes the balancing power in the whole free market supply-demand equation – unless governments are given the authority to act on behalf of their citizens the way any reasonable citizen would act when buying something, ie. demand a fair price.
In other countries, the governments are given the authority by their people to negotiate a fair price. This is not “price control”, despite what Big Pharma propagandists would have you believe. In health care, governments in many developed countries have taken over the role of customer – that does not in any way mean that they should not behave the way any sensible customer would in buying a product. You pay a fair price – which is whatever you can afford to pay for a product that you think is a reasonable measure of its value. But over here, we have actually medicare bills signed into law specifically stating that the government must agree to whatever price Big Pharma deems appropriate.
And so it happens – Big Pharma gouges its American customer mercilessly.
I find it interesting that whenever pro-Big Pharma types blather about this issue, they never fail to make vague reference to the glories of the “free market”, and how we need to liberalize the policies of other countries.
Dude – health care here is about as far away from a free market as you can get, outside socialism. “It would behoove your credibility to examine issues like this before attacking anyone based on a solitary view.”
Anon, you make a decent attempt at an argument, but you are clinging to an important fallacy.
Foreign governments do not “negotiate” a “fair” price on behalf of their consumers. The word “negotiate” refers to two parties working towards an equitable solution for both sides. It is not “negotiation” when one side threatens to invalidate the patent in order to get the price they want. Webster and I agree that is what is called “extortion”. The fact that foreign countries practice extortion and not negotiation makes the prices in fact, controlled prices (price controls).
This key fallacy undermines your argument. If you want to argue about domestic prices being as high as consumers are willing to pay, you answered it with “such is the nature of business”. You can’t honestly expect a business to be profitable and innovative when incentives are withdrawn from the process, can you?
Hi CK,
I am amazed, and not a little amused, that you think that *I* am the one burdened with a fallacy! LOL.
The approach in this last post is the typical rhetorical analysis commonly seen with BiG Pharma propagandists (note: the comment is about your post, not you :)).
Governments that seek to protect their citizens from the daylight thuggery of massive corporations, who pay fair prices that they (ie. through their taxpayers) can afford, but that nevertheless provide a market place where Big Pharma make massive, humongous profits, are “extortionists”. LOL.
I dispute your claim on a number of levels.
Firstly, the statement that foreign governments threaten patents is an outright factual mistake (I was going to type ‘lie’, but decided this would be needlessly inflammatory). Governments of developed nations outside the US, who are charged by their people with the task of purchasing health care, have a number of ways to stop drug companies from cheating patients. For example, Australia requires not just good quality data on efficacy, but also what that efficacy is likely to mean clinically (ie. there are cost-effectiveness considerations as well). This stops crappy me-too drugs, which when put to a Pharma company trial may show a 0.5% absolute risk reduction compared to placebo for the primary outcome being studied, but which the company wants to sell at 3000% the price of the standard generic drug. This is something that can actually happen in the US. Not so easily in Australia.
(Will you pay 3000% more for a new SUV that the manufacturer says has a top-speed that is 5mph faster than an otherwise identical SUV on the market? No? So if it happens that SUVs are an essential commodity, and your country’s government makes the buying decisions, would you like your government to use your taxpayer money to buy that SUV, with absolutely no control over whether and how much they can charge? Be honest now.)
Of course, drug company propagandists will protest, crying that taking cost-effectiveness into account is “non-scientific” – the term that they use when discussing Australian law in all their material.
There are also other measures, such as reference pricing. For example, in Canada, the PMPRB negotiates with Big Pharma for prices based on the prices in seven countries (USA, UK, France, Germany, Switzerland, Sweden, and one more, I can’t remember). The also set their budget based on what they can afford for that drug class (for example, if there is a new diuretic that a company wants to market, the costs of other diuretics in that class are factored in.
But here is the thing: no one (no developed, democracy anyway) ever threatens patents. This is an absurd LIE (there, I said it) that Pharma apologists very often trot out, and I don’t know where they get it from. If you don’t believe me, CONSULT YOUR OWN PHARMA PROPAGANDA REPORTS. See for instance, PhARMA’s “report” Foreign Government Pharmaceutical Price Controls to the US gov (2004), where they whine in an astonishingly deceitful manner about what they consider “price controls”. They are lists and lists of things, but even they don’t mention “threatening the patent”.
Did you seriously believe that the UK sits down at the table and says: “Look here, Mr. Big CEO, if you don’t sell Crestor to us at 50 cents a pop, we’re gonna cream your patent.” Are you outta your mind? You do know that businesses can’t operate in that kind of an environment, don’t you? I can see the headlines in the Financial Times now: Massive Exodus of Drug Firms over Govt
Big Pharma of course doesn’t want any sort of negotiation where prices are concerned – they believe that it is their right to set whatever prices they want, and a government must pay – if it doesn’t then it is not being “fair”.
This is poppy cock.
If you apologists want a completely free market, this is what has to do be done: Destroy all and every form of health insurance. Make people pay every penny of their medical care. Pills, doctors, surgeries, the works. No taxes need be collected for health purposes. Do this in every country. Remove all barriers to trade, ie. if I wanna buy my Whipples operation in France, that’s cool. Rosuvastatin from Belgium, no problemo.
I can guarantee you prices will fall. Among other things. Prices of some things will go up. Millions of people will also die, because they’ll still be too poor to buy the medicine they need. Many thousands of doctors and drug companies will still be very rich, because they can make their living off the very rich, as long as they can ignore the dying masses outside their door. There will be wide geographical variation in prices and services.
Liberal democracies however don’t do this. Because most enlightened people think that you should not have to die at age 20 just because you couldn’t afford the US$25,000 it costs to buy a supply of Gleevec, the only drug in the world that will cure chronic myeloid leukemia. (Oh, and you read that figure right. Novartis charges US$25,000 for one years supply of Gleevec. Oh, but I’m sure they had justification for that price, I here you say. Surely they must have spent millions in drug research. Bullcrap. The drug was developed by Drucker, an NIH researcher at Oregan HSU, Portland, who did a lot of the important work before Novartis took it into Phase III trials. But the whole “we are innovators” crap is another class of Lies from Big Pharma that will take me ten pages to write about, so I’m not going there).
Since we CAN’T have a free-market in health care, since governments HAVE to buy drugs for their citizens, governments HAVE to have a say in the price. In the US, this used to be severely limited, and the only reason the health care situation is not worse then it already is is because of competition from generics. With Buhsies handiwork though, the government is now barred by law from negotiating AT ALL. The moment the Medicare bill passed, drug company stock prices shot up. Gee, I wonder why?
Oops. Sorry for the double post. Graham, can you delete the earlier one? I thought it didn’t go through, then fixed a typo and reposted.
If I can familiarize you with a brief synopsis of international intellectual property rights:
In 1994, the World Trade Organization (WTO) enacted an agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). In this unprecedented mandate, patent rights were globalized under consistent legislation. In very many words, this basically guaranteed patent rights across international borders. The TRIPs agreement maintains that a country can violate a drug patent if the country is unable to negotiate a contract at reasonable terms, or if it declares a national emergency. While this was originally intended to protect poor and developing countries, it has been embraced by other countries as a way to undercut drug prices.
The term “use buying power” is a sweetened way of saying “force your own prices”. It is in no way a negotiation. Again, negotiations require concessions from each side to reach an equitable agreement. In the terms of government-run health care, the threat is to not allow access to a large market share. Ex: the price for a drug is $60 (lets say cost is $30, for a round 50%), and Canada has 2.4M possible consumers. Because the gov’t is paying for it, they want it dirt cheap. Canada says they want the drug for 56% of retail price (~$34). The drug company says they want to sell it for $45, conceding 25%. Canada says “take it or leave it, we pay only a fraction above cost, or you don’t sell at all.” The drug company can either take minimal profit, and make 4$/sale, or it can make no money at all. Canada has its ass covered, because should they ever NEED the drug, they can go over the company’s head and grant compulsory patents to their own companies (as allowed by the Doha Declaration and TRIPs agreement). There is a huge difference between buying power in the sense of an open market, and getting the price you want by denying access to a market. Foreign governments use the threat of restricting market access to get the price concessions they want, while keeping their interests covered in case the pharmaceutical companies refuse to sell.
Extortion via the TRIPs act is how all this is done. The previous paragraph covered a theoretical situation. This situation has actually occurred in Brazil, concerning the anti-AIDS drugs of Merck, Roche, and Bristol-Myers Squibb. The issue wasn’t even masqueraded as access, it was openly referred to as cost. Brazilian gov’t had already forced a lower purchase price for the anti-AIDS drugs, and was supplying them free to its constituents. The program had grown however, and the government wanted to limit its costs, so they imposed further cuts on the purchase price. In the end, although Brazil has the 9th largest economy in the world, the price of Merck’s Stocrin ended up barely above the price in Sub-Saharan Africa. This directly refutes your claim.
As far as the Australian system, I am not familiar with that, and I’m not sure how that plays into lower drug prices in Australia.
As far as the prices shooting up, its simple economics. Within government run systems like the VA, drug makers oblige the extremely low prices because it is such a small share of their market (2-3%), it familiarizes doctors in training with their drugs, and they don’t have to worry about the below-cost sales being sent back into the market (ie reimportation). When those prices are extended into a much larger market share (such as Medicare), drug manufacturers have to drastically change their pricing. The more you extend below-cost prices, the farther up you have to drive retail costs to recover what you’re losing in below-cost sales. It is simple economics. The United States Genearl Accounting Office (GAO) did a study on this. Its titled Drug Prices: “Effects of Opening Federal Supply Schedule for Pharmaceuticals Are Uncertain”
I see your analogy and you make better points the second time around, CK, but I still don’t see a huge difference between a government and Wal-Mart.
It’s price fixing when government’s involved (ie: acting as the buying representative for its citizens), but it’s buying power when it’s a gigantic retailer like Wal-Mart? The government may have a way to weasel around it, but both cases are price fixing or buying power. Wal-Mart forced this boxfan maker to cut jobs and go overseas to keep lowering its prices, else Wal-Mart would stop buying boxfans from them. I suppose you would argue that the boxfan maker has the ability to sell to other retailers, but today, there’s not a whole lot of other large retailers out there (besides Target, K-Mart, etc). Would you be opposed to a national drug purchasing scheme, where one buyer buys all the meds for the country for a year, if Wal-Mart or Walgreen’s ran it instead of the government?
Again, many of the drugs today come from NIH, taxpayer-funded grants to academic researchers. So we pay to fund a great deal of the research to develop and discover these drugs, and then we pay 2-3 times what other countries pay for them.
Again, I have problems with your “below-cost” payments. Is that “below-cost” to make the drug (plus its “R&D”) or “below-cost plus advertising?” I’m still not convinced that there’s no money to squeeze out of Pharma advertising budgets. The ridiculously complex pens, clocks, post-its, personalized Kleenex boxes, and full-page glossy photos promoting products couldn’t be downgraded in their quality? Please.
The mere comparison of life-saving drugs to boxfans is a gross understatement. Boxfans are not regulated, don’t have high overhead costs. Basically when you buy a boxfan you pay for parts an labor. The costs of drugs include MANY more factors.
I do oppose any type of single-payer system though, in response to your query. The boxfan case illustrates this rather nice. If only one entity is in control of the product, we are at the mercy of that entity. That entity (Wal-mart in your case) can decide to maximize their own profits, at the expense of the consumer and producer. Consumers and producers have no recourse in a single-payer system.
If you need a bit of a refresher on the logistics of pricing, perhaps I could direct you to this (http://www.economicprincipals.com/issues/04.08.15.html) which covers the basic idea for why drugs are expensive.
As far as advertising goes, thats a simple economics issue. Every dollar of advertising brings in more than 1$ in sales. The point of running a publicly shared company is to generate profits. Thus, money spent on advertising is not a “waste”. You can take issue with the fact that consumers are paying for the advertising, but you could make the same argument that the advertising actually drives up the money channeled into R&D (If you look at a % of profits going towards R&D). You could also make the argument that advertising actually drives down costs (by sharing the incentive payback over a greater number of consumers. Figure you need 800$ to recover investment. Spread that over 100 consumers, the share is 8$. Spend 200$ in advertising to spread it over 200 additional consumers, you’re looking at a 5$ share). I won’t actually use that argument though, as there is no evidence to support it.
As far as your NIH claim. SOME of tomorrows drugs are coming from academic research. Emphasis on SOME. It is hardly the plethora you seem to think. In addition, when pharm companies pick up those ideas, they PAY THE DISCOVERY TEAM FOR THE PATENT. Also note that not every single drug concept that gets bought up goes to market. I think the failure rate is 95%.
The NIH stuff shouldn’t make you angry at drug companies, but rather angry at other countries who are thriving off domestic ideas and paying negligible share of the investment payoff. The one-sidedness of the innovation/investment cost is very disturbing. This is part of why I am so vehemently against drug reimportation. Not only is it stifling pharm research, but countries like Canada would actually be making money off of us as well! If they get the drug for 20$, they’re not gonna turn around and sell it for 20$, they’re gonna sell it back to us for 25$. This is why we need some kind of WTO reform. I’d rather work towards some international sharing of the investment into drugs than resort to being screwed over even more by foreign countries.
Oops. Correction: the price equation should read: spend 200$ to spread over 200 additional consumers and the share drops to 3.33$. Again, I don’t have hard evidence for this, its just theory.