Healthcare Follies: Part Two—Drug Prices

In the renewed debate over healthcare, there will be many distortions in the discussion that will prevent progress for the majority of us who want reform. We dealt with Part One of this folly in my 2/13 post on insurance companies. Part Two of this discussion is the role of drug company pricing in healthcare reform.  

An opinion appearing in the WSJ on February 13, 2019, written by Scott W. Atlas, provides our launch point. In it, Atlas accurately states that “It’s true that Americans pay more for medication than just about anyone else: A 2018 report from the White House’s Council of Economic Advisers found that, as of 2009, the price per dose of patented drugs was five times as high in the U.S. as in foreign markets.” He goes on to say, also accurately, that “Americans get something in return—early access to lifesaving medications. Between 1995 and 2005, 12 new cancer drugs were first introduced in the U.S., versus 13 in Canada, France, Germany, Japan, Switzerland and the U.K. combined.” So far we are with him.

Both the president and Bernie Sanders have proposed that we control drug prices by pegging them to the average prices in relevant foreign countries. With respect to this, Atlas states that such “price controls would jeopardize” the advantage that Americans have in getting early access to “lifesaving” medications. While there is an element of truth to this assertion as well, it is only part of the story and it obscures the full issue.

Let’s try to be fact-based and rational. As we note in our Healthcare Research, the US pays 70% to 80% more for healthcare than several other comparable countries, with poorer outcomes in most categories. After the high cost and complexity of administration, drug prices in America are several times the average in those countries, making them the next largest contributor to our high cost of healthcare. The explanation for this is simple. Countries like France and Germany centrally negotiate drug prices. Because the US market is not regulated in a similar way (and in fact Medicare is prevented by law from doing so), drug companies charge Americans more in order to make up for their losses abroad. The industry is the first to acknowledge that they can’t “afford” to release some new drugs abroad without first paying for them in the US. In essence, Americans subsidize drug prices for the rest of the world. They can only pay less because we pay more.

If the US pegs drug prices to those of foreign countries, prices for consumers in those countries will have to rise while ours fall. Somewhere between the two current levels the new market price will settle out. In the process, Americans will save money and drug companies will continue to be profitable and innovate.

In this new environment, it is unlikely, as Atlas believes, that price controls will jeopardize our exclusive early access to lifesaving medications. When all prices are the same, where will new drugs be launched? Logic suggests that there will be no incentive to prefer one geography over another.

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Healthcare Follies: Part One—Insurance Companies