As it’s Medicare week, the NYT seems to be focusing on how US trade policies can hinder healthcare abroad. Earlier this week, Nicholas Kristof marked the FTAA discussions by reporting from Guatemala, where the government hopes to win US favour by buying brand name Aids drugs instead of generics, even though it costs three times as much and means the Guatemalans can only, presumably, treat a third as many people.
Yesterday’s front page story was about the US pharma industry’s drive, through the USTR, to stop other governments from imposing price controls on drugs bought to treat citizens. The Medicare bill was quite a victory for the drugs companies, as it prevents the US government from imposing price controls, and also mandates progress reports to Congress on efforts to open Australia’s drug pricing system.
On a first read of the story, I was transported back to my happy days in Public Policy and Public Choice I. I could almost hear the pharmas arguing; ‘In the US, we’ve just managed to ‘tie the king’s hands’, and stop the government from naming the price it pays for drugs (otherwise the government would pay such low prices that developing new drugs wouldn’t be worthwhile and soon we wouldn’t have any.). But abroad, we’re forced by governments to sell our drugs at lower prices. Which means the durn furners are free-riding on all that American R&D.’
In the US (broad brush strokes here, folks, very broad), most drugs R&D is done by the private sector and the pay-off is that these firms enjoy extremely, and some would say excessively, strong intellectual property rights (IPR) protection and can sell the resulting products at a price set by the market. (If anyone better informed wants to jump in on the role of HMOs in pricing, be my guest.) The US government in turn uses its clout in the WTO, WIPO and in bi-lateral trade negotiations to protect US companies’ IPR.
In Australia, and other social democratic countries, the public sector funds more R&D, and in return the government (the biggest purchaser of drugs in these countries) sets the prices at a lower level. Or, if you like, the drugs actually ARE cheaper because some R&D costs have already been absorbed by the governments. Which doesn’t help at all if you developed your product outside Australia and are trying to sell into that market.
The US pharma industry charges the Australians (and the rest of the world) with free-riding on US R&D, and says that US drugs prices are higher as a result. But, instead of urging other countries to do more R&D, the US is asking other countries to pay more for US drugs. Now maybe that makes sense to the USTR, but I can’t see how it could ever be in another country’s rational self-interest to pay more for foreign drugs instead of investing in their own R&D. (Especially when the Americans have gone to all the trouble of strengthening global IPR protections – now why not just invent loads of new stuff and free-ride on that?) Even if the Australian department of health dug a little deeper in its pockets, I don’t see the drugs companies passing the benefits on to US consumers.
But the free-rider charge deserves consideration. It all depends on whether the price the Australian health system is paying is too low. How low is ‘too low’? And what if prices in the US are simply ‘too high’?. In Australia, prices are low because the government has enormous purchasing power and can set the rules. In the US, there are no statutory price controls, but HMOs can still distort the market by passing negotiated higher costs onto subscribers. Well, I’m no economist, but both markets seem too distorted to gauge what the ‘market price’ of drugs is, so it’s impossible to say whether the Australians are free-riding or not.
But I am a lobbyist, sorry, ‘advocate’, and I know lobbying BS when I see it. The appeals to national self-interest (‘they’re free-riding on our ideas!’) and consumer interests (‘they’re stopping us cutting prices at home!’) are unconvincing. Big Pharma has run crying to the USTR to fight its battles because the pushback on pricing is a relatively new and painful experience.
In the US, drug consumers are a heterogeneous group with a relatively high cost of collective action. In Australia, there is effectively only one consumer of drugs – the government. As bulk purchasers, governments (of wealthy social democracies) can force down drug prices. And as institutions, they do not take kindly to being told they should run their national health systems for the benefit of foreign manufacturers. Which means that US pharma companies, used to enjoying weak resistance, find themselves up against a significant force.
The USTR and Depts of Commerce/Agriculture have long been captured by producer groups, be they producers of drugs, software, agricultural produce, etc. The producers are better funded, better resourced, better organised, and have privileged access to government. User interests face overwhelming collective action problems and mostly remain latent. They’re either weak, under-resourced, and on the fringe, or they simply don’t exist at all. These problems aren’t remotely limited to the US, though it’s worth noting that US trade delegations and delegations to intergovernmental negotiations are well known for their inclusion of, or closeness to, industry representatives.
The real problem here is that the US administration seems to be equating the American national interest with that of a narrow set of producers, reducing the USTR to an unthinking mouthpiece for a small and vocal minority interest. But just because producers are better organised, it doesn’t mean they speak for more people. It’s the government’s job to weigh up all the arguments, not just those advanced by the people in the sharpest suits.
But how much, ultimately, does any of this matter? At least for individuals, the main difference between the US and Australia is not so much the amount you pay, but when you pay it. Like so many policy debates, the question boils down to; ‘do you want it docked off your pay every month, or just when you go to the hospital, pharmacist, school, train station…?’ And then we’re back to arguing on first principles about the role of government, and what to do when the international trading system brings philosophically different types of government into conflict. Or at least I hope we would be arguing, and that we would all be invited to the table to say our piece. And not shuffled in after the producer groups had already done their deal and left by the back door.
Back in Public Choice and Public Policy I, I learned how political institutions are captured by narrow interests. Out in the real world, I know that regulatory capture by producer groups* is not just a theory. It is real, and deadly serious.
*tks Keith
{ 48 comments }
dsquared 11.28.03 at 3:54 pm
At least for individuals, the main difference between the US and Australia is not so much the amount you pay, but when you pay it. Like so many policy debates, the question boils down to; ‘do you want it docked off your pay every month, or just when you go to the hospital, pharmacist, school, train station…?
Exactly, and I’d just add on to this my personal hobby horse that this is not actually a neutral comparison; the risk transfers involved are pretty obvious, and pooling risks socially makes them smaller.
Matthew 11.28.03 at 4:09 pm
Is it correct the drugs industry does most of the spending? An article by patent protection by Dean Baker says otherwise (I know you said broad brush…)
“Though the pharmaceutical industry is spending $22.5 billion on drug research each year, by the industry’s own estimate this is less than half of the total annual amount spent on biomedical research in the United States. The largest chunk of the rest, about $15 billion, comes from the federal government through the National Institutes of Health (NIH). Another $3 billion is provided by other federal agencies, such as the Centers for Disease Control and Prevention. Universities, private foundations, and charities together fund approximately $10 billion worth of research annually. ”
Mike Jones 11.28.03 at 4:11 pm
In the US (broad brush strokes here, folks, very broad), most drugs R&D is done by the private sector and the pay-off is that these firms enjoy extremely, and some would say excessively, strong intellectual property rights (IPR) protection
Is this really true? I’ve read in a number of places that a lot of drug company R&D is at least guided by research done with public funds (such as at the NIH).
Maria 11.28.03 at 4:23 pm
Thanks Matthew and Mike – I think I may live to regret that statement, however couched in equivocations it was!
The US government funding numbers are certainly massive. The
NIH website says its funding is $23,256,571,000 (don’t know if that’s annually, or whatever).
Maybe others knowledgeable than me can pitch in?
Keith M Ellis 11.28.03 at 5:38 pm
You don’t say? Really? :)
I’ve written about this extensively elsewhere, but it’s simply not the case that there’s a healthy market of health care and pharmaceuticals in the US. A healthy market would, for example, provide inexpensive generic drugs that are found to be effective—where, instead, in the US there is a constant push to move consumers to new, expensive drugs, still under patent, that are in many cases less effective.
There’s nothing that makes my blood boil more than hearing a conservative defend the US health care system as a “market” when it is, in fact, a travesty of a market, a disaster.
Maria, you wrote:
…did you mean “regulatory capture by industry”? Because your phrase sounds more like a cartel to me.
Sebastian holsclaw 11.28.03 at 6:15 pm
What if the drugs being discovered in Australia (or more to the point India) are actually just copys of drugs discovered in the US? Obviously the research cost will be much cheaper-seeming because they haven’t really engaged in the expensive ‘new thing’ research.
What if there are fewer drugs discovered in the Australia regime? There are you know, but Australia is an unfair comparison because it is so small. Combine France and Germany and you still don’t get the drug-discovery output of the US. And many of the drugs attributed to France and Germany are actually discovered by French and German companies in the US who are utilizing the US system to motivate and pay scientists in the US. Am I to believe that adopting a French system will do practically nothing to change the long term research habits in the US? Why would anyone assume that changing the input motivational structure would do little to change the output of research product?
Sebastian holsclaw 11.28.03 at 6:38 pm
“Well, I’m no economist, but both markets seem too distorted to gauge what the ‘market price’ of drugs is, so it’s impossible to say whether the Australians are free-riding or not.”
This seems like an extreme cop out dismissal of the free-rider problem. You identify it as the main argument, and then dismiss it without analysis as too difficult to analyze. Your dismissal is an exact analouge of an annoying AI pose on human rights. The US bombs Iraqi TV stations, Saddam tortured and raped and committed genocide. So for all practical purposes both are human rights violators. Even Amnesty International is too embarassed to use that one very often. Actually exact analouge is incorrect. Your statement would be the even stronger ‘both countries engage in human rights violations and I’m not going to both to research which violations are going on or even worry about whether or not different violations might have different levels of importance.’
The free rider problem isn’t difficult to understand or analyze. The charge is that the socialized medicine countries generally threaten to break American patents by allowing 3rd parties to make the drugs unless American companies charge something near the unit production cost–ignoring all or most research costs. If American companies did nothing to stop that, they wouldn’t even get the small amount of just over unit-cost money, so they capitulate. Research costs are the expensive part of making drugs. If a company cannot recoup its research costs, it will go bankrupt and will not engage in further research. Since companies do not recoup their research costs in other countries, they do so where they can–the US. Therefore the other countries pay less money than they would if research costs were recouped in all countries, and the US pays much more money because it is paying a huge share the research burden of the cost for every other socialized medicine country. Classic free-rider problem.
The free rider problem is never solved by lowering the prices on the person paying the actual costs (in this instance the US). That is because the actual costs do not disappear. If they cease to be paid, the companies go under and the research done by the companies ceases.
The argument you want to make, but don’t, is that governments should have no big problem stepping in and replacing most of that research. I don’t agree, but I won’t argue against it until someone here makes that affirmative proposition, because otherwise I will be accused of ‘straw-man’ argumentation.
:)
Matt Weiner 11.28.03 at 7:06 pm
Combine France and Germany and you still don’t get the drug-discovery output of the US.
I don’t see how this supports your point. A French/German pharma company can sell the products of its research in the US at US prices, can’t it? So the US’s lack of price controls shouldn’t account for any lack of discoveries in France and Germany. If it makes economic sense for an American company to develop a drug without public subsidy and to sell it to American customers, then it makes the same economic sense for a French/German company to develop the drug without public subsidy and sell it to American customers.
Now if all the research is publicly subsidized, and the difference is that American companies get to keep more of the profits of publicly-subsidized research*, then we have something that would account for the difference. And I have an idea about who’s free-riding….
BTW: I endorse your straw-man position. The market does a lousy job of allocating pharma R&D funds, the government subsidizes research anyway, and we shouldn’t let the R&D issue stand in the way of reforming our ridiculous health-care system. If that means NIH has to take over the research, go for it.
*Which is roughly what I’ve heard in every lefty screed about commercialization of the university.
praktike 11.28.03 at 8:46 pm
My general take is that the government’s role should be to fund basic research, whereas applied research is properly left to the private sector.
As for the specific issue of drug research, there’s another way to look at it–what’s our discount rate? Do we value low-cost drugs for health problems that can be ameliorated now, or high-cost drugs for problems yet to be solved?
Doug 11.28.03 at 9:21 pm
And yet it really does take hundreds of millions of dollars to get a drug from druggable target to FDA or EMEA approved. It really does take about ten years to move from a workable idea to a bottle on a shelf, or a compound ready to be injected. And that’s not even truly accounting for the costs of the failures. Soberingly enough, the failure rate in Phase III clinical testing – after drugs have been modeled, tested in animals, tested for safety, tested for effectiveness – is still close to 50 percent.
One of my day jobs is covering the German biotech industry for a trade newsletter, so I’m not just whistlin Dixie here. The path from druggable target or novel idea for a mechanism of action is very long, very expensive and very prone to failure.
NIH and their European equivalents do not do drug discovery research. (I’m better versed on the EU side, but I believe this holds true for the US side, too.) They do things that lead to discovery that can if absolutely everything goes right lead to a drug in about a decade.
If a smaller company is doing the research to bring a drug to market, they’re running on venture capital, working for the big payoff in one form or another. There’s simply no way that you can bootstrap, or grow from revenues, or whatever, to the tune of the $100M that you need to get to Phase III. In the world of drug discovery, there are startups that are venture funded and there are startups that are broke and that’s all she wrote.
If a bigger company is doing the R&D, and big here is anyone from Boehringer-Ingelheim all the way to Pfizer, then you’re covering your pipeline research costs from ongoing profits. That’s more straightfoward and more like a big company anywhere, but you’re still looking at very long lead times and very high costs.
If this debate is still going next week, I’ll have more to report from Cordia, one of Europe’s biggest biotech gatherings.
msg 11.28.03 at 10:22 pm
The idea of health care as an industry is itself a viral disease. To place medicine in a Marshallian supply and demand context is to invite a race of cannibals to dine at the community table.
The parasitic attachment of pharmaceutical gangs to the living immune system of human society has become the norm, and the very real historic and traditional presence of healers and healing technologies, as co-inhabitants, as fellow members, as family, is an arcane silliness. There would be a great nostalgia for earlier times now if the real conditions of those times had not been all but erased from the public record, and it would be the nostalgia, not of a weary adult for carefree childhood, but the yearning of the cancerous and dying for a time of health and vigor.
The day to day business of the companies involved is by definition strictly economic, and no different than the manufacture of cheese snacks. The adamant insistence that health care be seen as merely another stall in the marketplace must be addressed as what it is, a clamor of protective denial by greed-blind profiteers; and the connection between ‘provider’ and ‘consumer’ seen in turn for what it is, the hand of a predator on its prey.
Ophelia Benson 11.29.03 at 1:59 am
Umm…I’m as suspicious of the profit motive especially in areas of life or death as anyone (although I find Doug’s post convincing)…but even so, I certainly don’t feel any nostalgia for earlier times when it comes to medicine (or much of anything else). Those earlier times would be – before antibiotics? When TB was common and deadly (even deadlier than it’s now getting to be again)? When cholera, typhus, typhoid, gangrene, tetanus, pneumonia, just to name a few, were incurable and often lethal? Er, no thanks.
dop 11.29.03 at 2:33 am
Anyone got figures on how much US pharma companies spend on marketing vs. R&D?
Matt Weiner 11.29.03 at 3:42 am
Praktike, Doug–
Good points, I think. In which case I can move to the fall-back position; what prevents drug companies from negotiating with national health systems? Perhaps now the drug companies don’t do so because they know they can gouge US consumers, but if we go single-payer I imagine a drug company will find a way to say “We won’t sell drug X for less than $Y.” That would resemble a market at least as much as our current system.
msg 11.29.03 at 4:05 am
Ophelia—That’s sort of the point. Your reaction is to an image you were given early on that’s been reinforced your whole life.
Brutal short lives of painful labor and misery, random horror as plague after plague swept through the desperately shivering populace.
The men who made that argument had an agenda that was never made plain, and they distorted what little record there was to prove their false assertions.
That there was misery is inarguable, that there is misery now is equally inarguable.
The idea that there was no health before modern medicine is bizarre. It’s like saying modern dentistry rescued us from hundreds of millenia of rotten teeth and halitosis. Bullshit. It occurred to me last June that there must have been flower gardens at least as early as there was gardening for food. That that idea is tangential and uncommon is a failure of the collective memory.
The same nonsense was perpetrated on us in school up until quite recently regarding native people and their ways of living. Short brutal lives of painful labor and misery. Bullshit again. And add to that the entirely missing recognition of what it must have been like to awaken on a spring morning after a good rain, in a landscape that knew nothing of gasoline or coal.
Not all present lives are bettered by the gifts of civilization, not all lives then were less for their absence.
The pretense is prosthetic man’s is the only human destiny. There are those for whom it is, obviously, but we’re a complex and diverse species.
Sebastian Holsclaw 11.29.03 at 4:15 am
“To place medicine in a Marshallian supply and demand context is to invite a race of cannibals to dine at the community table.”
I’ll address this only because it refers to a common complaint–that medicine isn’t ‘appropriate for the market’ because it is a matter of life and death. Food is even more a matter of life and death, but the market handles food better than any non-market system.
msg 11.29.03 at 5:24 am
Sebastian—I understand your impatience with common complaints and knee-jerk reactions believe me.
A little clarification though, if you will.
Preventive therapy left aside, medicine in this context is more or less a crisis-demand good and/or service.
Lack of food for a healthy individual is a matter of life and death. Lack of medicine is not.
Charging what the market will bear for organic plums to a customer base with other choices, including not eating, is not the same as charging what research indicates someone whose child is seriously ill will pay for medical treatment.
Efficiency is by nature heartless and mechanical. And it is efficiency you mean when you say “handles food better”. A fine thing for machines and mechanical systems, but a grotesque thing for humans in excess, too much efficiency is harmful and counterproductive. An analogy is hygiene, the sterile goals of mid-20th-century modern man, with his solvents and pesticides, and the resultant, unforeseen, consequences of imbalance and unintended extinction. And that’s not to mention the compromised immune systems of children who were not allowed enough contact with ‘dirt’ in their early development. Or ‘factory farming’ with its astonishingly efficient delivery of nutritionally degraded products at the cost of the health of the land itself. Viability of the land not being part of the equation by which its efficiency is measured.
Efficiency is a good thing in contrast with its opposite, and we are, most of us, working in the market place, but efficiency is not all, and the world itself is not an object of commerce.
We’re rapidly approaching a point when it will become more efficient to consume human flesh than that of any other animal, domestic or wild. There is no valid argument against that option that doesn’t transcend the rationale of efficiency entirely.
Little Papaya 11.29.03 at 6:18 am
Big Pharma sells Drug X to Australian consumers at price Y, and US consumers at price Z. Is Z equal to Y? If not, how much less is Y relevant to Z? I think that’s the key issue here. I would really like to know the figures. If Y and Z are equal or close, then arguments of “freeloading” go out the window, as Big Pharma get their filthy lucre in any circumstance.
A much lesser issue is how much the Australian government subsidises Y from taxpayer money, and how much consumers pay directly out of their own pocket. Much lesser. Either way, the cash will go to the drug companies. Wouldn’t it?
Australians like the P.B.S. on the whole, and any government wanting to abolish it would commit electoral suicide. The Liberal government (who are conservatives) know this, and will be fighting hard to keep it. If they don’t, they’ll lose a few marginal seats the next election – enough to throw them out of power. It’s the sort of bread-and-butter issue that makes or break Oz governments. (A related issue is that the opposition ALP has aided its electability by ridding itself of its hopeless leader Simon Crean. As long as they don’t get Mark Latham instead…)
praktike 11.29.03 at 7:05 am
Matt, I’m all for single payer, but you should disabuse yourself of the notion that the government beating down on price does not amount to price controls.
Sebastian will tell you that price controls lead to shortages, which may be true in general, but I seriously doubt that in a universal system we would allow such shortages to occur.
I’m confident that we can figure out away to encourage drug companies to conduct applied drug research via tax breaks and other incentives, while ensuring that essential medicines are affordable. More preventive care (say, exercise and healthy diets?) will help as well.
PG 11.29.03 at 8:58 am
FYI on HMOs: they generally have preferred drug lists, which lean toward generics, and which do have prices indicated in a general way. For example, the HMO will mark one drug as being more expensive than X but less expensive than Y. Example.
Drug companies are being fools about the matter because they want to have everything. If one company broke from the pack and agreed to give the government discounts in return for being the official Medicare provider for every sector in which it had appropriate medications, it could save all the money it spends on advertising to seniors. I am willing to bet that this saving would outweigh how much their discount to the government would cost.
Keep in mind that pharma’s advertising spending is much greater than its R&D. Some of my best childhood vacations were courtesy of the American drug industry because my father is a physician.
The companies are beginning to realize that this is a bit extravagant, not to mention quite unethical). But my parents still had a lovely stay at the Seattle Four Seasons last year for which they did not have to pay, but for which the company’s customers did.
And as anyone who has watched TV programming oriented toward older people knows, pharmas buy up a lot of expensive ad time to promote their products.
Jason McCullough 11.29.03 at 9:48 am
“Food is even more a matter of life and death, but the market handles food better than any non-market system.”
The problem is fundamentally “drug development is a lot better with incentives” vs. “drug availability solely to rich is not an acceptable solution.”
If conservatives don’t think a state system will work, they’re going to need to come up with a system that doesn’t result in a huge rich/poor gap in life expectancy. The current situation is both morally and politically untenable.
Matt Weiner 11.29.03 at 3:48 pm
praktike–
I like all your proposals. I’m still a little unsure about the price controls thing, though–if the government won’t allow shortages to occur–presumably by kicking more money to the drug companies–doesn’t that amount to a negotiation as to the price of the drug?
Or: Suppose that there are several huge toy store chains. Each sets its own price for a brand of toy. If my toy company can’t make a profit selling to Wal-Mart at price X, we won’t sell to Wal-Mart, and we’ll hope they raise their offer. Is this any different from a system in which several national plans compete for drug sales? (Note: The argument can go either way–I think Wal-Mart’s oligopsony power may stifle innovation by enforcing price controls on their suppliers.)
Sebastian–Just FYI, my remark above about the market and drug research wasn’t based on the idea that drugs are a necessity; the idea is that a drug that benefits many poor people a lot won’t be as profitable as one that benefits some rich people a little. So the market does not ensure that the most beneficial drugs get the most R&D money.
mr tek 11.29.03 at 5:52 pm
The arguments about food versus drugs comes down to the fact the food is a commodity.
Yes food is life or death, but there is food marketed down to the level of just over homelessness. We also recognize that in many situations it is appropriate to help out people that cannot afford to eat. (food stamps, other programs, and even shelters and soup kitchens)
Drugs on the other hand are a crisis driven market. Drugs are NOT priced by what it costs to produce then, (including OR excluding R&D costs) they are priced by what the market can bear. Not a proper pricing structure for a life and death necessarily.
Folks, WE HAVE VERY EFFECTIVE RATIONING, Shortages and all, in our current health care system, especially the drugs. But that rationing is not based on physical resources, time, assessments of medical need, outcome expectancy, or any other rational measure, or immutable limit. It is rationed SOLELY by profit margins, with the added bonus that the real risks are taken by the government.
Sure taking a potential med through trials takes a few years, and has a medium failure rate. Basic R&D takes DECADES, has much higher costs, and if 1 lead in 1000 even shows potential that is a huge success rate.
Now, if any one wants to argue that profit margin is a good and proper basis for providing health care and drugs to one person, and not another, then say so.
Frankly I seriously doubt that very many people would agree, but then that is why the arguments are dressed up in all of the other bullshit language used here to state this argument in ways that will not set people off.
Mr Tek
Randolph Fritz 11.29.03 at 11:11 pm
“My general take is that the government’s role should be to fund basic research, whereas applied research is properly left to the private sector.”
In fact, that is the US arrangement. It would therefore seem reasonable to require the pharmaceutical industry to accept some regulation along with the extensive government support.
cafl 11.29.03 at 11:20 pm
The problem with big pharma conducting drug research is that they do not choose their research to maximize public health benefits but rather to maximize profits. A story about a remarkable study which suggests that it may be possible to reverse atherosclerosis appeared too long ago to be retrievable from the Washington Post, but its citation is here, describes the drug study also reported here (registration required).
The interesting thing to note in the interview in medscape is this question:
Medscape: Do you attribute the findings to the effects of Milano apolipoprotein A specifically, as opposed to a general effect of any apolipoprotein A?
Dr. Nissen: Nobody knows. We didn’t test “normal” A1.
There is no follow-up here, but the wapo story noted that the apolipoprotein they tested was patentable, and that is why it was tested rather than the one asked about by the medscape interviewer. Now if this research were motivated by public health benefits, of course there would be a great impetus to try the “normal” apolipoprotein A. There is no motivation for drug companies to study beneficial effects of already-known drugs because the research will not lead to a lucrative monopoly period.
praktike 11.30.03 at 12:33 am
Matt-
See here for what I’m talking about.
dsquared 11.30.03 at 1:07 am
Food is even more a matter of life and death, but the market handles food better than any non-market system
Just to point out that it doesn’t; you have to reach a very high level of economic development indeed before you can afford to leave food distribution to the market (as opposed to either household production or some form of planning). And even in market economies, any time we’re actually worried about the supply of food (wars or natural disasters), we immediately look to the army to bring in the food parcels, not to the cattalaxy.
jimbo 11.30.03 at 3:22 am
So, D^2, I take it from your post that we should immediately socialize the food industry?
Jeremy Osner 11.30.03 at 4:10 am
Not necessarily meaning to distract from the back-and-forth here which I am finding most interesting; but here’s a question that always comes to mind when I see that a single-payer system can limit drug prices because of its power as the primary purchaser of drugs in the country’s market: why can’t (or don’t) HMO’s negotiate lower prices from pharmaceutical companies? I’m not suggesting they band together into a cooperative; each individual HMO is a huge customer and it seems like an HMO ought to be able to assert some power in the transaction. What would happen if, say, US Healthcare said to say, Pfizer, “We are only going to pay $.50/dose for Glembumax(tm), of which we bought $30 million worth in the past year at your asking price of $.75/dose?” — if Pfizer did not come back with a counter-offer they would be risking $30M of business, right? Some kind of system would have to arise whereby US Healthcare customers paid a different price for Glembumax(tm) than subscribers to other plans; it could get quite complicated, but that’s what we have computers for, right? Could such a thing happen?
Vinteuil 11.30.03 at 4:42 am
According to industry apologists, American pharmaceuticals spend about $30 billion per year on R&D, compared to $9 billion for advertising and another $10 billion for free drug samples. Can anyone cite reliable figures that put their marketing costs *above* their R&D? pg’s link above was completely useless.
Vinteuil 11.30.03 at 5:48 am
By the way, there’s a fundamental mystery lurking here. Net sum total, the EU is wealthier than the US. It’s public sector is proportionately larger. It spends comparatively little on defense. So it should have lots left over for feel-good stuff–like bio-medical R&D. And everyone keeps assuring us that publicly funded R&D is so much more efficient than the private kind, burdened as the latter is by all those excess administrative and marketing costs.
So why hasn’t the American pharmaceutical industry been left behind in the dust by the unstoppable juggernaut of EU innovation? Why aren’t *they* the ones worried about the other guy free-riding on their advances?
Something is wrong with this picture.
Dave 11.30.03 at 6:02 am
vintueil: Pharam companies do benefit from European research, both public and private; however, consolidation has put 3 of the 4 giants in the US, so all the stuff they sell tends to be described as “American research”, regardless of where it was actually developed.
As for the spending, here’s some 2002 numbers from SEC filings (GSK seems to file financial in the UK; I’m not sure where to get their numbers):
Merck: $52 bn sales, $33 bn production costs, $6.2 bn “marketing and administration”, $2.6 bn R&D.
Pfizer: $32.3 bn sales, $4.0 bn production, $10.8 bn M&A, $5.2 bn R&D.
Johnson & Johnson: $36.3 bn sales, $10.4 bn production, $12.2 bn M&A, $3.9 bn R&D.
(And good luck getting a breakdown of M&A expenses out of the companies themselves; anybody know what reasonable administrative costs would be?)
Vinteuil 11.30.03 at 6:43 am
Dave: thanks, but combined administrative + marketing costs are not helpful.
(Does *anyone* seriously believe that administrative costs would go down in a fully publically funded system? Marketing, sure. But administration? Ever been to Brussels?)
The only figure I’ve come across so far for the overseas component of American pharmaceutical R&D is about $4 billion out of the $30 some billion total. But the sourcing on that figure was inadequate. If you have better info, please fill me in.
Pharmaceutical-wise, it just seems like America is where the action is. Before people suggest that we move in a more European direction, they really need to explain this.
Antoni Jaume 11.30.03 at 10:07 am
Vinteuil, if I were a monied criminal the USA are the place to go. Then I could control my business in criminal ways, putting my profits over other individuals life, which is a very similar way to the US drug industry.
The true ability to do drug development has nothing to do with exacting profit, unless you obstaculize that development.
It is a similar behaviour to the one Edward Hugh describes in:
http://fistfulofeuros.net/archives/000145.php
key excerpt in my perspective:
“On my travels I met what you could consider to be a pretty bright programmer: he writes spider programmes. Now if you were silly enough to want to sit in the first few rows of a concert from some mediocre but popular pop star, you would probably want to be cursing him: for his boss and his spider programme would already have the tickets. He works for an entrepreneur in a nameless but extremely large country, who buys up all the tickets for 250 dollars and re-sells them at around a thousand a go.”
DSW
David Tiley 11.30.03 at 10:19 am
Here’s an argument: Of the research and development costs by private pharmaceutical companies, much more than half is spent creating imitations to share a market and evade IP. The reason emerges above: the risks for a genuinely new drug working in a new way are much higher – first in absorbs the danger. Is that true? And if so, does it not suggest a way in which the market is actually inefficient and sustains high costs?
bryan 11.30.03 at 1:31 pm
well I for one definitely think profits should be increased
Vinteuil 11.30.03 at 3:27 pm
Antoni: you seem to suggest that the high profits of American pharmaceutical companies allow them to buy up the available researchers. They then jack up the price of the resulting new drugs to keep profits high. Is this the point of your quote from Edward Hugh?
But the number of researchers, unlike the number of front-row seats in the analogy, is not static. More spending means more researchers and more R&D. Is that a bad thing?
Besides: what is to prevent the Europeans from upping their public funding ante if they want a bigger piece of the action?
Wealthy private universities like Harvard and Stanford drive up the price of the best academics in all fields–but that just means the states have to spend more on education if they want to keep up. The ultimate result is more and (possibly) better academics all round.
Why shouldn’t people profit from doing socially valuable work? Personally, I would *like* to see pharmaceutical researchers profit more than, say, real-estate agents…
Vinteuil 11.30.03 at 3:36 pm
David: presumably “creating imitations” is cheaper than working *de novo*. Moreover, the availability of cheaper knock-offs must tend to drive prices down. I can see why the company that developed the first drug in a certain class would not like this, but I’m not sure why it would bother anybody else.
Bryan: what does your story of regulators asleep at the switch have to do with profits?
Antoni Jaume 11.30.03 at 3:49 pm
“But the number of researchers, unlike the number of front-row seats in the analogy, is not static. More spending means more researchers and more R&D. Is that a bad thing?”
the limiting factor is the number of different corporations. And the high cost of entry in the market for new entrants. The fewer companies the fewer researchers on different lines.
DSW
John Moore (Useful Fools) 11.30.03 at 5:23 pm
I see way too much static analysis going on here. The issue with drug development involves a long timeline, with factors ranging from the incentives to invest venture capital to the incentives to get an education and enter into drug research.
I will believe the arguments that governments can do a better job than profit driven (i.e. evil to some folks here) companies when governments deliver the goods. So far, they haven’t.
In the US, academics funded by the government (whether at NIH or at Universities) concentrate on the basic science. They do not have the resources, infrastructure, or experience to perform the huge task of drug qualification (which, as been pointed out before, usually results in failure).
Instead, we have profit driven industry, which has proven quite adept at developing needed drugs. And we have profit driven secondary industry which develops techniques and equipment needed for the R&D. These are active, lively sectors full of brilliant people.
Some have a problem with profit involvement in medicine, because it is “crisis driven.” I find this argument absurd, except in some utopian world. Firtst of all, the drug market is not crisis driven, except in the individual sense. But the market responds to the aggregate demand, which is steady and not at all crisis driven. In that sense, it is much closer to the food market.
Many criticize the pharma companies for their large advertising expenses. Perhaps those people should study the slow adoption of new practices and drugs in the medical industry, and recognize that while the advertising is self serving, it nonetheless is a major source of ongoing education for physicians.
Finally, it is true that the rest of the world is free-riding on the US consumers. We are paying high prices because we don’t have the purchasing power of single payer health systems (although it is true the HMOs and PPOs do negotiate discounts).
Again, if other systems worked better than the profit driven systems, WHY DO WE NOT SEE THEM? Why isn’t Europe inventing AIDS drugs with government money and then distributing them to the world at a low cost?
I have yet to see an advocate of government development of pharmaceuticals come close to answering that question!
Although the private enterprise system draws lots of criticism from ideologues and others, and people point to high advertising costs (as if that meant someting), this messy system with the (gasp) profit motive delivers the goods. No other system is doing so.
That means that either the other systems will not work, or people are unwilling to pay the taxes to support them, while free-riding on, and simultaneously attacking the US model which is saving their lives or making their lives more tolerable!
Antoni Jaume 11.30.03 at 5:47 pm
It is the USA that free-rides the world. Well, to be precise it is not absolutely free: they spend more on weapons, military and war than the rest of the developed countries. It is this fact they use to press the interests of their owners over the interests ot the people living in other countries.
DSW
Anthony 11.30.03 at 10:42 pm
Worth looking at http://www.nofreelunch.org if talking about marketing.
While I’m critical about some of the marketing practices of the industry (although it has to be said health professionals are complicit in this activity) I have no problem with research being undertaken by companies. Compare the history of drug innovation in the US and the UK from 1950 to that in Soviet Russia. No contest.
jimbo 12.01.03 at 4:00 am
Yes, I agree Antoni – it is simply scandalous how the U.S. uses it’s military power to prevent the rest of the world from developing those drugs we all know are much more efficiently created under a state-funded system. An outrage, I tell you!
msg 12.01.03 at 6:17 am
“profit driven industry, which has proven quite adept at developing needed drugs”
Right. Meaning there’s very little demand now for new drugs, because they were so adept at creating all those others. Or maybe what you mean is, most of the drugs they market have a market? Needed. Right. I have this image of some pharmco R&D hack with an armful of wonder drugs that nobody’s buying, because they aren’t needed. Do you know anything about current antibiotic therapies? Are you aware that victory in that particular arms race seems to be going to the bug/virus side?
I’m sorry but underneath the graduate language and attitude I just see that same money-hunger and rationalization that’s been such a colorless feature of the social landscape for so long. The argument that the demand for therapeutic drugs is steady therefore the price-scale and willing participation of end-users is not crisis-driven fails even the most rudimentary test of logic. No crisis for Pharmco there though, you bet!
The other posts seem to be variants of the old Cold War hairball, derision of the other side that ignores any responsibility for its condition. Listening to the fool chorus scorn Cuba back in the 80’s, as though an island with a US base at one end, and the US 90 miles away at the other, and the biggest guns in the world arrayed against it, could be said to stand or fall on its own merits. I wish Lord Acton had said something about the acquisition of power. I’ve got a feeling it has something to do with a pre-existing condition.
—
John Moore’s question, …where are those other methods…, can be answered a few different ways. Most pertinently in a rehash of the efficiency trope.
It would be more efficient to eliminate the non-working elderly. The little bit of economic activity their progressions of debility and dependence create are overshadowed by their non-value-added consumption of resources. That’s of course factoring out the perpetual motion machine of insurance and health care that the American elderly power with their increasingly anxious lives.
It is my still firm contention that the economic philosophies, to dignify what are after all merely aggregates of blind groping after power and privilege, which have created the inhuman leviathan of current ‘health care’ will lead to just that elimination. And worse.
Currently the ‘special needs’ sub-populations of California and I’m sure the rest of the US as well, are facing bleak months of funding cuts and the chilling sight of their margins being drawn in in ever-tightening cycles of exclusion, in euthanisic legislation performed by attrition. We’re not talking about ‘units’ of consumption, we’re talking about real human beings, people who are far more aware of their needs and dependencies than you are, watching the most needy among themselves fall away.
All that ‘Social Darwinism’ horseshit. Rough tough cowboys of survival, making those hard manly choices to cull the undeserving. Now that their own marginal genes have risen to the top of the pool, after millenia of NON-Darwinian selection.
I’m sorry I know that’s way tangential; it fits but the connections are so tedious to make plain. Let’s just say that behind the question of drug pricing is a question of drug-providing, and behind that a question of healing and behind that a question of deserving and behind that a question of how we got here and behind that a question of where we go next and you know eventually it seems almost a little too metaphysical for this venue. Almost.
Jason McCullough 12.01.03 at 8:07 pm
“Does anyone seriously believe that administrative costs would go down in a fully publically funded system? Marketing, sure. But administration? Ever been to Brussels?)”
Seriously, look at European administrative costs. They’re lower as a percentage of outlays than in the US.
“Again, if other systems worked better than the profit driven systems, WHY DO WE NOT SEE THEM? Why isn’t Europe inventing AIDS drugs with government money and then distributing them to the world at a low cost?”
Because the US lets you freeload on public and academic research? Just an idea.
Vinteuil 12.01.03 at 11:18 pm
jason mccullough: I’d love to look at European administrative costs. Can you provide a link? This stuff is severely testing my Googling skills–lots of noise and not much signal.
sebastian holsclaw 12.02.03 at 4:41 am
“Again, if other systems worked better than the profit driven systems, WHY DO WE NOT SEE THEM? Why isn’t Europe inventing AIDS drugs with government money and then distributing them to the world at a low cost?â€
Because the US lets you freeload on public and academic research? Just an idea.
This makes no sense. Is there a truckload of knowledgeable scientists who think that all the real work is being done in Europe, but that it just ends up in America ‘because of the evil profit’? (Cue Darth Vader Voiceover)
The real research is done in America. And much of the research done in other countries is funded by the profits from drug sales in America. Drug profits fund research. It is that simple.
“Sebastian will tell you that price controls lead to shortages, which may be true in general, but I seriously doubt that in a universal system we would allow such shortages to occur.”
i’m not trying to be snarky, but I don’t think you understand the price control–shortage linkage if you think we can ‘disallow’ the shortages. Price controls ultimately cause shortages because of the way which they deform alternate use signals and priority of compenents signals (i.e. prices). The government can’t disallow this without taking over the entire economy, which causes other problems.
Antoni Jaume 12.02.03 at 8:00 pm
“[…]This makes no sense. Is there a truckload of knowledgeable scientists who think that all the real work is being done in Europe, but that it just ends up in America ‘because of the evil profit’? (Cue Darth Vader Voiceover)”
I take that you are a crook, because nobody has said that “all the real work is done in Europe”, in fact some of it happens in Africa. But yes, some of the more promising result are cherry-picked or their data used without attribution, did you forget the Montagnier-Gallo dispute?
“The real research is done in America.”
And what is more, nobody has either said that the research done in the USA –because America is bigger than the USA, you “forget” Canada and Mexico to begin–, is not real or of low quality.
“And much of the research done in other countries is funded by the profits from drug sales in America. Drug profits fund research. It is that simple.”
The USA, while an important market are not the only one, it is at most 300 millions individuals (and about a sixth of these are not covered so may not get the correct treatment in time), while the rest of the world is some twenty times bigger. Even if only the EU and Japan markets allowed for some profit, it would be succulent enough. There is no real reason for the greater prices paid by the US inhabitants for their drugs other than the corruption of their politicians.
DSW
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