Make Foreigners Pay Full Price For American Pharmaceuticals

The Cato Institute weighs in again in favor of allowing the reimportation of pharmaceuticals. Why?

"The current ban should be lifted, therefore, not to encourage reimportation, but to allow the incentives to surface that will "force" wider use of market practices and the international trade regimes that reflect such practices," writes Cato's Roger Pilon.

One such incentive would be forcing the pharmaceutical companies to choose between their American markets and their low profit price-controlled foreign markets. The companies' ultimatum to Canada and Europe would be something like: pay your fair share of our R&D costs by accepting higher prices or tell your citizens that they will have to go back to using older less effective drugs.

Comments

[Jason Ligon]

"I do not believe these companies are losing money selling to Canada. They're just not making as much as they'd like. Poor babies."

Again, joe, these are sunk costs. There is a reason to sell at a MARGINAL profit to anyone who will buy, but that isn't to say that you will spread sunk costs evenly among all buyers. If you push down in one place, you are pushing up somewhere else.

Another way of looking at this. Your view is that everyone should be able to have the Canadian price because pharma is gouging the US market for pure profit. If this is the case, they are positively guaranteed a profit by bulk buyers that is then padded to obscenity by US buyers. I would assume your 401(k) is 100% invested in pharma. If not, why not? How could share prices ever go down?

There is risk involved, of course, and not little risk. Funding a new drug development is a lunatic's job. You are much, much more likely to throw several hundred million down a hole than to get a return on investment. The sunk costs that have to be covered by marketable drugs aren't just the $600 some odd million needed to get those to market, they also need to fund the 100 drug failures for every success. Profit (by this I mean compared to current production costs) on a successful drug has to be very, very large to justify the risk of initial investment, otherwise people will just invest in bonds or something.

[Jamie S]

s.m. koppelman, fyodor, Jason Ligon, or anyone else who understands this: Why is it again that you think the government negotiates low prices from drug companies? I still think the problem is that we American's pay too much, not too little.

[Highway]

The posts so far lead me to wonder why it would be all that contentious (to the US and pharmaceutical companies) to bankrupt the price-fixing in other countries through importation. Assuming 3 groups in the equation - the US and others that allow quasi-market pricing, Other developed countries with price fixing and state subsidies but established patent law, and countries without patent law or those that would be willing to selectively ignore patents based on their "public good" - Amy's post seems to indicate that patent restrictions are held up in other countries that we wish to trade with by mutual agreement, or quid pro quo as a condition of bilateral trade agreements. So using those 3 groups, it would be agreements between the first and second that would dominate, as any country that would seem to be slipping into the 3rd group would face sanctions based on their trade agreements (or lack of same). The potential markets for new drugs would be smaller, since they'd only include groups in the first and second groups, but those are the only ones who would seem to be able to support market pricing anyway. And since the incentive to sell in countries at fixed prices (subsidy isn't really a problem, assuming that the subsidiser is making up the difference between the supplier and user cost) that are in group 2 is based on the idea that they'll slide into group 3 if the company stops cooperating, with the threat of rescinded trade agreements can the country risk being put in group 3?

The problems with this scenario, to show that I'm not completely pie-in-the-sky with it, include a black market in the generics imported from group 3 into group 2 and group 1 countries, the enforcement of the bilateral or multi-lateral trade agreements, and effects on other industries that are hurt by the punishments in response to patent-voiding. There are doubtlessly more that I'm not thinking of, as well.

Sorry for the long and probably confusing post.

[Jamie S]

Ignore my last, I finally figured out that s.m. was refferring to *foreign* governments. I will be smacking myself...

[Luisa]

Jamie,

Last time I checked, the profit margin of the top 10 pharmaceutical corps was over 17%--about three times that of any other industry represented in Fortune 500 and a margin impossible in a competitive market.

I'd argue that it is only because we allow them to continually buy politicians complicit it banning market competition that they can sustain these margins. And it may not be popular here, but banning all corporate spending to influence politics is the only solution I see. But before I get flamed, keep in mind the distinction between a corporation as an institution, and its employees, who should be free to do what they wish to influence politics -- so long as it's purely their time and money and not the corp's.

[Luisa]

Jamie,

Last time I checked, the profit margin of the top 10 pharmaceutical corps was over 17%--about three times that of any other industry represented in Fortune 500 and a margin impossible (long-term, at least) in a competitive market.

I'd argue that it is only because we allow them to continually buy politicians complicit it banning market competition that they can sustain these margins. And it may not be popular here, but banning all corporate spending to influence politics is the only solution I see. But before I get flamed, keep in mind the distinction between a corporation as an institution, and its employees, who should be free to do what they wish to influence politics -- so long as it's purely their time and money and not the corp's.

[fyodor]

"poor babies"

Joe, I hope you understand that opposition to socialized medicine and importing drugs from countries that practice it (the latter of which I'm undecided on, BTW) is not based on sympathy with drug companies per se so much as it is based on the belief that such practices interfere with the power of patents to spur R&D in new and better drugs.

Are you against drug patents, BTW? If not, you presumably understand the logic at play here, even if you act otherwise.

[s.m. koppelman]

Er, not the American government, Jamie. Foreign governments (that is to say, large-scale bulk purchasers of medication with a strong incentive to keep costs low) negotiate low prices from drug companies.

[Jason Ligon]

To Darwin's point about over insurance. I know this is standard libertarian doctrine, but there is a problem with the argument Tyler Cowen pointed out a while back on Marginal Revolution that I haven't been able to work out either.

Isn't it in the interest of the insurance company to put downward pressure on prices for medical care? Why are insurance companies so bad at shopping around when it is in their economic interest to do so?

[Jamie S]

Yes, the profits are high, but the risk is high as well. Competition is very strong in this industry - how many antidepressants or cholesterol or non-drowsy antihistamines do you have to choose from? As this article suggests, the profit margin is not really that far out of line with many other industries - even ones with much lower risks (banking, real estate, etc.) Besides, what evidence do you have that they are "buying" politicians (at least more so than anyone else) Most large corporations' officers make political donations, and the fact that lifting the ban on reimportation is being considered militates against that conclusion.

(thanks s.m., I realized this after I hit post and tried to retract my question above, mea culpa)

[fyodor]

Jason Ligon,

I would say the answer to your question is that insurance companies probably do this to some degree, but by passing laws that subsidize and/or encourage insurance coverage, especially via employers, the government adds extra layers of indirectness (maybe economists have a more technical term for this) that interfere with the most efficient means of purchaser/seller feedback. After all, if all feeback loops were equal, there'd be no problem with government bureaucracies because we'd simply vote out politicians who didn't oversee efficient bureaucracies. However, this is a very inefficient feeback loop; likewise (and consequentially) the feedback loops encouraged by government backed insurance coverage simply is less efficient than what the free market would hash out on its own. In other words, it's not black & white but a matter of degree.

[c]

I'd also add that while insurance cos. certainly do try to push down the price of drugs, they don't quite have the buying power of national plans, due to their smaller size. Also, the threat to buy generics is not something a private company can wield, not to mention god-only-knows-what other kinds of regulatory prodding governments subject pharma cos. to.

[crimethink]

joe,

I do not believe these companies are losing money selling to Canada. They're just not making as much as they'd like. Poor babies.

So you wouldn't have a problem being extorted into working for less than your market wage? When and if it happens, I hope to be there to tell you, "Poor baby."

[Darwin]

Insurance companies find it easier to increase premiums rather than wrestle with the pharmaceutical companies. They rely on the herd mentality that consumers use when purchasing prescriptions. The pharmacist hands the consumer a bottle of pills costing $80 and the consumer gladly hands over their $15 co-pay. They assume that "someone else" is paying for the difference, since they are covered by insurance, but the bill eventually comes due through higher premiums. Since the insurance premium hike happened at a different time/place than the purchase of the prescription, they don't make the connection. In the end, the insurance companies always make a profit and that is all they care about.

[joe]

"'I do not believe these companies are losing money selling to Canada. They're just not making as much as they'd like. Poor babies.'

So you wouldn't have a problem being extorted into working for less than your market wage? When and if it happens, I hope to be there to tell you, "Poor baby.""

Feelings of pity for a corporation that doesn't earn as much as it would like: is this what the phrase "compassionate conservative" refers to?

[crimethink]

Nice dodge, joe. I take it that means you recognize your own hypocrisy.

[thoreau]

Feelings of pity for a corporation that doesn't earn as much as it would like: is this what the phrase "compassionate conservative" refers to?

joe-

You just hit up on the difference between the libertarians that I like and the ones that I can't stand.

On the one side, I think Jason and others raise a good point when they fear that reimportation might kill innovation. I'm not sure I agree with them, but I definitely see their point. Killing innovation hurts everybody.

On the other side, there are those who get upset by the thought that some corporations might make lower profits because of reimportation. Those are the ones I can't stand.

It's not even a divide between left-libertarians and right-libertarians. It's a divide between those who think about real world consequences of actions vs. those who think about dogma.

[fyodor]

joe,

I didn't detect pity for corporations in crimethink's post so much as derision for your own likely hypocrisy. Do remember that corporations are made up of and owned by people. Some of them are very rich. More of them are not so rich. The better prices a corporation gets for its wares, the more people it can hire and at better wages, and the better off are its investors. All other things being equal, I'd say those are very good things.

Now, getting people the same drugs for less cost would be one of those "other things" that would be good, if it weren't for the other "other thing" that with less money to be made there'd be less incentive to produce new and better drugs. So crimethink's valid derision notwithstanding, I'd still say the effect on R&D is the most operative issue.

Sigh, it's so tedious to reiterate the obvious...

[c]

JC, the gov't isn't paying and taking shipment of the drugs, but by setting the price (and with companies consenting, or not, to do business with customers there) a government is in fact using "bulk buying power."

Let's face it -- a pharmaceutical company can decline to sell to customers in a country at the rate that country's government has set. And the company's decision to sell or not sell is going to take into considertation the size of the market in that country. So a legally fixed price might be a "final offer," but, if the company takes the offer, then any discount to the typical price has to be considered a bulk discount.

[Jason Ligon]

Luisa:

Revenue and margins fluctuate wildly for those companies. It is a business characterized by huge losses and huge wins. In addition to current costs, check out the balance sheet lines for Long Term Debt.

[fyodor]

thoreau,

How could you?!? 🙂

Being upset that someone glibly scoffs at the idea of a business having its profits suppressed is not so objectionable. See my last post for why.

[fyodor]

thoreau,

If talk show hosts who criticized the government were threatened with jail, would it be mere "dogma" to be concerned that people who had already had plenty of chance to exercise their freedom of speech might have that freedom curtailed? That's what you and Joe sound like to some of us when you seem to imply that it's okay to rob the rich (at least I presume your association of corporations with "the rich" is at the root of your callousness toward corporate profit).

Now, I admit that laws that curtail potential earnings are usually not so blatant or clearcut as that, but robbery is still what they ultimately amount to.

Plus, as I pointed out previously, the "rich" are not the only ones to benefit from successful companies. And in fact, in terms of number of people benefiting, the rich would likely be a small minority.

[Jamie S]

C,

I think companies view sales to foreign governments more as a "one time special order" than a bulk sale. In these cases, companies decide to sell their products below the total cost (fixed + variable) but above the variable costs. Companys only do this when they have spare capacity, and can be sure that those products will not be resold to their other customers who pay a higher price. If this happens, the company ends up underselling itself. The idea is eliminate the regulation that prevents those "special orders" from being resold to Americans. When this happens, companys will make the obvious decision not to sign the deal with those governments at a price below their total costs.

In a bulk sale the economic advantages are different and smaller: lowering inventory costs, longer production runs, fewer packaging costs, meeting the sales expectations of Wall Street etc.

[joe]

fyodor, the profits of drug companies would be squelched only to the extent that patients are giving them less money.

What makes you so certain that that money in the hands of drug companies has greater utility than the same money more widely distributed among the drug-buying public?

"Nice dodge, joe. I take it that means you recognize your own hypocrisy." You flatter me, crimethink.

[c]

I'm not arguing about what the terminology for the sale is, I'm pointing out that the difference between "bulk buying" and "price fixing" implied in JC's post doesn't exist.

joe-
What makes you so certain that that money in the hands of drug companies has greater utility than the same money more widely distributed among the drug-buying public?

because if the decision were left to the buyer and the seller, that's the decision they would come to.

[crimethink]

joe,

What makes you think your money in your hands has greater utility than the same money in the hands of the thug holding a gun to your head?

[joe]

c,

pat, pat, pat.

[Uncle Bill]

joe,

If this were the No Spin Zone, I'd unload two shopping carts full o' whoopass on you right now -- enough to keep an entire community of schoolchildren in the hospital for days.

[kevrob]

Will someone clue joe et al. into the fact that corporations are merely associations owned by people? Punishing the corps is really punishing the shareholders, from the richest coupon-clipping trust fund trash, to the lowest paid wage slave who has managed to stuff a few bucks in a 401(k) or IRA.

One may not like the people who own these businesses, but that is another story.

Kevin

[fyodor]

Joe, what makes you so certain that money in your wallet has greater utility than in the hands of the thief who would relieve you of it?

Okay, I take the point from your POV society has a right to shift money around from one group of people to another. No point in dragging out a long philosphical argument about that, or about the economics behind what c says. We'll never agree anyway.

But when you ridicule corporations as "poor babies" for not making as much money as they "want to," you're ignoring the very real harm that suppressing their income does. If you think that harm is worth it to benefit another group, that's your right to think that, and I don't mind if you say why. But that's not what you're expressing when you say "poor babies." That's telling me you don't give a shit if you rob corporations of money cause they're just rich pigs anyway. You shouldn't be surprised if you get a rise out of someone, which was probably your goal to begin with, so you could show them how wrong their priorities are and console yourself with the notion that libertarians don't give a damn about real people with real needs but are driven by ideology and/or a misplaced pity for the rich. But in reality you're the one who expressed callousness first. Now in the larger scheme of things, big shit, right? But in the larger scheme of things we'll all die eventually too. My only point is that you're being disengenuous and intellectually dishonest. Pretty much the same point you're always trying to foist upon libertarians. Maybe it's projection, I'll ask Dr. Freud the next time I see him...

[c]

crimethink - It clearly doesn't. In my hands, I'm dead, in his hands, I'm alive. In your scenario, my money is worth my entire life, which is why I would decide to hand it over.

"pat pat pat"?
Does that mean my answer was a 'pat' answer? Is it wrong, as well as being pat?

[Sigmund Fraud]

fyodor,

You called?

[fyodor]

crimethink,

Heh, you beat me to it!! That's what I get for typing up such a long post!! 🙂

joe,

pat, pat, pat??? Y'know this is getting to be a real pattern, whenever you start noticeably losing an argument, you resort to mindless sarcasm. Whatever. I do admire your gumption to post here at all, so perhaps that's the escape hatch you need to brave all the abuse you bring upon yourself.

[fyodor]

Dr. SF,

Well yes, as a matter of fact I did! So tell me, is Joe portraying a classic example of projection when he repeatedly tries to accuse his political opponents of the disengenuous intellectual dishonesty that he wantonly exhibits himself, or what?

[Gunnar Hegel]

"Feelings of pity for a corporation that doesn't earn as much as it would like: is this what the phrase "compassionate conservative" refers to?"

Joe, it's not pity or compassion, it's common sense. Several posts ago, Luisa reminded us that drug companies pull in 17% annually. Cato Institute reported recently that news outlets pull in over 20% annually. If we try to minimize pharmaceutical profit margins, investors might just give up on the business of saving lives and take up the business of complaining about those who do.

[fyodor]

Gunnar,

You missed the opportunity to say it's Reason!!!

[Sean S.]

I don't understand why libertarians feel the need to protect the inefficiencies of the pharmaceutical companies. If margins are so low, and the business that bad, that they have to supposedly gouge one market (America) to keep afloat, isn't it high time they start revising there business. Doesn't anyone beg to ask why its costing more and more to make drugs these days, yet less and less profitable drugs are being made? I doubt it has anything to do with the FDA, since its existed for years, or regulations in general. I just think the Big Pharma companies are bloated, have absolutely no control over their drug pipeline, and simply need to maintain there gouging price in order to keep afloat. What we need is the equivalent of low cost airlines in the pharmacuetical business, something to shake up the majors and make them realize what bloated fools they are.

[Phil]

From Pfizer's latest quarterly:

R&D costs: $1,806m
Sales, informational, admin: $4,258m

Given the proportion of marketing to R&D spend

OK, first of all, "sales" is not "marketing." That's Business 101, I'm afraid.

Second, "sales, informational and admin" is what's usually referred to as "cost of doing business." It's all the stuff that isn't research, manufacturing or shipping. Megan McArdle exploded that misconception at her blog some time ago.

Doesn't anyone beg to ask why its costing more and more to make drugs these days, yet less and less profitable drugs are being made?

Because the low-hanging fruit is gone, and has been for some time. Which is also why so many of the pharma products you see introduced are new indications for existing drugs rather than entirely new drugs.

[c]

Gunnar, I have to hand it to you: That is some truly gruesome arithmetic.

[crimethink]

thoreau,

Yes, yes, we have to be pragmatic about things. But really the only difference between those pointing out the chilling effect of reimportation on innovation (whom you like) and those pointing out the immorality of extorting from pharma corporations (whom you "can't stand") is just the difference between looking at ends and looking at means.

Theft, fraud, and extortion are immoral, and they also weaken the entire market by damping the incentive to acquire property (or in this case, patents). The actions of the soc-med nations are not only immoral but will also be self-destructive, if and when the US becomes unable or unwilling to keep footing the R&D bill.

[crimethink]

thoreau,

Actually, I see what you're saying. It's just pathetic -- and it says a lot about where our country is heading -- that "it's wrong to steal" arguments will lose out to "gimme gimme gimme" arguments every time.

More and more, it seems like American political discourse has devolved to the level of pre-schoolers fighting over who gets the box of crayons. And yes, I know that's an elitist remark, but TBH elitism is sometimes dead-on correct.

[joe]

If the companies weren't making money off the lower prices, they'd already be out of those countries.

[CL]

That ultimatim would work if the countries didn't have the trump card of deciding not to honor the drug company's patent and allowing generics.

[Jarod]

joe,

The point is that we subsidize lower prices in other countries. At artificially low prices, more drugs are sold in those countries than would be the case at market prices, and as a result supply here is diminished and we pay more. Or rather, our insurance companies pay more. Many of us think that hundred dollar bottle of happy pills costs a sawbuck, so most people don't know or care how pumped up our prices are. What a mess.

[Jason Ligon]

Not at all, joe. You can make a current 'profit' by charging one cent over the price of current production. That has nothing whatsoever to do with recovering sunk costs. The first pill costs $600 million and the second one costs $.06. It is better to sell at $.10 than not at all, as long as you have someone to cover your sunk costs. Right now, that is the US consumer, even for EU pharma companies. Take the levels of profit made in the US out of the picture, and you have unrecoverable costs.

My problem with the Cato proposal, and I waffle on this all the time, is that I believe that countries will flat out violate patent protection and still refuse to pay. They will accept the loss of innovation as something unseen that their voters don't care about when there are freebies to be handed out now. They will NEVER point out that they have been freeloading on the back of the US consumer for years.

Socialized medicine is a religion, and I suspect that many people would rather flush the future down the toilet than give it up.

[joe]

That's actually a very good answer, Jason. So we're not subsidizing the production and distribution of existing drugs; we're subsidizing research on new drugs, which people paying lower prices will be able to enjoy right along with us.

Lemme groove on that.

[Jeff Smith]

One thing ignored in both the original post and
in the discussion is that the market price might
be lower in the EU and Canada than in the US.
These countries are poorer than we are. Just
as movie theaters charge less for kids, drug
companies would likely find it optimal to charge
less in Canada and Europe than in the US even
absent the monopsony power that socialized
medicine creates. For those who think that this
is a pedantic, theoretical point, I will note
that the Honda Civic I bought in Canada when I
lived there was priced below the same car in
the US for exactly this reason. Honda kept
cars from flowing across the border in respone
to the price discrimination by making it tough
to move the warranty.

Jeff

[MJ]

"The current ban should be lifted, therefore, not to encourage reimportation, but to allow the incentives to surface that will "force" wider use of market practices and the international trade regimes that reflect such practices."

Overall, I'm in favor drug-reimportation for precisely the reasons Cato expresses above. The problem is that the legislators that are pushing the drug-reimportation bill have already anticipated that outcome and are moving to block it:

"An...insidious bill in the Senate would not only allow the reimportation of drugs from Canada at their government controlled cut-rate prices, but require U.S drug firms to sell as many of the drugs as the Canadians want at that price."-Stephen Moore

That bill would remove the one bargaining tool the pharma companies have left in dealing with foreign governments, effectively making it illegal for those companies to negotiate prices. A couple of Sundays ago the Orlando Sentinal ran an editorial praising this bill saying that the threat of pharmaceutical companies to withhold drugs from reimporting countries amounted to "bullying".

[Jane Galt]

I see Cato's point, but I think they're willfully disregarding the risk of "compulsory licensing", aka voiding the patent. Jeff, the market price for drugs is almost certainly lower than the US price in other countries, but it is almost certainly not 40-60% lower, which is what consumers in countries with price controls currently pay. Few people would find it worth the bother of reimportation to save 5% on their drugs, especially when you factor in shipping.

[joe]

You mean I'm subsidizing automobile R&D for Canadians?

[Larry A]

Jeff: Or maybe the Honda Civic you purchased in Canada isn't "improved" with some of the US government mandated "economy" and "safety" features. Like the one that won't let my Jeep shift out of neutral unless the brake pedal is down.

[joe]

"Jeff, the market price for drugs is almost certainly lower than the US price in other countries"

Is there a typo in here? Are you saying that, absent government intervention, it would cost more to buy Levitra in France than in the US? Why?

[joe]

OK, I get, you're saying the opposite; the market price in other countries is lower than the market price in the US, because we're richer.

[Jamie S]

Jane,

right on. If drug companies try to recoup some of their fixed R&D costs in foreign markets, companies there will simple start making knockoffs, which Americans will then reimport. The only reason this doesn't happen already is technical difficulties and the fact that they are already getting them close to their marginal cost. Without a way to enforce patents internationally, this would be a nightmare. I think, however, that this is probably not as much an issue in Canada. It will be a problem in Mexico to a greater degree but there are still some legal mechanisms to enforce patent law. Maybe someone who knows a bit more about international patent law can fill us in.

Cato's proposal that companies can use no-resale contracts as a method to discourage reimportation from countries being offered a lower price is a bit silly. They admit that enforcement of these contracts would be difficult, but underestimate the economic incentive of third party distributors to violate such contracts.

[Luisa]

Take off your corporate lenses, Ron! Foreigners ARE paying the full price for American drugs. WE are paying at least triple the "full price" due to corporate pawns in Congress and the White House government forbidding market competition in the US -- often for drugs developed largely with taxpayer funds.

[Highway]

But wouldn't patent violations of that sort be an actionable item in some sort of international trade body? I do realize it would be difficult to stop industrial espionage that would bring drug formulas from the US to other countries, but is there really no action that can be taken against a country that invalidates patents? It just seems unsporting that so many can be, in essence, free riders on the work of others. But I guess we see that all the time, in just about everything.

[joe]

Ah Highway, you're running up against the libertarian globalist paradox - intellectually, they know they need to have a government enforcing contracts, but emotionally, they aren't willing to support the structes necessary in a globalized world to carry out that function.

As for reimportation and its effect on the domestic market (and drug companies' R&D budgets): I might well decie to reimport drugs from Canada. But there is no way in hell I'm ingesting substances from Nigeria, I don't care what the packaging says. The countries Americans would be willing to buy drugs from are going to be those whose prices are the closest to our own.

[Jamie S]

Highway, I think that patents can only be enforced through treaty agreement between the countries. I might a have a treaty with Canada, but not with Mexico. It also depends on the willingness of foreign government to enforce those agreements.

Luisa, If you think that is true, I encourage you to invest every penny you have in big pharm. A decade length chart of several of the largest drug companies should quick dispel the idea that these companies are achieving some sort of "monopoly profits."

[Amy Phillips]

We do have binding international agreements with most of these countries under which they've agreed to respect our patents. They'd have to bow out of numerous bilateral trade agreements in order to violate our patents. So the real question is, can we make it worth their while to continue respecting our patents by giving them enough other free trade incentives, like lower tariffs on their products and a greater ability to import into the US. Patent agreements don't exist in a vaccuum, which is why I tend to think the Canadians et. al. will yell and scream and throw a tantrum, but in the end, they'll have no choice but to respect our intellectual property.

The more interesting question, in my opinion, is how this piece of the puzzle will affect socialized medicine. Liberals in this country always tell us how much more efficient socialized medicine is by pointing out that Canada spends so much less than we do on healthcare. In fact, lower prescription drug costs are a big part of the reason that Canada can afford to have socialized healthcare. It will be interesting to watch what happens if these socialized systems have to pay what our free market currently pays for drugs, to see whether they can still afford to have socialized medicine at all.

[fyodor]

"You mean I'm subsidizing automobile R&D for Canadians?"

By definition (at least the one we're using here), a subsidy is a centralized form of assistance. Therefore, the higher prices for autos in the US do not constitute a subsidy. Sometimes we stretch the meaning of the word to make a point, and thus one may want to say what you said above to make the point that the US market does more to make auto R&D possible than the Canadian market. But technically and literally speaking, the answer is no.

[s.m. koppelman]

What's not "market-oriented" about government health services using their concentrated buying power to negotiate low prices from drug companies? If they were private monopolies would they be cheered?

Are people who buy cheap 100-roll packages of toilet paper at Costco "free-riding" on the consumers who buy 4-packs at at their supermarket at five times the per-roll cost?

If Wal-Mart buys a million lightbulbs at a time and resells themn at less than the wholesale price paid by a mom-and-pop store, are they unfairly depriving the lightbulb manufacturer of revenue, or are they just using their market power to eat into the manufacturers' margins fair and square?

[Jamie S]

Amy, You seem to know a bit about the international patent thing - What recourse would the US have if foreign companies were violating trade agreements? It seems to me that a lack of political will would prevent any serious leverage from being applied. Additionally, the converse of offering lower tarriffs for cooperation, would be threatening higher tarriffs for non-cooperation. It sucks to think we would have to "buy them off" to simply to enforce a their own laws, and the penalty idea is not one I think most free traders would be happy with. BTW, I think current tarriffs on drug imports are already effectively zero.

[Jamie S]

s.m., I think the complaint is that gov't healthcare services *don't* negotiate a low price, and that the law prevents market based competition to provide those goods. Thus, the higher price gets passed on to us.

[fyodor]

"What's not "market-oriented" about government health services using their concentrated buying power to negotiate low prices from drug companies?"

Those governments are using tax monies to pay for these negotiated low prices. Citizens of those countries don't have the choice not to pay those taxes and drug companies don't have the choice to sell their wares in a market not corrupted by said use of tax monies. That may seem like an esoteric point, but you can see the affect it has on the prices. Take away the government's ability to coerce money from people for this purpose, and the whole system falls apart. Convenient way to negotiate, with money people had to give or else go to jail.

[fyodor]

"Ah Highway, you're running up against the libertarian globalist paradox - intellectually, they know they need to have a government enforcing contracts, but emotionally, they aren't willing to support the structes necessary in a globalized world to carry out that function."

Joe, seems you're conflating different POV's of different libertarians into a contradiction that doesn't necessarily exist. We're not all Kevin Carson, y'know! 🙂 Many libertoids have no problem with international enforcement of intellectual property, as some posts since yours demonstrates. I will agree, however, that once you get outside your own sovereign border, libertarianism inevitably becomes messier. That said, I think international law is inevitably messy for any POV.

[s.m. koppelman]

I don't ever hear street-sign manufacturing companies complaining that government roads departments unfairly strongarm them on prices by virtue of their being tax-funded monopolies.

What makes the pharmaceutical market a special case?

[Jamie S]

fyodor,

there is a big distinction between intellectual property and patent enforcement. Intellectual property is an expansion of already bloated copyright law (currently life plus 75 years), while patents are 20 years, and are usually considered a property right. By libertoids at least.

[thoreau]

joe-

I'd be willing to take a medication imported from the third world if two very simple conditions were met:

1) That a reputable and independent laboratory in the US (not affiliated with the pharmacy selling the imported drug) randomly tested samples from the pill bottles to make sure that the content was indeed what's on the label.

2) That this laboratory guarantee its results in writing with all the appropriate legalese that allows me to sue them if they're wrong, and includes proof that their liability insurance has signed off on this.

This combines 3 things: Independent testing, an incentive to cover their ass, and an additional testimonial from yet another independent entity (the insurance company) that will be hit hard if they're wrong. 2 independent entities with big incentives are good enough for me.

[Tim]

Hey s.m.,

the reason you don't "don't ever hear street-sign manufacturing companies complaining" is because the signs on highways are manufactured BY THE STATE.

[fyodor]

sm,

The big R&D costs that have been mentioned by others are enough to make drug production a unique issue. Plus, tax subsidies for roads is a fairly universal phenomenon (whether or not it should be) and it's hard to say whether the government's role hurts sign makers by limiting competition or helps sign makers by expanding the market. And I doubt sign making is the big business drug making is. Maybe sign makers do hate having to work with governments but we just don't hear about it! 🙂 Seems like a silly point to have to make, but you brought it up! 🙂

[Krybo Amgine]

I don't ever hear street-sign manufacturing companies complaining that government roads departments unfairly strongarm them on prices by virtue of their being tax-funded monopolies.

I don't think there's much chance of a "Winnipeg - 10 km" sign being resold to a consumer in California.

[Russ D]

joe brings up a point that I was going mention in regards to knockoffs.

If your have Illness A, you can get the US drug, a cheaper Canadian knockoff, or a dirt-cheap Sudanese knockoff (hypothetical countries) to treat the illness. You may trust the US and Canadian ones but not the Sudanese ones. But... would you trust the Sudanese knockoff if there was some testing house you trusted that said the Sudanese one was A-OK?

If you think about European drugs that are not available in the US due to lack of FDA approval, it seems that consumers are not really as concerned about patents and the market protection the patents provide as much as they are concerned about the certification of the drug's safety. I don't know why someone would trust a Canadian knockoff over a Sudanese knockoff except for the fact that "Canada" is a more trusted brand-name than "Sudan" in the US market.

Even if you accept that the FDA is honestly trying to ascertain drug safety, the fact is it also has the effect of being a "blesser" of products on the market. I don't have a problem with that role, it's acceptable to me that the FDA could say that it won't bless any "generic" knockoff of a drug for X years, either following patent law or making it a defacto patent. The problem is that by law there can be no other competing certification boards. So while some European markets have certified drugs on their markets, the FDA not only prevents those drugs from being marketed here, it also prevents knockoffs of those drugs from being marketed here.

What we have is a certifying body that by law, not by market shakeout, is a monopoly that can give preferential certification to anyone it chooses giving them market control. If you put your full faith and trust in the FDA, that is fine. But the fact is if you also have full faith and trust in, say, the French equivalent of the FDA, you cannot make any purchase based on that.

It's absurd to think that you cannot treat an illness due to patent protection.

[Jason Ligon]

"You mean I'm subsidizing automobile R&D for Canadians?"

Yes, but to a much smaller extent. As Jeff points out, there is a natural amount of price discrimination in global markets. You can charge more of people willing and able to pay more. It isn't that this is an insignificant point, it is that it is a small phenomenon compared to the weight of the tax funded monopsony combined with the lack of such in the US.

The reduction in prices in government run systems result from several components:

1) s.m. koppleman's monopsony buying power. Buying in bulk allows you to drive down costs because companies make up the difference on quantity.

2) The kicker about the bulk buying argument as it relates to pharma is that the buying power of the Canadian government is greatly amplified by the fact that prices in the US can rise. Companies won't sell their drugs in total at a loss, but that doesn't mean they won't gouge the US market for sunk costs so they can meet the tax supported demands of another market. Total profit in pharma is very, very close to the same as profit realized in US sales only.

3) The Canadian government in particular has in the past played 'hard ball' when drug companies raised prices, not by refusing to buy at the higher price, but by threatening to violate the patent by going to Brazil for generic versions.

There is no free lunch. If US prices fall and foreign governments still refuse to pay higher prices, there will be a very strong negative impact on development. Similarly, if foreign governments decide that they will get all new drugs through violation of copyright, they will soon find no new drugs to copy. On the other side, a single payer system that actually has to pay its own development costs would likely cause a rebellion in those countries.

You can't help total healthcare by destroying the incentive of private investment. I hate supporting the rest of the world with my drug prices, but I am legitimately scared that if I don't continue doing so, demands of the current generation will guarantee current medicine for all and future medicine for none.

[Isaac Bartram]

"....signs on highways are manufactured BY THE STATE."

Not true, at least not in Fla. Road signs are supplied to the State by private contractors thru open bidding.

However most scenarios for govt controlled drug pricing have been price setting schemes. The supplier is told what to supply and what the price will be. This is backed up by the state's coercive power. This is not the same as competitive bidding.

[Darwin]

The prescription drug market in the US has been distorted by allowing a third-party (i.e. insurance companies) to pay for prescription drugs. Originally, insurance was designed to cover catastrophic events, such as the loss of a home or a primary wage earner. Now, we use "insurance" to pay for routine office visits. If patients paid directly for their prescription drugs, doctors, patients and pharmaceutical companies would react to market pressures and keep prices reasonable.

[joe]

"Companies won't sell their drugs in total at a loss, but that doesn't mean they won't gouge the US market for sunk costs so they can meet the tax supported demands of another market." Why would they do that? Why would then choose to sell even some of their drugs at a loss? Why put their profits into subsidizing drugs for Canadians, rather than investing in, say, a 40 foot cabin cruises and a crew of genetically enhanced eye candy?

I do not believe these companies are losing money selling to Canada. They're just not making as much as they'd like. Poor babies.

[Jason Ligon]

"I don't ever hear street-sign manufacturing companies complaining that government roads departments unfairly strongarm them on prices by virtue of their being tax-funded monopolies."

Is this to say that if all sign purchasing were made by the federal government, we would get high quality roadsigns at low prices? Kind of like defense spending, maybe?

[joe]

Darwin, perhaps President Kerry's plan to cover catastrophic costs will have the result you're looking for, as individuals choose to forego insurance plans, since the "big stuff" will already be covered.

OTOH, it may result in more people having comprehensive insurance, since insurance will be cheaper for individuals and companies to buy, without the catastrophic costs being worked in.

[Gary Gunnels]

"The companies' ultimatum to Canada and Europe would be something like: pay your fair share of our R&D costs by accepting higher prices or tell your citizens that they will have to go back to using older less effective drugs."

Whose R&D costs? Sorry, but this issue is mythologized a lot. Some of the largest pharma companies aren't U.S. companies after all, and European countries subsidize their pharma industries ... Europeans pay for these drugs via their tax dollars as much as through their pocket books.

[fyodor]

Gary Gunnels,

I don't know all the details of European drug subsidies, but I wonder what your point is: is patent protection unnecessary for drug innovation? Or put another way, does patent protection provide no incentive to innovation in light of said subsidies?

[Jason Ligon]

"Whose R&D costs?"

Profit in every major pharma company, regardless of country of origin, is driven to an obscene extent by US sales. The subsidies given could not support a fraction of current development if the profitability of the US market suddenly dropped to that of the Canadian market.

The answer to this question is, 'The R&D costs funded by the US consumer - nearly all of them.'

[jc]

Complaining about pharma profits completely avoids the subject of supply and demand. I'm not arguing that some form of price gouging could be happening, but price gouging can only take place when supply is being limited or demand is being inflated.

This is why I tried arguing above that patent protection and foreign market price-fixing may be the wrong path to go down when looking at the preceived high price of pharmaceuticals. I guess it's easier and more emotionally satisfying to "blame big pharma", and while it's not entirely wrong to do that, it's certainly wrong to do that entirely.

I've been involved in filling prescriptions of nursing homes at 2 separate pharmacies. I don't have any studies to back up my observations, but it appears that the number of prescription meds per patient is higher now than 20 years ago. As well as the number of patients. From personal experience with my own grandmother, I've had to grill the doctors as to exactly why each medication was prescribed; my grandmother was certainly too frail and exhausted (Alzheimer's) to question authority, but I wasn't. There is no sense in prescribing diuretics to a patient to induce them to "drink more fluids" (old folks often reduce their fluid intake because they're in pain and would rather not have to get up to go to the bathroom), then have to deal with the nurses complaints that she has to go to the bathroom too often (assistance required), and then prescribe another med to help her "hold it". I could have an effect before the "privacy" laws went into effect, but since I wasn't the prime contact (my mother was) they no longer had to answer my questions about her medical care. At one point though, one of the doctors said "as long as Medicare is covering the cost, what do you care?" My first reaction was that they're keeping these people alive as long as they possibly can to make sure they can continue billing. If it's fair to say "poor babies" about big pharma, it's also fair to say it about doctors, hospitals, and nursing homes. But some people want to delude themselves into thinking everyone in health care is altrusitic except the drug makers.

[crimethink]

fyodor,

TBH = to be honest

[Gary Gunnels]

Jason Ligon,

Got some research to back that assertion up with?

fyodor,

My point is that Europeans do pay relatively high prices for their drugs; they simply don't pay such high prices at the counter because they've already had that money deducted from their checks via high taxes. That money in turn is forked over the the European pharma companies - some of which likely goes to to American companies because some of those pharma companies are owned by American firms.

[fyodor]

"If it's fair to say "poor babies" about big pharma, it's also fair to say it about doctors, hospitals, and nursing homes"

I suspect that most people who say that about big pharma would be likely say it about most anyone making more money than them (or perceived to be, since not even everyone employed by or invested in big pharmaceuticals makes a lot of money).

[fyodor]

thoreau,

I didn't read your whole post (boss has caught me on the net twice already this morn!), but regarding your objection to "people [who] criticize economic regulation and focus only on how it hurts the business," a few things. First, if, as I've already pointed out and you've nominally agreed, regulation is a form of theft, what's especially wrong with focusing on that? Secondly, I don't think anyone here has acted that way anyway. Most folks were discussing (and in fact have continued to) the effects of regulation on innovation, of which you evidently approve. But then Joe made a snarky comment implying that pharmaceutical companies were crybabies to object to losing profits to regulation, and someone (was it crimethink?) took the bait and gave him shit. That's all that happened, really! Read over the thread and see! (Before I jumped in, that is.) I don't think that's tantamount to caring only about business or falling into the leftist frame of mind of zero-sum analysis. It was only pointing out that what Joe considered frivolous might not seem so were it to happen to him. For my part, I admitted that from the statist/collectivist POV of left-liberalism, regulation is not theft, so I can understand his POV even if I disagree with it, but I still felt his tone revealed the very callousness he was attributing to those who were in the process of analyzing the innovation issue.

Well, that's what I think happened. I can understand the desire to distinguish ourselves from the type of libertarian (real or imagined) who might say rich people should be left alone because they're great while poor people can fuck off and die, but really, I just don't think anything of the sort was in evidence on this thread.

[Jason Ligon]

"From Pfizer's latest quarterly:

R&D costs: $1,806m
Sales, informational, admin: $4,258m"

Also from the balance sheet of pfe:

3/31 outstanding Long Term Debt: $7,144 million
Net Margin (not including long term debt): 3.2%

Inhuman margins, I tell you.

[fyodor]

crimethink (or anyone),

What's TBH?