How to End Unfair Foreign Drug-Price Disparities
In his State of the Union address in January, President Trump said it was “very, very unfair” that “in many other countries…drugs cost far less than what we pay in the United States.” He’s right, and there’s a way to fix the disparity that fits neatly into the president’s own strategy for making trade relations more beneficial to the United States. In fact, he has an opportunity right now in negotiations with Europe.
Brand-name innovative medicines do cost more – for consumers and government and private insurers -- in the United States than in other rich countries. For example, a study by three Harvard researchers, published in the Journal of the American Medical Association last month, found that the asthma medicine Advair cost $155 per month (after discounts) in the U.S. while the same drug in Canada was $74; in Japan, $51; and in Germany, $38. Humira, the highest-grossing drug in the United States, used to treat such diseases as rheumatoid arthritis, costs $2,505 in the U.S. but an average of $1,436 in the seven high-income countries that supplied data.
The reason for these differences is no secret: Other countries have nationalized, single-payer health care systems. The government is usually the monopsony – that is, only – purchaser of prescription drugs and the decision-maker on which patients (if any at all) will have access to medicines. Even when foreign governments aren’t sole purchasers, they impose price controls – in Canada, through a Patented Medicine Prices Review Board. For new drugs, Canadian prices cannot exceed the median price in other yardstick countries, which themselves have price controls.
The result is that U.S. consumers fund new pharmaceutical discoveries, and the rest of the world benefits. As the authors of the JAMA study say, “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation.” Firms based in the U.S. invent the majority of new medicines; no other country is close.
“The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations,” said a February study by the President’s Council of Economic Advisors. “This indicates that our current policies are neither wise nor just. Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area.”
The CEA estimates that 70 percent of patented pharmaceutical profits come from sales to U.S. patients. Those profits are plowed back into R&D, whose results benefit people in countries that produce little or no profits. But if U.S. revenues and profits are reduced, there will be a sharp decline in new treatments – and in overall health – for Americans as well as foreigners.
A study by Thomas Abbott and John Vernon, published as a working paper by the National Bureau of Economic Research, found that “cutting prices by 40 to 50 percent in the United States will lead to between 30 and 60 percent fewer R and D projects being undertaken in the early stage of developing a new drug.”
Conversely, what would happen if other OECD (Organisation for Economic Cooperation and Development) countries lifted or significantly relaxed price controls? A USC study concludes that if European prices were just “20 percent higher, the resulting increased innovation would generate $10 trillion in welfare gains for Americans, and $7.5 trillion for Europeans over the next 50 years.”
Economists know the answer to the problem. In 2004, more than 200 of them, including the late Nobel Prize winner Milton Friedman and current CEA Chairman Kevin Hassett, signed a public letter on how to tackle the price-disparity problem. They said, “The ideal solution would be for other wealthy nations to remove their price controls over pharmaceuticals. America is the last major market without these controls. Imposing price controls here would have a major impact on drug development worldwide, harming not only Americans but people all over the world. On the other hand, removing foreign price controls would bolster research incentives.”
Right, but how can we get wealthy nations to stop their free-riding? The answer is tough bargaining. Price controls badly distort trade and may be impermissible under current trade agreements – and can certainly be changed in future ones. We need better trade deals.
A golden opportunity is on the table now. The European Union is attempting to negotiate a simplified trade agreement with the U.S., mainly involving automobiles, agriculture and government procurement. The deal must also insist on limiting Europe’s price controls on medicines.
Europeans are certainly entitled to take a different national approach to health care. For example, they can provide tax credits or direct subsidies so that citizens bear a lighter burden for drugs and other health care costs. But they cannot take advantage of the United States in trading relationships with government-mandated monopsony pricing.
The Trump administration has already shown that tough bargaining on drugs can pay off. After recent negotiations, South Korea agreed to equal treatment for U.S. drug manufacturers in a renegotiated bilateral agreement; in the past, Korean companies got to charge more than U.S. companies.
In addition to renegotiating agreements, we should appoint a special negotiator with jurisdiction over complicated issues of pharmaceutical trade and demand sanctions for countries that cheat on current trade pacts. The U.S. exported $47 billion in pharmaceuticals in 2015. That figure would be far higher without unfair foreign price controls.
Meanwhile, the administration is driving down costs with record approvals for generic drugs – 1,027 last year, breaking the old mark by 26 percent. Easing the path to approval for biosimilar drugs (roughly the equivalent of generics for advanced biological products) would provide even more relief for patients.
In the end, by creating a market for medicines that is more free, at home and around the world, President Trump can improve the health of Americans, keep costs down, and enforce fairness across the board.