Timothy Taylor, the Conversable Economist, posted today on some highlights from the late Uwe Reinhardt’s last book, Priced Out: The Economic and Ethical Costs of American Health Care. He, following the lead of the Milken Institute Review in its excerpt of the book, shows charts comparing the cost of various health care goods and services in the United States to the cost in other countries. The bottom line, which will surprise no one who has followed the issue, is that the cost of pretty much everything is higher in the United States.
But also following the Milken Institute Review‘s lead, he shows charts on the price of some brand name prescription drugs, showing that they are way above the prices in other countries.
If you want to know the differences in prices of drugs, though, that comparison is highly misleading.
Here’s what I wrote in my review of Reinhardt’s book in the Summer 2019 issue of Regulation (scroll down a little over half way):
Reinhardt’s most important factual message is that Americans spend more per capita on health care than people in any other country and that the prices we pay for health care are much higher than prices elsewhere. He is right on both counts.
He uses two figures, though, that bias the comparison for drug prices. One figure shows that the average price for a 30-day supply of Xarelto, used to prevent or treat blood clots, is $292 in the United States versus $126 in the United Kingdom and $48 in South Africa. Another figure shows that the average price for a 30-day supply of Tecfidera, used to treat multiple sclerosis, is $5,089 in the United States versus $1,855 in Switzerland and $663 in the UK. Those comparisons are biased because both drugs are brand-name drugs, yet a large percentage of the drugs Americans take are generics.
According to an October 2017 study by the Commonwealth Fund, 84% of the drugs Americans took in 2014 were generics. The UK was tied at 84%, but every other country was much lower. The lowest in the Commonwealth Fund study was Switzerland, where only 22% of drugs taken were generics.
Not surprisingly, therefore, the differences in spending on drugs between the United States and these other countries were narrower than the brand-name drug prices would suggest. In 2015, according to the Commonwealth study, per-capita spending on pharmaceuticals in the United States was $1,011.40 versus $783.30 in Switzerland and $497.40 in the UK. One might wonder if that’s because the higher prices in America give us an incentive to buy a lower quantity of drugs per person, but the Commonwealth study says that’s not so: “Drug utilization appears to be similar in the U.S. and the nine other countries considered.”
Disappointingly, in Reinhardt’s discussion of drug prices he does not mention one of the culprits responsible. The FDA makes prices higher for some drugs by putting barriers in the way of pharmaceutical companies that make so-called “me-too” drugs. Frequent Regulation contributor Henry Miller, formerly of the Hoover Institution, has defended such drugs on the grounds that no drug is a perfect substitute for another and that, therefore, some patients whom the original drug wouldn’t help would benefit from the me-too drug. But there’s also a narrow economic argument for these drugs, one that I’ll make by analogy with cars. A Chevrolet is a me-too Ford. If a government agency put barriers in the way of Chevrolets, Fords would be more expensive. Putting barriers in the way of me-too drugs gives pharmaceutical companies even more market power.
READER COMMENTS
Alan Goldhammer
Aug 12 2019 at 2:34pm
David – you are mixing up apples and oranges here. The primary reason that generic utilization of Rx drugs is higher in the US is the huge price differential and that the US has an expedited pathway for approval. Other countries have negotiated prices for Rx drugs and the marginal difference between the brand and generic is not nearly as wide.
The final paragraph in your comment only applies to biologic drugs which for a number of years did not have an FDA pathway for the approval of ‘biosimilars’ (the generic equivalent in this category of drugs). Even with this pathway, the innovator company can still play games with the US patent system and delay introduction of the biosimilar product (most generic drug delays are the result of patent litigation and not the lack of regulatory action). Take the example of AbbVie’s Humira, the best drug in its class for several clinical indications. The FDA has recently approved two biosimilars but the patent does not expire until 2023 so American consumers will continue to pay inflated prices relative to Europe where the biosimilars are already available. In anticipation of full loss of market exclusivity, AbbVie has raised the price of Humira in the US quite dramatically to compensate for lack of sales in foreign markets. BTW, Henry Miller’s argument is speciously false.
There is a lot of wasted overhead in the US healthcare system as I have come to realize in my work on a non-profit board that runs a health insurance program for research fellows at a large institution.
David Henderson
Aug 12 2019 at 3:41pm
Alan,
You write:
That’s absolutely correct. I wasn’t mixing apples and oranges. If I were to use your analogy, I would say that apples can be a close substitute for oranges.
Alan Goldhammer
Aug 12 2019 at 4:11pm
Let me try again. The two drugs you cite in the second paragraph above, are still on patent in the US and do not have generic competition. This is irrelevant to the pricing and utilization arguments about generic drugs.
David Henderson
Aug 12 2019 at 4:22pm
Thanks, Alan. That wasn’t clear in your earlier comment.
My point still stands, though. Notice that he used two drugs that were patented with no generic competitors to make a statement about drug prices in general. That’s why it was misleading. It wasn’t misleading about the prices of those two drugs in the U.S. versus other countries. Rather, it was misleading if he meant it to stand for drug prices in general.
Mark Brady
Aug 12 2019 at 5:11pm
Patented drugs are cheaper abroad because pharmaceutical firms price discriminate and charge less outside of the U.S. market.
David Henderson
Aug 12 2019 at 5:40pm
That’s one reason: the other reason is that governments often negotiate prices as a monopsonist and the Canadian government, to enhance its bargaining power, threatens to force brand name Pharma companies to license generics if they don’t cooperate.
Mark Brady
Aug 12 2019 at 8:19pm
Many health care systems act as monopsonists by negotiating lower prices, but in so far as this is an example of government intervention it is in the context of government-bestowed patents.
Do any governments apart from the Canadian government threaten to force brand name pharmaceutical companies to license generics if they don’t cooperate?
Alan Goldhammer
Aug 13 2019 at 7:47am
This was a huge issue when I was still working at PhRMA (I was in regulatory so it was not in our department). There was a multi-year negotiation as part of the Doha round of trade negotiations. I believe that the final agreement allows any party to use compulsory licensing for distribution of needed pharmaceuticals to developing countries who cannot otherwise afford them (best example are the HIV drugs for African countries). In certain cases is also applies to developed countries and Canada has used this as a negotiating tool since 2006.
Brad Hobbs
Aug 13 2019 at 1:21pm
Regarding government negotiation for lower prices. I met two Canadian pharmacists on a vacation to the Caribbean. They told me that while Canada may negotiate a good deal on say two blood pressure meds, those drugs are the only ones available in Canada. If one works well for you, that’s good you got a deal. If however you need to be on several like many people are and the other does not work well for you, then you have no options.
I’m not certain if this was just his hypothetical example of the exclusive drug contract problem they have in Canada, of if blood pressure meds are a specific and true example. Regardless, both pharmacists said that they often have patients who resort to buying meds in the US because of the limited availability in Canada.
Any thoughts on their assertions?
David Henderson
Aug 13 2019 at 4:56pm
Brad, It sounds plausible but I don’t know for sure.
Fred
Aug 12 2019 at 8:05pm
Healthcare and pharmaceuticals are very heavily regulated by patent laws, copyrights, safety and purity laws. These regulations, like regulations in many other areas, are created with substantial industry input that frequently empowers monopolistic behavior rather than consumer interests. I am always puzzled by a defense of the status quo by people purporting free market sympathies. I think that there is no example of the pernicious power of government interference in markets than drug prices. We pay the most in the world due to regulatory capture. The high prices are due to serious non market forces.
David Henderson
Aug 12 2019 at 8:31pm
You write:
You’re right.
You write:
The monopolistic power hurts the consumer in the short run–higher prices of drugs–but helps him in the long run–the higher prices are an incentive to innovate. If the FDA retained all the power it now has to prevent drugs from being marketed, and we didn’t have patents, there would be far less investment in new drugs. I could imagine getting rid of both the FDA’s monopoly power over drugs and the monopoly power created by patents, and then getting some innovation. But keep the FDA’s monopoly power and end the patents and you’ll get very little.
I don’t advocate safety and purity laws, though.
You write:
I don’t defend the status quo, as you probably know if you read this blog much.
You write:
I think you left out a word, but I get your point. I think there are many such examples. Immigration laws, for example.
Mark Brady
Aug 12 2019 at 11:56pm
“The monopolistic power hurts the consumer in the short run–higher prices of drugs–but helps him in the long run–the higher prices are an incentive to innovate.”
But does government patent law achieve the right sort of balance between consumers’ access to drugs and the invention of new drugs? I doubt it. And this isn’t the only trade-off we might consider. There are other ways of incentivizing research into new drugs that don’t involve charging monopoly prices to consumers.
David Henderson
Aug 13 2019 at 12:25am
You write:
I have no idea.
Which ones do you have in mind?
Mark Brady
Aug 13 2019 at 4:17pm
Invention may be encouraged by state aid (I realize, of course, that this would not appeal to you or me) and by private philanthropy (e.g., the Bill and Melinda Gates Foundation).
Inventors can also be rewarded in several other different ways, including (a) earning payments from lectures, media appearances, performances, and sponsorship; (b) exploiting the “first-mover” advantage in selling their inventions before anyone else; and (c) receiving prizes and pensions in recognition of their achievements.
Dylan
Aug 13 2019 at 8:10am
David,
You say:
I certainly agree with the second part of this statement, but I’m not so sure about the first. It sounds like what you are describing is what we already have in the supplements market, where as long as a product is generally regarded as safe (GRAS) then it is allowed on the market. I’m not against this, but it should be acknowledged that this has led to a flood of products making thinly veiled claims about amazing efficacy (veiled because they are not allowed to outright claim they are effective without clinical trial data), but ~0 products that are actually effective. In fact, there have been multiple tests of these products that have found that a very large portion of them do not even contain the active ingredients that are listed on the label.
When I look at the incentives and the scientific difficulty with discovering effective and safe drugs, I have trouble imagining that the pharma world would develop much differently. Do you disagree?
David Henderson
Aug 13 2019 at 4:58pm
I don’t know. What I do think is that you would get much less innovation and much less assurance of efficacy.
Dylan
Aug 13 2019 at 6:50pm
Just to be clear, this is in relation to a no patents and no FDA gatekeeper role over what can be on the market, right?
I apologize, because I know you’ve written on this before, but is your preferred policy then one where we retain patents on drugs and the FDA only ensures safety? Do you expect we would get more innovation in that world, but still reduced assurance of efficacy?
David Seltzer
Aug 13 2019 at 5:59pm
In 1973, Sam Peltzman examined the pre- and post-1962 market to estimate the effect of the FDA’s new powers. The number of new drugs were reduced by 60 percent. From 1963 through 2003, the number of new drugs approved each year approximately doubled, but pharmaceutical R&D expenditures grew by a factor of twenty. Prices for inelastic goods rise, like life saving drugs.
Dylan
Aug 13 2019 at 6:57pm
Do we have an international comparison, since I imagine different countries introduced drug regulation at different times, and the drug industry was not nearly as global then as it is now. Would be interesting to see the impact over different countries, and also if we could dig deep enough into the data to see if the additional drugs that made it to market in countries without regulation have proven to be safe and effective, and eventually made it to the U.S?
David Henderson
Aug 13 2019 at 9:09pm
Dylan,
We seem to have run out of space for me to answer in your thread.
My preferred policy is to have no FDA and to have shorter-term, say 17-year, patents. I think we would get many more drugs and assurance of efficacy with a little lag: the assurance would be a market test and not an FDA test.
Dylan
Aug 14 2019 at 12:55pm
Thanks for the response David. I’m skeptical that market forces would align in a way that would give us as good of a test of efficacy as we have now. And what we have now is by no means perfect on those grounds, there are a number of examples of drugs getting approved where an impartial reading of the data suggests that they don’t work. But I’d certainly be happy to be proved wrong.
Comments are closed.