Policy researchers at the Memorial Sloan Kettering Center for Health Policy and Outcomes have published a recent, valuable Health Affairs Blog post. The post shows that major pharmaceutical companies that manufacture some of the top-selling drugs “charge much more for their drugs in the United States than they do in other Western countries.” US prices averaged 2.4 times more than the $81 billion Americans would have paid at the average prices in other affluent countries; Americans paid a total of about $197 billion, or an excess of $116 billion per year. That would be $1.16 trillion in higher charges in a decade.
The one danger posed by this excellent work by Nancy Yu, Zachary Helms, and Peter Bach is that, because it focuses on the excess of US prices over prices in other developed countries, it could promote the “foreign free-rider myth”—the idea that US prices have to be high to pay for pharmaceutical research and development because other nations with lower prices don’t pay their fair share of research and development costs. This claim that “everyone gets a free ride off us,” pushed so vigorously by pharmaceutical companies to the US public and policy makers, is simply not true. The claim has been made so often for so long that many hold it as an economic fact, even though no solid evidence is presented to back it up.
In fact, other countries such as Canada and the United Kingdom are keen to attract pharmaceutical research and development investments. Prices in these nations are set to enable companies to recover all research and development, manufacturing, marketing, and overhead costs, and to make a reasonable profit. UK prices, among the lowest in Europe, have long been set to pay for all these costs plus a profit.
Government and industry reports in Europe and Canada undercut the myth of foreign free riders. As Europeans and Canadians will tell you, the prices charged on new patented drugs are very high, about 30–50 times manufacturing costs. One reason why Americans pay even more is that our political leaders are richly rewarded by an army of more than 1,000 lobbyists to not set up an independent agency to determine fair prices that reflect the added clinical value for patients: Drug companies champion what they call a “free market,” but they want to disarm the purchasing side of the market before bargaining even starts. We have all witnessed the market pricing spirals that result in burdens for businesses and taxpayers.
The Myth Of Silos
The free-rider myth is based on the claim that Canadian revenues at Canadian prices fall short of paying for Canadian research and development, German revenues at German prices fall short of paying for German research and development, and British revenues at UK prices fall short of paying for British research and development expenses. But such market silos are a myth. In fact, if a better new drug is discovered in one country, it is sold in every other country. The myth of foreign free riders misrepresents how research costs, prices, and revenues are related in an international pharmaceutical market.
When pharmaceutical companies threaten that they will cut back on research if Americans pay European or Canadian prices, it’s a kind of economic blackmail: Pay our excess US prices, or your families will suffer from cutbacks on research for new cures. President Donald Trump and his team should call this bluff, because no research-based industry will cut back on the source of their own future revenues. The drug industry could much more easily cut back on marketing costs, which are two to three times greater than reported research costs before taxpayers’ subsidies.
The $76 billion in research and development that pharmaceutical companies claim overlooks the ways that US employers and taxpayers pay for at least 44 percent of total corporate research and development through tax subsidies and credits. If one adds the taxes not paid when companies park tens of billions in foreign tax havens, most of the high risk and cost of pharmaceutical research is actually borne by taxpayers, not the companies. And this does not take into account the billions in research conducted by the National Institutes of Health, other government agencies, foundations, and charities.
Finally, most corporate research and development is directed at minimally innovative new drugs. Independent teams of physicians and pharmacists conclude that 85–90 percent of new drugs offer few or no clinical advantages over existing drugs. But all of them give companies another 20 years of patent protection for charging monopoly prices.
The pharmaceutical lobby convinced then-President Barack Obama to prohibit major forms of national and international free-market price competition. Will they be equally effective getting Trump to protect high prices by promoting the myth that lower prices will reduce research and innovation?
This analysis is based on 25 years of the author’s research and does not necessarily represent the views of any institution to which he is affiliated.