If drug companies have won the same percentage of performance as government bonds, no one will invest … more
President Trump believes Americans pay too much for brand drugs. Sub His proposalThe US will pay the lowest price for US drugs sold in other developed countries.
At the moment, Americans pay three times more From the average price paid to the OECD countries. So, even if we just paid the average price paying other countries, this would be a significant reduction.
More than one critics have noted that if you limit drug income, we will have fewer new medicines. But the reverse is also true. If we do things to increase the profits of the drug company, we will take more new medicines. The right question is: What is the optimal policy?
My approach to this issue is economists themselves to most public policies. This is an approach introduced by Adam Smith, the father of finances. We start asking what will happen in a completely free market. Then we ask if the government’s intervention of some kind would improve social well -being.
With a free market, I mean a market in which companies are free to develop drugs and (once it is found to be safe and effective) to charge any price the market for the life of a patent. When the patent ends, others are free to produce identical drugs (generics) and charge what is likely to become a competitive market price.
Let’s think about this area from the field.
Behavior of the drug company
Like any monopoly, drug companies are motivated to charge a monopoly price – the price that maximizes profits. If they can separate the markets (and prevent buyers from reselling each other), they will distinguish prices-to charge more to those who are willing and capable of paying more. That is why there are different prices in different countries.
Sometimes it is said that drug companies must charge a high price to restore growth costs, which these days average About $ 2.6 billion per new drug. But this takes the basket before the horse.
The Constitution gives us the government the power to create patents and copyright and the reason is obvious. These short -term monopoly grants allow inventors and pioneers to receive new ideas that have the potential to benefit the public as a whole. However, once the product is invented, the growth costs are a submerged cost. The only thing that matters at this point is the value of the product to people who need it and want it.
Bottom line: There is no relationship between the cost of developing medicines and the price charged to consumers.
It is sometimes argued that, since government funding is involved in the initial phases of scientific discovery, the price charged to the public should be very low. But this is just a variant for the same confusion. Regardless of the role of the government, drug companies are willing to buy the right to produce and sell a medicine (from universities and research institutes) precisely because they can charge a monopoly price.
Once the patent is obtained and many competitors can produce general drug versions, we expect that the competition of the free market will bring the price up to marginal cost of production. Today, over 90 percent of all the drugs purchased in the US today are generally and their own The average price is $ 17.90 per dose.
Impact on public policy
From this brief overview, there are six things that need to be noted.
First, drug manufacturers never get the complete social value of their creations.
The typical patent of drugs lasts 20 years. However, it takes many years from the moment a patent is granted until a drug on the market really appears. On average, a new drug takes patent on the market only for 8 years old. There are circumstances in which possible short extensions are possible. But remember, a drug that has salvation may pass 20 or 30 years before being replaced by a better medicine.
What applies to drugs applies to all innovations and inventions. Economist William nordhaus He has estimated that pioneers (including drug manufacturers, technology companies, etc.) record only about 2.2% of the total social value created by their innovations.
Undoubtedly, we need to think about how to increase rewards for innovation and discovery – not only for medicinal products but also for many other areas.
Second, the performance rate in the pharmaceutical industry have be higher than in other industries.
Critics sometimes argue that the high Percentage earned by drug companies means that consumers have been deceived. However, attracting a drug to the market is not only very expensive with a very long repayment period, the business is also very dangerous. About 90% of all drugs that introduce a clinical trial never get to the market.
If the drug companies have won a percentage of efficiency no greater than the performance of government bonds, no one will invest in medicinal products.
Thirdly, price distinctions in the drug market help improve social welfare.
In Part II we will show that the value of a drug (as measured by people’s willingness to pay for it) in various countries depends on their average income. If the government did not participate at all, we expect to find that different values for a brand drug in different countries almost reflect exactly the differences in income.
President Trump seems to believe that if drug companies were forced to charge the same price to international markets, the US price would be much lower. However, drug companies could increase the price charged by other countries and maintain the price of the US where it is. Something would probably happen in between, and that would mean that many patients would be charged the market.
The same principle applies to countries. If a drug company is able to charge patients with higher income at a higher price and patients with lower income at a lower price. If prohibited by such price discrimination, lower -income patients will fail to take a drug that could help them.
This is a good way to understand the next thought.
Fourth, monopoly pricing may leave many needs.
Suppose a new cancer drug sells for $ 1,000 a month, but the actual production costs are only $ 20, then all patients who are willing to pay between $ 20 and $ 1,000 will be excluded from the market. This leaves us with unfulfilled social benefits that are well above the social costs of dealing with them.
This is probably the strongest argument for government intervention. For example, some economists have supported the replacement of the patent diploma system with a monetary awards system – under which the government will pay the manufacturers for new discoveries and then make the medicines available to the public for prices equal to the marginal cost of production
However, our experience with government regulation should all cause skepticists. In addition, drug companies have discovered several ways to distinguish prices to significantly reduce the size of the problem (including Copay cards to reduce out -of -pocket expenses for those who do not have insurance or limited insurance). Almost Never see a title About a victim of cancer dying because she could not afford her drug price.
Fifth, price distinction creates strong incentives for drug resale in all markets.
One should not surprise that Americans sometimes buy their drugs in Mexico or order them from Canada. Nor should one be surprised when US drug companies warn that Canadian drugs can be insecure – although we do not see Canadians fall dead after eating.
Sixth, other countries are hypocritical.
In addition to the US, almost every developed country negotiates the prices of brand drugs with manufacturers. You may assume that this is out of concern about the health and well -being of their own citizens. However, when it comes to generic drugs produced in these same countries, they tend to be very protective – to show their general producers from international competition.
Americans pay the world’s highest prices for brand drugs and some of the lower prices For generic medicines.
In Part II, we will look at the decisions of brand drug buyers.
