One of the few issues in health policy on which there is bipartisan agreement is that it would be nice to lower the prices for patented brand name drugs. It would be even nicer if this could be done without reducing the flow of profits to drug companies that incentivize them to invest in research on new and better products.
One way the Trump administration seeks to pull off this trick is by focusing on other developed countries (think France) who, in the president’s opinion, are freeloading on American taxpayers and consumers. Secretary of Health and Human Services Alex Azar provided the economics and political science for this outrage: “The American senior and the American patient have too long been asked to overpay for drugs to subsidize the socialist system of Europe.”
If Europeans would just pay more, Americans would pay less, and justice would be served. But is this diagnosis correct, and what other remedies are available to us? Economics provides an answer to the question of what determines the price in the U.S.: drug firms with a patent (the time-limited government guarantee against any competition) will charge the price that maximizes their profits from U.S. customers. This price is set as high as it can go without driving too many customers away. In contrast, the price in Europe is set by politics, as a result of a negotiation by drug firms with a central body that decides prices for a country’s socialized health insurance system. American drug firms often can and do walk away from European markets if the price is too low, but for some branded products they settle for the best they can get, which is often below the U.S. price. Research found that the prices paid by Medicare for the top 20 most costly drugs (almost all branded) was 80 percent higher than the average in a large sample of developed countries with social insurance systems.
Here is the problem in coming up with a solution. Even if drug firms get higher prices in Europe, they will have no reason to lower the U.S. price below the profit-maximizing level; it should stay the same. A greater flow of profits from European markets may incentivize investment in more new products in the long run, but that will be little consolation for current American seniors and American insurers. Plus, it is hard to see how the Trump administration can force European socialists to raise their payments closer to the outrageous U.S. levels while continuing to buy the same amounts of the same drugs. A threat to impose a tariff on European products might force those countries to agree to pay more for the same thing, but such one-sided negotiation will be hard.
That leaves the only other option — force down U.S. prices. Any attempt by the U.S. government to do this will be filled with irony. For one thing, this would not be government intervention in a free market — instead the government would be adding new regulations to offset the effect of patent regulations that it itself enforces. Moreover, the Trump administration is apparently considering forcing drug firms to charge Medicare no more than prevailing European prices for some U.S. drugs. That would be freeloading on the price negotiation efforts of European health systems, the same socialist systems that Secretary Azar denounced.
What else to do? We first need to admit that we cannot have it all — lower prices and more great new drugs. We could take a more direct approach and reduce the strength of patent protection to allow more competition in sooner. Reducing barriers to generic competition always makes sense (unless you worry about that long shot blockbuster idea that will be abandoned if profits fall even a little). Most sensibly, but probably least likely, politicians of both parties should stop promising what they cannot deliver.