Thursday, March 10, 2011

Regulate Pill Prices

My friend Sudip came up with a public policy idea so simple and logical, I am surprised I haven't heard it before. It's a powerful idea that could make an enormous difference for the American economy and the federal government deficit.

First, observe the anti-dumping laws in our trade regulations, which prevent non-US manufacturers from selling products at a loss in the states. Dumping is considered a predatory practice, an investment foreign companies make with the goal of hurting their American competitors, while they make their profits elsewhere. The US government protects American manufacturers by regulating multi-national pricing practices.

Now take the pharmaceutical industry. It is well established that the multinational pharmaceuticals earn their profits in the United States. In the developing world, people can't afford to pay anything close to US prices. In the developed world, away from the states, governments negotiate with manufacturers and set prices, generally far below US prices. Here in the states, the market determines how much the drug companies can charge. Certainly, health insurers can negotiate more effectively than individuals can, but they don't get help from regulators. In fact, legislators know how important US profits are to the pharmaceuticals, so they protect this industry from regulators who might want to side with consumers. So life-improving or life-saving pills are available here, and often invented here, but we pay fifty times what our friends in India pay.

While the practice of regulating prices and the relative profitability of selling in different countries is well established, it is employed only to protect US business. American consumers are asked to provide big pharma with almost all its profits, while sales abroad clearly prove that pills could be made and sold profitably for much less.

A profitable pharmaceutical industry is a critical player in American health care and we are fortunate to have them as a part of our compelling economic arsenal. And clearly profits drive them to perform research which can lead to newer better drugs with luck and a lot of money. But health care costs in the US are famously unsustainable. Governments, corporations, and individuals who pick up the tab for our health care cannot make their future budgets balance, because health care inflation has been steadily above inflation in other goods. Why should the American consumer, the sick consumer in particular, be asked to shoulder the whole subsidy, while the rest of the world free rides on the latest science?

Pharmaceuical companies that sell drugs in different countries should not be allowed to vary the price as they see fit. Why not say the US price can't be more than, say, 25% greater than the average price in the next five highest-price countries? That's far from "most favored nation," and would still leave a lot of profitability and incentive to do research. The US consumer would benefit, insurance carriers would benefit. US non-pharma business and government would benefit. Other rich countries might see a price increase for their pills. But the pricing would be much more fair.