President Trump proposed last week that Medicare should base what it pays for prescription drugs on what these drugs cost in other developed countries.
Medicare would establish an "international pricing index" derived from drug prices in other developed countries, where drugs generally cost less than in the U.S.
Since lowering drugs costs is cited as a top concern by six in ten Americans, the administration is wise to address this issue. And these proposals are in the early stages.
But there are some serious drawbacks to price controls based on drug costs in other countries. First, as Roger Pilon of Cato points out, it's important to understand why our drug costs are higher. It has to do with the cost of developing new drugs. Pilon writes:
In a nutshell, the miracle drugs that have so revolutionized modern medicine don’t come cheaply. On average it takes a billion dollars and 15 years of research and development to meet FDA safety and efficacy requirements, which most new drugs fail. But once a drug succeeds, the second pill costs pennies to produce, which is why patents are so crucial, failing which no one would invest in such risky ventures.
When companies look at the world, however, they see socialized systems imposing price controls—except in America. So they charge market prices here (half the world market) and take what they can get abroad. What that means, of course, is that American’s pay the lion’s share of R&D costs while foreigners get drugs “on the cheap,” and therein lies the political problem here and the call for reimporting “cheaper” drugs from abroad.
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This new HHS proposal is not as far-reaching as the earlier reimportation proposals, but the implications for future drug R&D investment are the same. As the Journal writes, “any investor who wants to bankroll the cure for Alzheimer’s is already staring at a very small chance of success—and the Trump HHS proposal adds another potential limit on return,” likely driving investment “into less difficult drug categories” or into other ventures altogether.
Government funded drug R&D might not then be far behind. That would further politicize the development of drugs, much like European formulary limits do by rendering unavailable many of the modern miracle drugs we Americans enjoy.
Heather Madden has addressed the costs and benefits of R&D.
Another big contributing factor in the high cost of drugs is markups of middlemen (pharmacy benefit managers).
A Bloomberg story recounts how a small pharmacy was reimbursed less than six dollars for pills distributed in a correctional facility. Another company was reimbursed nearly $200 for the same bottle of pills.
The administration has also proposed to give market incentives to companies to sell drugs at lower prices by requiring the price of a drug to be included in advertising.