Prescription drug companies have been vilified, especially over the past few years, and rightfully so. They charge outrageous amounts on drugs that continue to be over-utilized.
In response to this, many politicians have proposed policies to lower the costs of such drugs in the American market. Many Democrats, including Vermont Senator Bernie Sanders (VT-I), have called for proposals that permit Medicare to negotiate prescription drug prices for its beneficiaries. Many Republicans, as well as Democrats, have suggested we permit the importation of drugs from other countries, namely Canada.
But there are causes for concern with both these proposals. First, lets look at the possibility of Medicare price negotiation. Obviously, Medicare, with all of its beneficiaries, would have a strong bargaining position with drug companies. My worry, however, is that Medicare, as a result of this, gets to aggressive in its negotiations. It is possible that under such an allowance of negotiations by Medicare, the negotiated price could significantly affect the incentives of pharmaceutical companies to produce drugs. Back in 2006, the idea of price-negotiation by Medicare was studied by the Manhattan Institute, and what they found was concerning. They found that such negotiated prices would “would lower drug prices below those that otherwise would be set by the market…reduc[ing] incentives for the capital market to invest in the research and development of new medicines.” Still not concerned? Well, their research also found that such reduced incentives would results in between 6 and 12 fewer medicines each year. Although in the short-run negotiations would certainly lower prices for Medicare beneficiaries, in the long-run “federal price negotiations would yield a loss of 5 million expected life-years annually, an adverse effect that can be valued conservatively at about $500 billion per year.” For reference, the US spent $388 billion between June 2017 and June 2018.
Its also possible that pharmaceutical companies attempt to make up the lost revenue by increasing prices on private payers. Robert Book detailed a similar instance when Medicaid was required to “get the best prices for prescription drugs offered to any private payer, or 15 percent off list price, whichever was lower.” The government also estimated some $3.3 billion in savings over 5 years for both the states and the federal government. Not only did that savings never come about, but discounts for private payers also fell by, you guessed it, 15 percent. It is entirely likely that an unintended consequence of Medicare price negotiations is the shifting of cost onto those not part of the negotiations-the private payer.
What about importing drugs from Canada, as well as other countries? That seems like a good idea. Perhaps it would increase competition with American drug companies, reducing prices. After all, people in other countries pay far less for prescription drugs than we do.
But why do other countries pay less for prescriptions than we do? To put it simply, other countries have heavy price regulations that push down the price of such prescriptions. Well, if you haven’t been paying attention to the situation in Canadian health, Canadians are constantly dealing with shortages of drugs (there even is a website devoted to Canadian drug shortages). Regardless of the cause, these shortages that occur throughout many developed countries do give reasons to doubt whether drug importation could actually serve to mitigate our drug pricing problems. After all, if Canada is struggling with drug shortages, how can we expect it to adequately supply the soaring demand that would occur were importation to be legalized in the US. In order for such supply to do so, prices for Canadian pharmaceuticals would have to rise to encourage such increased supply, something their drug price policies seek to prevent. It is also entirely possible that drug prices are high in the US to make up for the lost revenue in other countries. After all, to get to the cost transferring problem with Medicare we discussed earlier, you simply replace the other countries with Medicare and the US with private payers. In which case, the US would also likely suffer from the consequences of lowered revenues of pharmaceutical companies that these other countries suffer from, namely decreased innovation.
Clearly, drug prices in the United States are at outrageous levels. Republicans and Democrats have pushed for these policies to help mitigate the problem, but there are very important reasons these policies at best will not solve the problem, and at worst will lead to other problems. There are policies we can enact to contribute to lowered drug pricing, but neither of these two are adequate. I will gladly touch on some reforms that can be enacted in a future post.