The prescription drug market in the United States is an incredible mess. From an economic standpoint, everything is wrong. Drugs that would sell for a few hundred dollars in a free market often sell for tens or even hundreds of thousands of dollars because we give their manufacturers patent monopolies. This leads to the sort of distortions and inefficiency that would be expected from tariffs as high as many thousands percent.
From a heath perspective the situation is no better. The huge markups give drug companies enormous incentive to misrepresent the safety and effectiveness of their drugs and to push them for uses where they may not be appropriate. This is a big part of the story of the opioid epidemic.
Cumulatively, it is a huge deal in both economics and health. We spent more than $430 billion (2.2 percent of GDP) on prescription drugs last year. These drugs likely would have cost less than $80 billion in a free market. The difference of $350 billion is almost five times the annual federal budget for food stamps. This is real money.
This is the backdrop for three bills proposed last week by Senator Bernie Sanders, along with Representatives Elijah Cummings and Ro Khanna, to address the high and rapidly rising cost of prescription drugs. The three measures provide alternative paths for reducing drug prices.
The first one, “The Prescription Drug Price Relief Act,” would end the patent monopoly for any drug that sold for a price exceeding the median price in five other major countries: Canada, the United Kingdom, France, Germany, and Japan. This would allow large savings since drug prices in these countries are roughly half as much as in the United States. Drug companies would have a choice of either lowering their prices or losing their patent monopoly.
In the latter case, the competition is likely to push the price well below the levels in the five countries. While these nations do regulate drug prices, patent monopolies still let the companies charge a price that is far higher than the price that would exist in a competitive market with generic competition.
The second bill is “The Medicare Drug Price Negotiation Act.” This bill would allow Medicare to negotiate collectively for the drugs purchased through Medicare prescription drug insurance. Since this program spends roughly $100 billion annually on drugs, it should have serious bargaining power.
Anyone designing a rational drug insurance program would have required negotiation when the program was created, but rational design was not necessarily the top priority at the time this program was enacted. Representative Billy Tauzin, who headed the Energy and Commerce Committee, which structured the Medicare prescription drug legislation, resigned immediately after the bill was signed into law to become head of the pharmaceutical industry’s trade association.
The third bill, “The Affordable and Safe Prescription Drug Importation Act,” is also an effort to take advantage of the fact that drugs are so much cheaper in other countries than in the United States. This bill would allow people to freely import drugs from other wealthy countries that have safety standards that are comparable to those in the United States.
This bill both highlights the sharp differences in prices between the United States and other countries and calls out one of the big lies used to justify these differences. Allies of the drug industry often claim that we cannot count on getting safe drugs from other countries, implying that countries like Canada and Germany do not protect their populations from unsafe drugs.
This is, of course, absurd. The standards in these countries are every bit as high as in the United States. And, if we think the quality of imported drugs is a problem, we all should already be very worried because many of the drugs and ingredients in drugs sold in the United States are already imported, largely from China. So the idea that we can’t be assured of the safety of imported drugs is simply an industry talking point, not a real concern.
Which of these paths for reducing drug costs is best? Importation is probably the most far-reaching, since it should quickly bring our prices down to the level of other wealthy countries. As a practical matter, however, progressives should back anything that moves the debate forward.
We really need to turn the industry on its head, paying for research upfront and then having drugs sold in a free market, like paper plates and shovels. It is absurd to pay for research that has already been done, at the point when people are suffering from serious conditions jeopardizing their health or their life.
No one thinks it makes sense to pay firefighters based on the value of their work when they come to our burning house with our families inside, yet this is essentially how we pay for drug research under the patent monopoly system. In fact, the story is even worse with drugs, since typically we have a third party payer (either an insurance company or the government) who we are trying to get pick up most of the tab.
These bills would not fully solve the problem, but each would be a big step in the right direction. Sanders, Cummings, and Khanna have done a great service in pushing them forward.