Politics and the pricing of drugs – Twin Cities

If GOP Senate Minority Leader Mitch McConnell stands for anything it’s his opposition to socialism. It’s not clear he knows what that term really means, but he is adamant that allowing Medicare to bargain with drug companies over prices is part of it.

Edward Lotterman
Edward Lotterman

In response to a 2019 compromise bill authored by fellow GOP Sen. Charles Grassley, and supported by then-President Donald Trump, McConnell opined that “Socialist price controls will do a lot of left-wing damage to the healthcare system.”

Now, his is an aversion to “socializing prices that is putting the government in charge” or to “put socialist price controls between American innovators and new cures for debilitating diseases.”

This is pure bunk, but drug prices are an economically more fraught issue than many people understand.

A few observations:

The U.S.’s intellectual property — patent — laws are more favorable to the pharmaceutical industry than any other nation in the world.

In international trade negotiations for over 30 years, that industry has gotten the U.S. to pursue measures to crush competition from companies in other countries with laws more favorable to generics or more limiting of prices. This, in the guise of “maintaining a level playing field” for trade to take place, has greatly contributed to the global profitability of big pharmaceutical companies, mostly ones based in our nation.

Our nation’s government-financed or -operated portion of the U.S. health care system, including Medicare, Medicaid, the Veterans Administration, Tricare (the military health system) and the Indian Health Service, is a larger fraction of Gross Domestic Product than all health care in most nations with “socialized health care.” We have effectively socialized health care, but then tack on a big chunk of out-of-pocket employer and household costs in the private sector beside.

So the degree to which overall U.S. health care spending exceeds that of other nations is effectively a tax on the U.S. economy not paid by overseas competitors.

The U.S. stands alone in the degree to which we simply pay asking prices for meds funded by taxpayers. Stopgap measures including “Medicare drug plans,” and ”pharmacy benefit managers” in programs like Tricare have accentuated problems rather than relieved them.

In analogous situations where government needs vendors with monopoly power, such as procurement of planes and ships, we have always required that the government “bargain.” Such bargaining has not led to “a government takeover” of the industrial defense sector. Another aspect of defense procurement, the GOCO, or “government-owned, contractor-operated” munitions plants cranking out explosives and ammunition, are a case of government ownership of an industry, but its cost efficiency is similar to comparable manufacturing sectors and competitive with private munitions businesses in arms-exporting nations such as Italy.

And even local governments, municipalities, have to put needed work by private sector business, be it consulting, engineering or actual road construction, “out to bid,” before signing a contract.

Yet, with all that said, don’t underestimate the knottiness of any improvement in health care, much less a “solution.”

Economists broadly agree that private sector provision of goods and services can meet public needs with smaller use of productive resources in many cases. But for this to materialize, several conditions must be true, including no monopoly power, good information on both sides, no “externalities,” no “barriers to entry” and others. Few, if any, of these necessary conditions hold true with drugs. Indeed, U.S. patent laws create artificial “barriers to entry.”

But an optimum path in the market we have is not apparent in economic theory. Selling gasoline to local police is competitive. Buying aircraft carriers is the other end of the spectrum, a ”duopoly” with one buyer and one seller. If we unified procurement for all federal agencies, we would have a single buyer overall facing an oligopoly, or a small number, of sellers, although for specific drugs, the market structure also would be a duopoly, difficult for economics to identify an ideal approach.

Also, the U.S. is the big dog of drug customer markets. Policies that Denmark, with its 5.8 million people, Switzerland, with its 8.6 million or even the Netherlands or Canada with around 30 million, can implement, without knock-down opposition from Big Pharma or without reducing incentives for innovation, won’t be similarly innocuous if adopted by the United States. To assume that they would is a classic logical “fallacy of composition.”

U.S. willingness to pay very high prices for drugs and to operate a drug-trials-and-approval bureaucracy that benefits most of the globe is, in effect, a subsidy to the rest of the world that free-rides on our bearing these substantial costs. To paraphrase a Rudyard Kipling term too racist to quote verbatim these days, the U.S. “bears the big dog’s burden” in pharmaceuticals. Whether that is a moral imperative, as Kipling’s poem argued for colonialism, or an efficient way of meeting a global need, are entirely subjective matters.

Some federal agencies, including the VA and the Department of Defense for its direct purchases, long have been able to bargain for drugs. But the cost advantages are not as clear as one might think. See a Congressional Budget Office study, “A Comparison of Brand-Name Drug Prices Among Selected Federal Programs,” for a good analysis.

Understand that the McConnell line has no real defense. The 2019 legislation sponsored by Grassley that had support from both parties in committee went further than the 2022 proposal being considered now. But even that was very tentative, initially covering only 25 drugs, allowing a long phase-in period and guaranteeing manufacturers a nine- to 11-year grace period to charge whatever they wanted before bargaining would set in.

Also understand that the fundamental problem is a drug patent protection system highly skewed in favor of industry. Until there is political willingness to move the patent law balance back toward neutral, there is a danger that “bargaining” will not be much more than a gimmick.

The other side of this is that changing patent laws is a huge club that Congress could wield in curbing big pharma. But again, that depends on enough political willingness, including some in both parties, to wield the club.

Furthermore, recognize that most of the problems and abuses that exist in pharmaceuticals also show up in the medical device sector, albeit at greatly reduced scale. But just as in the public mind, the oil industry is evil and the steel industry angelic, so drugs are evil and devices good, at least to Minnesotans.



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