6/22/17

The issue of the high cost of prescription drug prices is all the rage.

There are various numbers bandied about, some suggesting that Americans overpay by as much as $90 billion a year for these pills.

The attached article, “Take Me Out to the Pill Game,” published in the WSJ on June 20th, 2017, summarizes the issue quite well and is well worth reading.

The bottom line: In a large measure, the writers justify the current prices based on the need for drug companies to make money on the few successful drugs that they get in order to finance all the failures that they have on the way.

While the writers do not mention it, an additional fact supporting their case is that drug companies’ return on capital employed is well within the norms of other manufacturing sectors.

The 800 pounds Gorilla in the room that the writers do not even mention is the fact that in ALL other developed countries around the world one can buy EXACTLY the same drugs produced by EXACTLY the same drug company at a significant discount to the price paid in the US. Sometimes 1/3 less, and at times even more. Why is that?

It is because all other governments intervene in the free market, manipulate it and regulate it, thus causing drug companies to charge less than what the free market will allow them to charge.

The question to be asked is why should the US not do the same?

The answer is the same as the writers articulate. If the US does it, too, drug manufactures will not be able to earn a good enough return on their investment and will restrict and eliminate new drug research & development, which will cause all of us to be less healthy, die younger and have lower quality of life.

So, the undisputed facts are these:

  • Prescription drug prices in the US are higher than in other countries around the world
  • Other countries’ governments force prescription drug prices down by administrative means and free market intervention
  • Drug companies—basically all selling their drugs all over the world—earn only a decent return on their investment. Nothing outrageous

What is the conclusion of all that?

There is only one conclusion: If governments in the rest of the world cease their intervention in the market for drugs, drug companies will be able to raise prices for their drugs in other countries. Given that the free market, over time through competition, will force drug companies’ return on investment back down to mean, the assumption must be that by earning more money on overseas sales, they will charge less for prescription drugs in the US and still earn the same return on investment. That is the way the free market works. It may take few years to adjust following the removal of government intervention, but it will for sure get there.

What it also means is that this is another example of the world taking advantage of the US. Yet again, the American consumers and the US government are subsidizing the world at large and no one cares, and I keep asking where is the outrage???

I did hope that the Trump administration, full of sophisticated business people, would understand this phenomenon and would add it to Trump’s “fair trade” agenda.

No sign of that yet.

How disappointing.