Why Drugs Are Expensive Here, But Not There

Senator Lieberman in the Democratic debate this evening mentioned that he believes that it is wrong that prescription drugs generally cost more in the US than they do overseas. He goes on to blame a number of factors ranging from foreign price controls, to US import restrictions, to unfairness in the way the drug companies treat American comsumers. All interesting points, but they ignore one of the biggest costs: government interference.

FDA red tape and Medicare/Medicaid squeezing of prices both put enormous pressure on drug company profit margins. Like it or not, the drug companies don't exist for some greater altruistic motivation, the exist to make money. When they invest millions upon millions in R&D they're going to expect to earn a respectable return on that investment when the drug actually goes to market.

Foreign price controls make earning that return more difficult. But foreign price controls, while beneficial to the foreign nations in the short term, also put tham at great risk long term. Think of the major drug names: Pfizer, Bristol-Myers, Schering-Plough - they're almost all American based companies (there are some exceptions, but not many). With the designer drugs - the newest, most effective ones on the market - countries with price controls really risk losing their access to these drugs. If Pfizer decides to quit selling their brand name drugs to Canada, the Canadians don't have a pharmaceutical industry sufficient to pick up the slack - or to research new drugs of their own. Many of the price controlling nations are dependent on the continuing goodwill of the American drug companies to keep selling the drugs at restricted prices. They're gaining the reward of lower prescription drug costs, but at the risk of a nearly complete implosion of their medical system should the drug companies decide to quit playing ball on these terms.

Now as to the US import restrictions, I don't like them in general, but they do have a real point in this issue. Many countries don't have the same inventory controls required for US distributors. Expired medications, watered down, misfilled prescriptions are more likely to occur with less regulated foreign pharmacies than they are with American ones. Canada and most of Europe generally do fairly well in matching American standards, but not all the foreign mail-order pharmacies are from these nations. The additional safety regulation of the American pharmacies is both proof of the benefit and of the costs of the FDA regulation in the US.

As for the perceived unfairness, America's health care system is still one of the most respected in the world. Every other nation with price controls (and therefore socialized medicine) has some form of rationing. It is incredibly rare to hear stories of rationing of medicine in the US, but folks from these other nations sure seem to want to figure out how to get here for their health care. We may pay more, but we also get more.

I don't think that Lieberman is on the right track with his seeming desire to either institute price controls or to allow the importation of US-produced drugs from other countries. You want to find a way to subsidize drug R&D? I might be convinced to go along with that. But to reduce the drug companies to an uncompetitive status in the capital markets by fiat? No way.

We first need to find a way to rationalize the FDA. Red tape is a significant contribution to the cost of drugs from the research phase to distribution. Find ways to cut some of the regualtory fat and prices should come down - some. Let's try to find other ways to make this work.

But the status quo is still much better than socialization.