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Prescription Drugs: Overcharged Americans Are Subsidizing Europe’s Socialist Medicine

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President Trump finalized a “most favored nation (MFN)” or “best price” prescription drug pricing rule on Nov. 20. The goal of the MFN concept is to deliver fair drug prices to Americans without diminishing drug company profits. While there is controversy as to whether the final rule genuinely implements the concept, the MFN approach should be followed. Opponents of the rule should work to improve it, not oppose it.

The MFN best-price concept mandates the same price for Americans and wealthy Europeans, who have been paying about one-third of what Americans pay. It does so by empowering Medicare to require drug sellers to give it the “best” (lowest) price charged any other buyer. Notably, the MFN concept does not impose government-set prices upon drug manufacturers, who would be free to set whatever price would maximize sales and profits.

But you wouldn’t know that from the fervent opposition from the Pharmaceutical Research and Manufacturers of America (PhRMA), the U.S. Chamber of Commerce, and a coalition organized by Americans for Tax Reform as well as certain economists.

December 10, 2020

PhRMA has never worried that Americans pay anywhere from two to three times as much for the same prescription drugs as wealthy Europeans, whose socialist national health care systems purchase in bulk. The Chamber is chartered to look out for businesses, not consumers.

The PhRMA, Chamber and Tax Reform fog machines are leveling misleading charges of “socialism” and that MFN “gives foreign governments the upper hand in deciding the value of medicines and “would implement harmful price controls.” Properly implemented, the MFN concept accomplishes exactly the opposite.

Since the introduction of the Medicare Part D prescription drug benefit, Medicare has been prohibited by law from using its volume purchasing power to negotiate prices for the estimated $100 billion in total annual drug purchases it covers, while socialist government-run European health authorities have been using such volume purchasing power to beat up drug manufacturers to obtain drastically low prices. Manufacturers charge Medicare high prices, and, then, give deep discount prices to Europeans because they are already assured robust U.S. profits in the Medicare market.

The MFN concept would leave drug manufacturers complete discretion in setting actual prices. Naturally, they would not adopt the marginally profitable European price, which, when extended to the U.S. would forfeit all their profits. Nor would they be able to impose upon Europeans the current Medicare prices which are three times what Europeans are paying now.   

Prices charged Medicare for drugs sold here and in Europe would settle at a middle level, well below current high prices charged Medicare and significantly above European prices, an eminently fair outcome.

No longer would uber-wealthy Norway be able to demand a drastically low price, one at which drug manufacturers cannot make money in the United States. Norway would have to capitulate and pay a higher price or go without the drug.

Some economists think Europeans would forego new drugs during the patent period and wait for generic versions to become available. However, what is likely to happen is that wealthy citizens of such nations would travel to the U.S. for treatment, with this medical tourism increasing business and profits for the U.S. health care industry – a good thing.

Poorer fellow European citizens left without care would be unlikely to tolerate denial of drug coverage over years-long patent periods without agitating for coverage.

At stake is not only equity among and between the U.S. and other wealthy nations in contributing to drug company profits which fund all-important research and development, but the very existence of profits and R&D.  Other proposals to lower U.S. drug prices would eliminate profits. If, as many advocate, legislation were passed allowing importation of “low-cost drugs” from Canada and overseas, then foreign governments would set drug prices in the U.S. Is this what PhRMA wants?

Some economists have opposed MFN with the argument that, instead, the expensive FDA approval process – which takes as much as a decade and $2 billion per approval — should be streamlined and the required time and expense reduced. That is a false choice. The FDA approval process should be reformed AND the MFN rule employed.

The real reason PhRMA opposes the MFN concept is that the current system assures manufacturers’ profits, is easy to administer, and doesn’t rock the boat. Manufacturers do not have to negotiate with multiple buyers to devise a single developed-world price that is low enough to be acceptable to the majority of developed nations but still high enough to generate profits. Admittedly, cajoling and negotiating with many different governments simultaneously is a difficult marketing and pricing challenge.

Certainly it is more difficult than what drug companies do now, which is to set a high U.S. price which assures profitability, and, then everything else is gravy – no matter how thin the profit margin on European sales.

This is the system which PhRMA demanded in 2003 when Medicare Part D legislation was passed by Congress and signed into law by President George W. Bush. PhRMA demanded and obtained a prohibition against Medicare negotiating drug prices. PhRMA feared, rightfully, that otherwise, Medicare would negotiate prices down ultimately to an unprofitable level – just as European governments do.

MFN strikes a fair balance between that prohibition and the unhappy present circumstance under which Americans pay exorbitant prices for drugs and wealthy Europeans get bargain basement prices.

There’s absolutely no reason or justification for Americans to subsidize the health care of wealthy European socialists, especially when the unfair lower prices charged in Europe contribute to the illusion that socialist national health care systems are more cost-efficient and constitute a better way to deliver health care.

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