Drugs For Poor Countries
Medical drugs have large fixed costs, the costs of research, development and testing, low marginal cost, the cost of making one more pill. If the company sells the drug at marginal cost everyone to whom it is worth at least the cost of producing the pill gets it but the company never covers the fixed cost; if it keeps doing that it goes out of business. If it sells the drug at a price enough above marginal cost to pay back the initial expenditure many people who value the pill above the cost of producing it do not get it.
The solution is price discrimination, selling the drug at a high price to customers who are willing to pay it, at a low price to customers who are not. In practice this usually means selling the drug at a high price in rich countries and a low price in poor countries.
The problem is preventing resale. If the same pill sells for five dollars in Nigeria and fifty in France, what prevents an enterprising Nigerian from buying in Nigeria and selling in France, costing the drug company the high price sales that were paying for its fixed costs? If too many enterprising Nigerians do so, making the present drug more available may prevent the development of future drugs.
There are two quite different arguments for why it would do so, one that is obvious and intuitive and one that is correct.
The first argument takes the form “If the drug companies don’t have enough money from drugs produced by past research they cannot afford to finance future research to produce new drugs.” That sounds right but isn’t. If future research looks to be profitable drug companies don’t need to finance it from past profits; that’s what capital markets are for. If future research looks unprofitable then however much money drug companies have from past research they can find somewhere else to put it. That too is what capital markets are for.
The argument that makes sense to an economist is about incentives, not resources. Anything that makes future research less profitable, such as extensive resale, means that some projects go from just worth doing to not quite worth doing, reducing the amount of future research.
The other argument is the wrong one from the standpoint of an economist but while economically wrong it is rhetorically right. With that argument the drug companies are claiming that they would like to develop new drugs to save lives but can’t do it if resale of drugs deprives them of the needed resources. That sounds a lot more attractive than saying that, while they could develop new drugs to save lives they won’t unless it pays.
One solution to the problem is to monitor consumption, make sure that every pill sold in Nigeria is consumed there. Drug companies do not have the resources or expertise to set up mass distribution in every poor country in the world and make sure that every pill they hand out is consumed on the spot. The poor country’s government or a rich country NGO that is distributing the drug might be able to do it — but can all the employees of either be trusted to resist the temptation to divert some of the pills to a more profitable market?
A Modest Proposal
I have another solution. Let charitable donors in rich countries buy out the patent on the second best drug or combination of drugs and public domain it, let anyone make it. Buying the second best drug should not be that expensive since it is not making much money any more. And even if the same company owns the first best drug, it should not lose too many sales, since most customers who can afford the best drug will keep taking it.
This proposal has one large advantage over the alternative of forcing drug companies to make their drugs available at a low price in poor countries with the threat that if they don’t the countries in question will refuse to enforce their patents. That makes the development of new drugs less profitable and so buys a short run gain in availability at the long run cost of slowing the development of new drugs. It could be a very large long run cost if the practice spreads from very poor countries up to less poor countries. My proposal, on the other hand, makes the development of drugs more profitable. You can make money on your drug until a competitor brings out something better then make a little more selling it to the Gates Foundation or some similar organization.
While on the subject, I have a second suggestion, this one intended to make drugs more available for both rich people and poor people. FDA rules on testing should be designed to encourage drug companies to make not yet approved drugs available abroad in order to use the information so generated to meet the requirements for approval in the U.S. That would bring down the cost of finding out whether new drugs are safe and getting them approved. At the same time it would provide low cost, albeit somewhat risky, drugs for people in poor countries.
Here again, there may be a conflict between good economics and good rhetoric, between an argument that is right and one that is persuasive. Opponents will argue that it is unjust for rich people to get the best drugs and poor people the second best, even if the realistic alternative is poor people not getting any drugs at all. They will make good demagogic use of the idea that it is wicked to use human beings as guinea pigs for potentially dangerous drugs, despite the fact that using humans as guinea pigs is the only way we have of finding out whether or not drugs are safe.
When I made this proposal on my old blog, I got an interesting comment:
Because Japan has a socialized medical system, they’re desperate to cut costs in any way possible. One way they do it is to use second-rate drugs. If you get a prescription from a doctor in Japan, check it out on the Internet. You sometimes find that it was obsoleted by a new drug in the U.S. The U.S. pharmaceutical company then sold the rights to a Japanese pharmaceutical company, and the obsolete drug is manufactured and routinely prescribed in Japan. Japanese doctors complain that they can’t get access to the best drugs. It means there’s a fairly strong demand even for out-of-date U.S. drugs.
That was twenty years ago. I have no idea if it is still true but with luck at least one of my readers does and can tell us in the comment thread.
I have seen the claim that drug companies sometimes release a new variant on a drug in order to extend the patent, when the new version is at most a marginal improvement on the old. If so, the Japanese doctors may have been making the right choice.
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I am an old guy in poor health. One of the drugs I take has a list price of $24,000 per month. My Medicare Part D drug plan undoubtedly pays a lot less, probably around $12,000 per month. My total out of pocket annual drug costs are capped at $2,000, and so effectively the cost to me is zero. The drug is the only one available for the particular condition for which it is prescribed, but it is doubtful that it is benefiting me. The clinical trials showed some participants - a minority - showing a small improvement. It may be slowing the progression of my disease, but maybe not. If it is providing a benefit, it is quite marginal. I am not particularly sensitive to the cost of drugs, but there is no way that I would pay for this drug if Medicare did not pay. Do we really want to incentivize the drug companies to develop very expensive drugs that are slightly better than the alternative?
I’ve worked in the pharmaceutical industry for 37 years and one of the topics I’ve been involved with is pricing, so perhaps I can help here.
First of all, there isn’t unanimity among drug pricing folks about how to address some of the problems you raise. I’ll discuss some of the approaches.
You are right about the difference between the rhetorical argument for high drug prices and the correct one. The profits from this drug are not necessary to fund the development of the next drug. However, the return of all drugs goes into a database on past drugs, some of which made money and others of which didn’t, and that alters the probabilities that a new drug will make or lose money. The linkage is indirect, but it’s there.
Of course, when explaining the situation to outsiders, the argument is that profits on this drug fund the development of the next drug.
To prevent diversion, one approach has been to limit the sales to the low-priced country. This has been done for Canada, for which diversion is easy and powerful, with the Canadian government demanding low drug prices and Canada sharing a border with a country seeing much higher drug prices. With this approach, the drug company will estimate that the Canadian market will need, say, one million tablets per year. In negotiations with the Canadian government, the supply will be capped at one million tablets. This has two effects. First, it limits the ultimate damage to pricing in the American market. Second, it makes it clear to Canadians that every bottle shipped across the border leaves a needy Canadian without that medicine.
Regarding the “best drug” and the “second-best drug,” that’s really a myth. There are essentially better and worse drugs, but the distinction isn’t as clear as we think, because not everyone will do better on one drug over another. Patient A might do better on the best drug than on the second-best drug, but Patient B might do better on the second-best drug. Patient B might do best on the third-best drug. The practice of medicine is really a matchmaking exercise to find the best drug for each patient. Hence, even “worse” drugs have an important role to play. The more drugs available to choose from, the better for both the physician and patient.
What often happens is the worse/older drugs are kept around for use on new patients. If the patient responds, then the patient gets an effective drug and his insurance company (often called the “payer”) saves money. This is called stepped therapy. Plus, the insurance company uses the existence of the worse/older drug to negotiate a better price for the better/newer drug.
The one therapeutic area where your best/second-best idea may work is HIV/AIDS drugs. The older drugs work well but they just aren’t as convenient as the newer ones (more pills per dose, more doses per day).
People are really irrational about the concept of selling older and/or less tested drugs to poorer countries. In terms of testing, a drug starts out without no human testing and ends with a bunch. Someone must be a guinea pig. But to admit that someone must be a guinea pig makes people squeamish. And the FDA will be right there, saying, essentially, that the drug could be a dangerous killer until the FDA has given its imprimatur. To support this argument, the FDA will look poorly upon a drug company that tries to sell an untested drug to a poorer country.
But there is another good reason drug companies wouldn’t like this approach and that is while the drug is at the FDA being reviewed, any bad news can sink it. If the drug is given to 10,000 in India and 100 people die, whether their deaths are related to the drug or not, that might be enough to doom the drug. In other words, drug companies are super conservative while the drug is being reviewed at the FDA to prevent something that could give the new drug a black eye that it couldn’t recover from. This is why “right to try” laws don’t make much of a difference. Yes, a drug company could give an unapproved drug to a person dying from cancer, but that patient might still die, and it could give the impression the drug didn’t work. Or, worse, it may be implicated in the death.
I estimate that there are many, many good drugs that have failed because some small percentage of the first patients upon which it was tested had a bad response. When this happens, the pharmaceutical company stops development and puts the drug on the shelf. Now, with a bad reputation, the drug is unlikely to be revived by that company or any other. It wasn’t a bad drug, it was just some bad luck.