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.
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?
> 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?
There are plenty of such pills and yet I do not think (widespread resale)* is a reality.
For pills that are sold at scale, the absolute price is low enough that a Frenchman might not buy it from a shady seller on Ebay. For a pill that costs $5 in Nigeria, the transaction nand logistics cost might make it around $15 in France. So the Frenchman might not save enough. Then there are things like insurance etc.
For pills that are specialised. Say something that costs $1000, it might already be hard to buy anywhere as you will need a prescription, drug stores might not keep it in stock unless you order it in advance etc. Running a big business around reselling this would be even harder.
* To the extend that the drug company feels the need to not sell the drug in that poor country to avoid resale.
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.
As in all things, there are no perfect solutions in pharmaceutical pricing, only trade-offs.
In the US, federal pricing policy incentivized drugs to move away from drugs that go generic and focus on new drugs and particularly orphan drugs. Thus the most profitable products tend to serve a very small number of people and provide ever-diminishing marginal benefits, a perverse outcome. There are occasional exceptions with breakthrough benefits for a broad spectrum of patients, e.g., GLP-1 drugs indicated for diabetes and obesity that are an entirely novel therapeutic class, but they are few and far between. Most of the low hanging food has been plucked.
Thanks for explaining this. When I first heard of the same drugs being cheap outside the US and expensive inside the US, my gut instinct was to be mad as hell. But I have extreme positive faith in markets and extreme negative faith in governments, so any legislative solution was right out. Not having any other instincts available, I fell back on wishing the government would just butt out and leave markets to work their magic. Of course that never happens when votes and bureaucracy are at stake.
I like your alternate solution of charities buying up the second best drug patents, but alas that will never happen. Big Pharma will enlist government and bureaucrats to squelch any such scheme.
I have an alternate alternate scheme to prevent poor countries from selling their cheap drugs to countries with expensive drugs: don't monitor individual sales in cheap countries, just cheap sales in expensive countries. If they rise too much, stop selling cheaply in the source countries. This will raise prices in the source countries, reduce the smugglers' profits, and reduce cheap sales to expensive countries. It does assume the smuggled drugs can be tracked to some extent, and "smuggle" may not be the right word, but it's close enough.
Your proposal is interesting, but I wonder whether there is an even simpler solution along the lines suggested by Paul Romer: rather than trying to make drugs cheap in poor countries by putting patents into the public domain, why not subsidize the purchase of patented drugs in poor countries?
The pharmaceutical company would still receive a remunerative price, preserving the incentive to innovate, while poor patients would pay only what they can afford. It would also avoid the difficult problem of deciding which drug is the “second best” and should therefore be bought out and placed in the public domain.
The cost would of course have to be borne by taxpayers or international donors, but that seems more transparent than using the patent system itself to achieve redistribution.
> 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.
I would think that this is mostly solved by drugs being subsidized by the government in France.
Very timely! I wish it could be drummed into the Trump administration that price discrimination hurts American consumers or taxpayers in the present, while of course it benefits others. Raise prices to others and expected profits fall and R&D falls, making all future people worse off.
I expect there's rhetoric involved here, too. The Trump administration presumably means Europe, not a collection of truly poor countries. Still, at least a few of those countries have formal mechanisms to determine how much their health systems are willing to pay for new drugs. There must be some advantages to the new drug. It varies from country to country what weight is put on what characteristic. But the new drug can be sold at any price; it just won't be reimbursed by the health system.
I like the principle very much, though of course it can fairly be deemed too technocratic and. collectivist.
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?
> 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?
There are plenty of such pills and yet I do not think (widespread resale)* is a reality.
For pills that are sold at scale, the absolute price is low enough that a Frenchman might not buy it from a shady seller on Ebay. For a pill that costs $5 in Nigeria, the transaction nand logistics cost might make it around $15 in France. So the Frenchman might not save enough. Then there are things like insurance etc.
For pills that are specialised. Say something that costs $1000, it might already be hard to buy anywhere as you will need a prescription, drug stores might not keep it in stock unless you order it in advance etc. Running a big business around reselling this would be even harder.
* To the extend that the drug company feels the need to not sell the drug in that poor country to avoid resale.
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.
It's a pity that the FDA came to be.
We'll never know how much faster progress could have been.
As in all things, there are no perfect solutions in pharmaceutical pricing, only trade-offs.
In the US, federal pricing policy incentivized drugs to move away from drugs that go generic and focus on new drugs and particularly orphan drugs. Thus the most profitable products tend to serve a very small number of people and provide ever-diminishing marginal benefits, a perverse outcome. There are occasional exceptions with breakthrough benefits for a broad spectrum of patients, e.g., GLP-1 drugs indicated for diabetes and obesity that are an entirely novel therapeutic class, but they are few and far between. Most of the low hanging food has been plucked.
Thanks for explaining this. When I first heard of the same drugs being cheap outside the US and expensive inside the US, my gut instinct was to be mad as hell. But I have extreme positive faith in markets and extreme negative faith in governments, so any legislative solution was right out. Not having any other instincts available, I fell back on wishing the government would just butt out and leave markets to work their magic. Of course that never happens when votes and bureaucracy are at stake.
I like your alternate solution of charities buying up the second best drug patents, but alas that will never happen. Big Pharma will enlist government and bureaucrats to squelch any such scheme.
I have an alternate alternate scheme to prevent poor countries from selling their cheap drugs to countries with expensive drugs: don't monitor individual sales in cheap countries, just cheap sales in expensive countries. If they rise too much, stop selling cheaply in the source countries. This will raise prices in the source countries, reduce the smugglers' profits, and reduce cheap sales to expensive countries. It does assume the smuggled drugs can be tracked to some extent, and "smuggle" may not be the right word, but it's close enough.
Your proposal is interesting, but I wonder whether there is an even simpler solution along the lines suggested by Paul Romer: rather than trying to make drugs cheap in poor countries by putting patents into the public domain, why not subsidize the purchase of patented drugs in poor countries?
The pharmaceutical company would still receive a remunerative price, preserving the incentive to innovate, while poor patients would pay only what they can afford. It would also avoid the difficult problem of deciding which drug is the “second best” and should therefore be bought out and placed in the public domain.
The cost would of course have to be borne by taxpayers or international donors, but that seems more transparent than using the patent system itself to achieve redistribution.
> 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.
I would think that this is mostly solved by drugs being subsidized by the government in France.
Very timely! I wish it could be drummed into the Trump administration that price discrimination hurts American consumers or taxpayers in the present, while of course it benefits others. Raise prices to others and expected profits fall and R&D falls, making all future people worse off.
I expect there's rhetoric involved here, too. The Trump administration presumably means Europe, not a collection of truly poor countries. Still, at least a few of those countries have formal mechanisms to determine how much their health systems are willing to pay for new drugs. There must be some advantages to the new drug. It varies from country to country what weight is put on what characteristic. But the new drug can be sold at any price; it just won't be reimbursed by the health system.
I like the principle very much, though of course it can fairly be deemed too technocratic and. collectivist.