There is no such thing as a free lunch, but there are a lot of people
out there who believe there is such a thing as free medicine. The case
they make is that Big Pharma in the United States makes a lot of money.
It is true that there are a lot of problems with Big Pharma; there are
drugs that are marketed as though they are amazing for people but
aren’t, the most obvious example being OxyContin. But it is also true
that every single drug you take was developed by Big Pharma. Every
single medicine you take was developed by Big Pharma. Big Pharma is
responsible for OxyContin — but they're also responsible for Advil.
Big Pharma is responsible for the MMR vaccine that you didn't want to
take — but Big Pharma is also responsible for all of the chemotherapy medications that your mother may be taking. And the medical advances in
the United States have led to a tremendous expansion of life expectancy
in the United States; the five-year cancer survival rate in the United
States is much higher than anywhere else on Earth, because we have
better medicines than anywhere else on Earth.
We develop a huge number of medical patents right here in the United
States. The reason for that is because when it comes to drug pricing,
the United States is possibly the last country on Earth that actively
allows patients and doctors to buy drugs at the price that Pharma is
selling them, rather than the government cramming down particular
pricing. This has been a bugaboo for a lot of politicians because they
look at Canada, Germany, Europe, or any place else on Earth and say,
“Well, they're buying those American drugs for far less than we are
paying for those American drugs.”
Yesterday, the U.S. government named 10 drugs that will be subject to
the first-ever price negotiations by Medicare, taking aim at some of
the most widely used and costly medicines in the country. The 10 drugs
include many drugs fighting diabetes, an arthritis drug from Amgen
called Enbrel, and the psoriasis drug from Johnson and Johnson.
Joe Biden is very excited about all of this. He says we pay much more
for prescription drugs than any other economy in the world. That’s
true, but — the reason that's true is because the United States has
allowed a bunch of other countries to free ride off the prices that
Americans are paying.
So what exactly would be the downstream effects of the feds getting
involved in drug pricing? According to the Wall Street Journal, lower
prices. Medicare would save an estimated $25 billion a year by 2031.
The savings would mostly go to Medicare because it pays the bulk of the
cost of the drugs. The reductions wouldn't directly affect the price
patients pay at the pharmacy counter. But the price cuts would have an
indirect impact on people’s spending. Medicare plans to use the savings
to put a $2,000 annual cap on how much members have to pay out of
pocket for drugs starting in 2025.
This sounds like an unalloyed good, right? Everything is great. It's
There's only one problem: Medical innovation in the United States is
about to crater. And when the government can cram down pricing in any particular area and remove the profit margin from the actual pricing
mechanism, that means people are not going to invest the kinds of money necessary in order to create the drugs in the first place. This is
similar to the way that rent control decreases the number of people
building and constructing. Why would you build a new apartment knowing
there's no profit in it? The investment in the biotech sphere is going
to utterly dry up if the government, via Medicare, continues to force
policies like this one.
Here is the thing that people are not seeing: The amount of money that
is put into Research and Development on developing and producing drugs
is insane. The amount of money that is sunk into biotech to develop a
working drug is totally crazy. If you remove the profit margin from
these companies, there will just be less investment in this sphere.
Drugs that would have been produced just will not be produced.
When the government simply names prices for drugs and then the price
magically comes down, the prices on those drugs will indeed come down,
but what you won’t see is the drugs that will never be developed.
In 2019 alone, the pharmaceutical industry spent $83 billion on
research and development, according to one 2020 study, which covered
632 new therapeutic drugs and biologic agents approved by the FDA. The estimated median capitalized research and development cost per product
was $985 million, counting expenditures on failed trials, which should
count because the vast majority of drugs that are originally developed
never make it to market. Somewhere between 85% and 90% of all drugs
that enter phase one testing never make it through the FDA approval
process. But they still cost a fortune.
That means, for every drug that actually hits the market — and it's not
that many drugs every year, maybe a dozen — it's costing roughly $1
billion by some estimates, while others estimate the cost to be between
$1.3. and $2.4 billion a year to develop each one of those drugs.
Why would the pharma companies spend billions creating a drug or risk
hundreds of millions of dollars on drugs that aren't ever going to make
it out of phase three? The reason is that on the other end, there has
to be some sort of way to earn back that money. What exactly would
happen if Medicare gets away with cramming down this pricing structure?
Drug development would plummet.
There's another solution: Aggressively make other countries pay their
fair share when it comes to American medication.
We could use every lever at our disposal in order to do that. This is
where a trade war would be useful. Say to Canada or to the National
Health Service, “You guys are going to pay American companies what we
pay here in the United States.” America is subsidizing the rest of the
world when it comes to drug creation. But the solution to that is not
the American government cramming down a pricing mechanism on Big Pharma companies, drug companies, and medicine companies.