Medicine Pricing

The price of medicines are controlled to varying degrees by the Indian government. We aren’t the only country that regulates the prices of various medicines. I had assumed this is a practice of poorer countries only.

 

Not true, I learnt as I read Alex Tabarrok’s post. But first, why do pharma companies (including Western giants with political clout) agree to such reduced pricing? Because of the nature of their product – coming up with a new medicine is very, very costly (research, clinical trials, regulatory clearances, making doctors aware). But the manufacturing cost of each pill in and of itself is very tiny (in most cases). Therein lies the answer to our question.

“Not because firms are charitable, but because a high price means poorer countries buy nothing, while any price above marginal cost is still profit.”

Thus:

“This type of price discrimination is good for poorer countries, good for pharma, and (indirectly) good for the United States: more profits mean more R&D and, over time, more drugs.”

 

As healthcare totters in the US, more and more Americans ask why they pay more for the same medicine that is sold cheaper elsewhere (including Europe).

“Riding that grievance, Trump has demanded that U.S. prices be no higher than the lowest level paid in other developed countries.”

How could this play out?

 

Option 1 is pharma companies increase prices worldover, their profits increase, they spend more on R&D to find newer cures. In this scenario, medicine prices in the US don’t/won’t come down by much (since prices are raised everywhere to US-comparable levels).

 

Option 2 is most countries refuse to pay more. Already Switzerland indicayed they would rather ration and switch to off-patent generics. In this case, pharma profits decline, R&D spending reduces, and US prices don’t drop much.

 

The article doesn’t talk of Option 3, which to me esp. in a world that dislikes Trump so intensely is a real possibility. Countries may decide to produce their own medicines or more likely, show a willingness to switch to non-American options. European countries would be best placed to come up with new pharma giants of the future. China and many emerging economies would also enter the fray in certain areas. Who can really bet against some of them succeeding?

 

All systems are complicated. Changing them is fraught with risks of second and third order consequences. Things could end up worse than before. Any such changes require a thought-out and phased approach, but the largest economy on the planet doesn’t have any of those characteristics nowadays.

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