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Why the US is losing the war on drug prices: trader

Healthcare: “Life is hard, but it’s even harder when you’re stupid”

By David Nelson, CFA

The Senate health care bill, now on hold till after the Fourth of July break, triggers partisan rhetoric across print and broadcast media. The challenges of an aging population and the increased drain on social backstops like Medicaid and Medicare have pushed the system to the limit and can no longer be put off till the next election cycle. While there is huge disagreement regarding the path forward, one point where there’s consensus across the political aisle is that drug pricing in the US is putting a heavy burden on consumers and the system at large.

The US is losing the war on drug prices

I think we all understand that drug discovery is expensive and that if you reduce the profit incentive, much less money will be earmarked for research and development. However, I along with millions of Americans would like a simple explanation as to why drugs in the United States are more expensive than most countries in the developed world.

In its 2015 report, the International Federation of Health Plans released some key comparisons across several popular prescription drugs. A quick Google search will pull up dozens more.

Source: The International Federation of Health Plans
Source: The International Federation of Health Plans

With 48% of Americans receiving at least one prescription drug, it’s pretty easy to conclude that if we don’t get a handle on this, Congress is just rearranging the deck chairs on the Titanic.

Source: Flickr

After more than a week of digging into the issue, I’ve concluded that the current system of drug pricing sucks. A team of detectives headed by Charlie Chan, Columbo and Sherlock Holmes couldn’t get to the bottom of this one.

I’ve talked with many from the industry, and after hours of debate and discussion, I knew less than I did going in.

Here’s something I do know: Drugs here are more expensive than in Canada and Europe. What can and should be done about it.

“Life is hard, but it’s even harder when you’re stupid” – The Friends of Eddie Coyle

Even with a disagreement over the path forward, we should be able to coalesce around the idea of avoiding STUPID. It’s conventional wisdom that other government-run health care systems negotiate more effectively than their US counterparts. Senator Sanders and others have pointed out that Medicare still doesn’t negotiate.

Here in the US, we pay $2,669 for a 28-day supply of Humira. Switzerland pays $822 and the UK $1,362. Important cancer drug Avastin (400mg vial) here in the US comes in at $3,930. In Switzerland, the cost is $1752 and in the UK $470.

After examining dozens of comparisons, I did find one drug and one procedure where Americans aren’t paying top dollar. For the potent and often abused pain medicine OxyContin, the cost here in the states is $265 for a 30-day supply and, for a colonoscopy, it’s only $1,301. Both were well below some of the countries mentioned earlier. Great news! I guess we can get high while we take it up the …. well you get the picture.

Hello, anyone home? US consumers are subsidizing health care systems around the world even while we can’t afford our own. I put the following scenario to a drug company executive and couldn’t get a straight answer.

Think like a drug company CEO

In my mind, if I’m the CEO of a drug company with an important in-demand product, I go through the following pricing excise. We’ve spent millions in research and legal to get the drug to market so we have to price accordingly in the US to recoup development and marketing costs. That’s economics 101.

Europe says it’ll only pay half that price. The actual cost to manufacture the drug may be nominal and even still profitable at a reduced cost, as long as I’m covering my R&D here in the US. Why not? It’s a little extra revenue and adds something to the bottom line.

Europe, Canada and others are playing us for fools

We pay for the R&D, and they get the drugs well below the real cost. If Merck (MRK), Johnson & Johnson (JNJ) and others weren’t allowed to play one country off the other, Europe would be forced to pay more and we would likely be paying less. The gap in pricing would start to close. Force these countries to pay more now!

The complexity of our system along with cross-border price differentials plays into the hands of both the industry and our so-called friends and allies across the pond. I don’t find it that much different from the cost of NATO defense spending. Americans carry more than their fair share of the burden with Europe and others freeloading off of our generosity.

Legislation will be difficult as those who stand to lose will fight hard against change. Free trade issues and potential retaliation will dominate the rhetoric. Perhaps an export tax geared to the gap in pricing would work. After all, there are many in Congress that would love another tax.

Out of the gate, Canada and Europe will balk and try to hold out saying they won’t pay a higher price. In the end, they’ll pay. Deny your citizens a lifesaving drug because you aren’t willing to pay your fair share and see how that works out for you.

I would imagine there are any number of ways to tackle the problem and we’ll need some of the brightest minds on the planet to help us come up with the best options, but in the end we have no choice.

“Life is hard, but it’s even harder when you’re stupid.”


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