In reaction to my recent blog on the cost of drug development, Peter raised the “global free-riding” problem and asked for my perspective. The global free-riding problem is the perception that the United States is subsidizing drugs for the rest of the world due to high drug prices in the United States compared with other countries.
Global price differences
U.S. prices for some drugs can be higher than in other countries, although the problem is often overemphasized through incorrect information or by, for example, selectively comparing prices of drugs that are still patent-protected in the United States while just off-patent in other countries. On average though, U.S. prices are generally on the high end of global price ranges. Canadian prices tend to be lower as a long-term side effect of compulsory licensing laws from the 1980s, benefiting the now dominant Canadian generics industry. European prices in some therapy areas are lower as a result of government monopsonies that have been able to force lower prices on the basis of national purchasing power, particularly where multiple similar and competing drug options exist. In developing countries, affordability dictates lower prices. The question is whether and how global price differences for drugs are different from other products and whether this should be considered a subsidy or simply a reflection of differences in local economies.
Drugs: Essential good with a luxury item cost structure
How do global price differences compare between a Big Mac, an iPad and prescription drugs? A broad discussion of this topic can be found in Chapter 1 of The Price of Global Health (Gower, second edition). In essence, luxury articles like the iPad tend to have relatively small global price differences with prices in the United States on the lower end of the spectrum. A Big Mac is priced much lower in developing countries, but it poses no financial challenges as local raw materials and labor allow McDonald’s to do so and still be profitable. The challenge with the pharmaceutical industry is that its cost is largely globally defined, but ethics demand an adjustment in price to allow for local affordability. Nobody in Central Africa will protest the price of an iPad, but by many standards, certain prescription drugs are considered an essential good. On this basis, various countries had compulsory licensing provisions engaged under the TRIPS agreement to force lower prices for HIV/AIDS and anticancer drugs.
Is there a free-riding problem?
To what extent are lower prices in other countries a problem? For a U.S. citizen, it is hard to understand why he or she should pay more than, for example, Canadian or French citizens. In 1994, Hillary Clinton chastised the drug industry for supplying vaccines at lower prices to developing countries while a sizable part of the U.S. pediatric population did not have similar access to the same vaccines. A Big Mac costs $1.50 in India and $7.50, five times as much, in Norway. Are Indians freeloading on Norwegian citizens? An iPad in Brazil is almost 50% more expensive than in the United States. Is the United States free-riding on Brazil? Most would feel that these are not necessarily examples of free-riding. So what are some examples of free-riding that we have seen in other industries?
Interestingly, there are some very high-profile cases of free-ridership:
- U.S. leaders have long complained that Europe is free-riding on U.S. military spending, relying on it as a security blanket for relatively underfunded European forces.
- Many are complaining about U.S. and EU agricultural subsidies as unfair competition with farmers from other countries.
- In December 2014, the EU filed a lawsuit against the United States for subsidizing the Boeing 777X jet, thus unfairly competing with Airbus.
The three above examples all involve long-lasting disputes over unfair competition in industries with heavy government involvement and funding. In agriculture, the lobby from agricultural organizations has been aided by a government’s wish to keep sizable national production capabilities for reasons of independence in food supply. In case of the aircraft industry, maintaining a strong local industry may have both economic and military objectives.
A pharmaceutical balancing act
In the drug industry, the real issue goes much beyond free-riding. Every drug company needs to carefully balance between monopsony governments demanding lower prices and compulsory licensing risks on one side, and parallel trade, price referencing and free-rider complaints on the other side. These are complex political trade-offs that go far beyond commercial profit optimization considerations and involve global politics. The Indian government is setting a dangerous global precedent as it is denying patents for some oncology drugs, while issuing compulsory licenses to others in an apparent bid to strengthen local industry. Avoiding this issue is likely one of the reasons why Gilead has discounted Sovaldi by 99% to Indian and Egypt government agencies as part of an affordability-based global pricing strategy, a strategy that raised a lot of challenges in the United States and Europe. Free-riding or not, the U.S. drug industry depends on the support of the U.S. government to maintain a fair competitive environment.
Work to do…
The drug industry’s public reputation may very well be at an all-time low with a global groundswell of objections against drug pricing. Hot debate about hepatitis C drug pricing and medical community action to incorporate drug cost into treatment recommendations are just some of the most recent examples that plague public perceptions and threaten willingness of the U.S. government strongly support the industry on those issues. It is urgent that the industry reaches out to government agencies, while at the same time addresses its public perception issues.