When pointing a finger at someone, usually three fingers are pointed at yourself. U.S. government and presidential candidates should consider this before they rush to the media briefing rooms.
Former U.S. secretary of state and current presidential candidate Hillary Clinton intensified her messaging in favor of controlling the pharmaceutical industry’s ability to freely price drugs in the United States and abroad. Bloomberg recently reported comments from Clinton at a New Hampshire town hall stating that we cannot go on to sell drugs outside the United States at much lower prices. She was seemingly targeting reduced (list) prices for hepatitis C drugs in Europe and heavily discounted prices in India and Egypt.
Hillary Clinton’s comments were reminiscent of critiques she made of U.S.-based vaccine manufacturers while pushing her healthcare reform plans in 1994. At that time, she chastised drug companies for supplying lifesaving pediatric vaccines to developing countries at lower cost than in the United States, arguing that U.S. patients did not have full access to these drugs. As a result, drug companies were forced to be more careful with price differences between countries over U.S. political concerns. About eight years later, drug companies were accused of “lacking compassion” in their global pricing policies for HIV/AIDS drugs. They were pressured through emotional appeals and compulsory licensing threats, particularly in Brazil and South Africa, to make antiretroviral drugs available at substantially discounted or nominal prices. U.S. politicians silently observed. Today, India routinely disowns patent rights for oncology drugs. Under this threat, hepatitis C drugs were likely priced at steep discounts in India and Egypt. Clinton should simply know that.
Should drug prices in lower income countries be lower than in the United States?
If so, is this fair to Americans, particularly lower-income citizens? Should prices for lifesaving drugs be similar across the world, independent of average national or individual patient income? That is a complex political, social and economic question. Interestingly, it is in the interest of U.S. citizens to set drug prices at the optimal economic level in each country, i.e. the price level at which the local contribution to company profits is maximized, typically resulting in prices that are pegged to a country’s per capita income level. This way, each country is contributing to the global drug company’s overhead and return on investment needs. Demanding higher prices than what is economically viable, will significantly lower the local utilization due to affordability issues and hence reduce the local contribution. As a result, the drug company will have to offset foregone revenues and profits in other countries. So by forcing equal prices across the world, U.S. prices will actually have to go up, as use in less-affluent countries will drastically decline. Doing the socially right thing by pricing at local affordability is actually in the economic interest of U.S. citizens, particularly those without sufficient health insurance to pay for high-cost drugs.
So why don’t drug companies set prices lower in lower-income countries?
Ironically, politics and government interference discourage particularly U.S.-based companies from doing so.
- Politicians such as Clinton find it easier to use populism to gain support than to try to explain a complex situation. As we live in an age of sound bites, complex truths are not welcomed in politics.
- Government agencies in many countries use international price referencing with other countries, including some with lower per capita income to force a better deal for themselves.
- Free trade principles create arbitrage opportunities that limit the ability to price optimally across countries.
- The U.S. government could serve its population better by supporting the pharmaceutical industry and its ability to price globally at fair market value, and should support intellectual property rights rather than dilute them through the recent Trans-Pacific Partnership trade deal and inaction against Indian intellectual property-right violations.
At the December 2015 Forbes Healthcare Summit in New York, a panel of five drug company CEOs discussed drug-pricing challenges. GlaxoSmithKline’s Andrew Witty, the only non-American on the panel, noted that Americans, living in a rich country, can afford to pay more for prescription drugs than citizens of many other countries, including those in Europe. This comment doesn’t just reflect differences in tolerance versus European price controls, but also illustrates the point that European governments tend to be much more forgiving toward allowing lower prices for drugs (including vaccines) to developing countries.
Back to the question in the title of this article: Are Clinton’s comments populism, a real problem or both? In my opinion, it is a real problem that is further worsened by political populism. The U.S. government and its politicians can certainly criticize any industry strategy, but in the end, they should realize that one of the last remaining U.S. industrial strongholds needs government support to compete in the global market and to address interventions by European government monopsonies and lack of intellectual property protection in countries such as India. I will follow up with some specific suggestions in an upcoming article.
As always, I look forward to your reactions and further discussions.