A Price Too Good To Be True

By Steven Tepp

Virtually every consumer in every country wants products and services as inexpensively as possible. Nowhere is that demand more acute than in health care, where quality of life, and life itself, is at stake.

In Europe, most national governments use the monopsony power of a single-payer national health care system to negotiate (or dictate) what prices they will pay, an activity that has been considered “anti-competitive” in EU private markets.[1] And some governments simply issue price controls.[2]

The game of artificially lowering prices by national governments is a buyers’ cartel, with incentives for each player to go even lower that the others. Nation A can confidentially negotiate lower prices for its citizens while Nation B’s citizens pay more. Once Nation B realizes this, it negotiates (or mandates) still lower prices. It is a race to the bottom.

So why not simply mandate that everything be free? That is the logical end of this approach. Of course the answer is that nothing would be produced if nothing were paid for it. The same is true of innovation; if innovative companies are limited to selling their products at prices that do not reflect the substantial investment in the research and development (R&D) of new treatments, or that offer only little or no profit margin, there is little or nothing to reinvest in new R&D. This fundamental formulation appears lost on a former co-chair of the biased U.N. High Level Panel on Access to Medicines (UNHLP), who said recently that companies have no legitimate intellectual property (IP) rights.[3]

IP rights are a tool for preventing unfair competition and free riding by those who have spent nothing on R&D. IP affords those who invested the billions of Euros needed to discover and implement a new treatment the opportunity to recoup that investment and re-invest the money into new and expensive research. Now we see that at least one leader of the UNHLP wants to afford IP rights only to individual inventors. But how many individuals in the world can afford to gamble billions of Euros on R&D? How, then, do they imagine that new treatments will be developed?

“It is true that the panel did not address the big picture of the issue of innovation and access to medicines. It was our mandate to focus on one aspect of the issue.”[4] Even a leader of the UNHLP process acknowledges its failure to consider the issues in context. No wonder the results are contrived policy recommendations to reduce prices, but that are commercially unrealistic and would place the future of human health in the hands of oligarchs.

So, too, national policies and practices to force prices to artificially low levels only focus on one aspect of the issue. Both have a short-term appeal; everyone wants medical treatments for as little as possible, especially in cases where the overall costs are more than the patients can afford. And both would deprive innovative companies of the market value of their products, leaving less opportunity for innovation in new treatments.

Approaches aimed only at reducing prices are based on a static view of the world that overlooks how companies react to government policies. For example, consumers who pay more get better service; the U.S. pays more and gets new treatments sooner than E.U. markets.[5] In the long term, if profits are not available or are depressed in certain markets, those markets are worse off because it creates an incentive to focus on research aimed at the problems facing the markets that can and do pay market price. This dynamic has already contributed to so-called “neglected diseases.”[6]

It is also important to remember that medicine is only a small part of health care costs. In France, Germany, Spain, and the U.K., prescription medicine is no more than fifteen percent of total health care spending.[7] And new therapies can reduce overall costs by helping patients avoid more expensive treatments or long-term care. For example, in the U.K. a new therapy to delay the onset of dementia by years could save over twenty-one billion Pounds.[8] And in Germany, a medicine that halts the progression of Parkinson’s disease could save twenty-two billion Euros over the next dozen years.[9]

None of this is to say that the immediate health care needs of the poor should be overlooked or ignored. Indeed, policies limiting prices have considerably less effect in the context of patients who lack the financial resources to pay more. Innovative companies already address this to some degree through differential pricing; setting the price at a level that market can bear, thus adjusting prices downward for poorer countries.[10] Governments of wealthier countries can do more by subsidizing their poorest consumers. And public-private partnerships to help patients prevent and/or manage diseases can reduce costs, as well.

Europe’s artificial price controls place it on a path where the long-term costs outweigh the short-term benefits. If governments are serious about making medicines more affordable to patients and also sustaining innovation, they should subsidize their consumers, not punish the inventors.