I'd like to point some things out about the ongoing debate about prescription drugs. This is important stuff, so please bear with me.
The latest hue and cry by budding socialists is the cost of prescription drugs. There are a lot of reasons for this and I'd like to explain my position a little bit. The price of prescription drugs makes a great target for several reasons. First off, drugs are life-saving and it becomes tragic when a poor person cannot afford to save (or even just improve) their life because the cost of doing so is too high. Obviously, we want to help as many people as we can and our impulse is to call for clemency or mercy to supply them with the means to save or improve their lives. Second, other "industrialized nations" have cheaper drug prices. Third, drug companies are huge and they have profit margins in the teens and large budgets for things that we don't understand (like marketing).
Okay, that's why drug companies are such lovely targets by the soft-headed socialists in our press and government. Here's some things that you should bear in mind when you try to call for regulated drug prices.
Number one, drugs are in our discourse now because drugs have become such a large part of our lives. In fact, many ailments that used to require hospitalization can now be remedied for about a tenth the cost with a prescription. Drugs now account for about a third of our medical spending where they were barely on the map just ten years ago. Improved medications account for about ten additional years of our ever increasing life-span estimations. Unfortunately, for all their benefit, drugs aren't as visible as a hospital stay and we are used to their costs being a marginal portion of our health care costs. This is too bad because if we understood the actual trade-offs we would be grateful for the advances we have instead of being so resentful. If a patient understood that they were paying $250 for a month of pills that saved them a two-day hospital stay they would understand better that the true cost of drugs adds up to a substantial savings. In fact, our medical costs have been decreasing in recent years in large part due to increasingly effective medications.
Number two, there are a lot of factors that go into the cost of drugs that we aren't used to considering when we evaluate a product. Drugs are the heaviest research industry bar none. It costs approximately $500 million to bring a drug to market. That is before even one pill has been sold. That price includes research and the government approval processes. This expenditure is only possible because of the patent laws that we have in the United States that allow the company to profit from the sale of their drug. Now, a company only has 20 years from the time the patent is applied for before they lose patent protection. That seems like a long time, but remember that a) the patent has to be applied for as soon as possible in order to protect the company, b) it takes between five and ten years after application to bring the drug to market, and c) a competing drug can be introduced at any time that might make your drug obsolete. That means that a company has approximately five to ten years (and a maximum of 15) to make back this huge investment and sometimes they have less than two.
This brings us to number three, the marketing costs. Drug companies spend approximately as much on marketing as they do on research. The reason for this is simple: if nobody knows about the drug, how can they benefit from it? Now, our drug companies actually fit all their philanthropy under their marketing budgets as well, so you have to be careful when people decry the marketing budgets of drug companies. In fact, fully half the marketing cost of the drug companies is in the form of free samples given to doctors for their poor patients.
All of this means that the cost of drugs will be high. So what about all those countries that restrict drug prices to a certain percentage over manufacturing costs like all of Europe and Canada? Well, you can thank them for your high drug costs. In fact, it turns out that the United States citizens are supporting the entire research and development costs for all the drugs in the world. Well, that's a little extreme. Perhaps it would be better to state that the United states supports the research and development costs for all the socialist countries in the world. Oh wait, same thing. In fact, the next time you read some article about the Canadians paying $5 for a pill that costs you $100, you can thank the Canadians for raising the price of your pills by forcing you to support the entire R & D costs of the drug companies.
What's left for the left to gripe about? Oh yeah, obscene profits. It is true that the drug companies are some of the most profitable in the U.S. You can understand why by the simple saying that "with the greatest risk go the greatest rewards". Drug companies take huge risks with their capital. They have the highest research costs, the highest "product-to-market" costs of any industry in the United States. In order to pull together the money to invest in that kind of risk, the rewards at the end will naturally be higher than for a company (like mine) with little start-up cost. And here's some things to bear in mind when people talk about profits. First, high profits generate high taxes. And second, only a small portion of company profits get paid out to the owners of the company (usually, profits are funneled back into the company in the form of increased spending on things like labs, researchers etc.).
Two short facts that illustrate the success of the United States vs. everyone else. Five of the top ten drugs in the world were developed in the United States. That means that all the other "industrialized nations" combined can't match us. Canada is actually improving some because they toughened up their patent laws recently and saw an immediate increase in research (with the goal of actually recouping their costs in the U.S., by the way because they won't get their money back in Canada). Both of the top two drugs in the world (which account for over 80% of world-wide drug sales) are U.S. drugs. No other country comes anywhere close to the innovation of the United States in improving our lives.
Finally, a short note on medical innovation. Everyone has heard of wonderful herbal remedies for common ailments. In fact, some people claim to be able to cure cancer (which I doubt) and epileptic seizures (which actually bears up under scrutiny) by controlling diet alone. I'd like to point out that the reason we never pursue these cures is because there is no money in it to do so. You cannot patent a diet. You cannot patent a plant extract. In order to make medical claims about, say, St. John's Wart, you would have to make multi-million dollar investments that you could never, ever recoup because once you documented it, anybody who wanted to could sell St. John's Wart at the super market. This is sad, but I don't see any way around it under our current system (beyond philanthropic donations or government subsidy--both expensive options fraught with opportunities for fraud and abuse).
Anyway, long live capitalism. And God Bless the United States for continuing to bear the costs for helping the world solve their medical problems. If you want to see an end to innovative research on drugs that save and improve our lives, please pursue price controls on prescription drugs.
Technorati Tags: Drugs