America is subsidizing Europe’s socialist medicine — with higher drug prices here

President Trump finalized a “most favored nation” (MFN), or “best price,” prescription drug-pricing rule on Nov. 20. The goal of the MFN concept is to deliver fair prices to Americans without diminishing drug company profits. While there is controversy as to whether the final rule genuinely implements the concept, the MFN approach should be followed. Opponents of the rule should improve it, not oppose it.

The MFN best-price concept mandates the same drug prices for Americans and wealthy Europeans, who have been paying about one-third of what Americans pay. But, notably, the MFN concept does not impose government-set prices upon drug manufacturers, who would be free to set whatever price would maximize sales and profits.

You wouldn’t know that, however, from the fervent opposition it has encountered from the Pharmaceutical Research and Manufacturers of America (PhRMA), the U.S. Chamber of Commerce, and a coalition organized by Americans for Tax Reform, as well as certain economists. 

PhRMA apparently has never worried that Americans pay anywhere from two to three times as much for the same prescription drugs as wealthy Europeans, whose socialist national health care systems purchase in bulk. The Chamber of Commerce is chartered to look out for businesses, not consumers.

The PhRMA, the Chamber and other fog machines are leveling misleading charges of “socialism” and that MFN “gives foreign governments the upper hand in deciding the value of medicines” and “would implement harmful price controls.” Properly implemented, the MFN concept accomplishes exactly the opposite. It would put an end to drug manufacturers exploiting Medicare for disproportionate profits, while liberating drug manufacturers from extremely low prices imposed by socialist European government health authorities.

Since the introduction of the Medicare Part D prescription drug benefit, Medicare has been prohibited by law from using its volume-purchasing power to negotiate prices for the drugs it covers, while government-run European health authorities have used such volume-purchasing power to obtain drastically low prices. Manufacturers charge Medicare high prices and then give deep discount prices to Europeans because they are already assured robust U.S. profits in the Medicare market.

The MFN concept would leave drug manufacturers complete discretion in setting actual prices. Naturally, they would not adopt the marginally profitable European prices which, when extended to the U.S., would forfeit all their profits. Nor would they be able to impose upon Europeans the current Medicare prices, which are three times what Europeans pay now.   

The prices charged to Medicare for drugs sold here and in Europe would settle at a middle level, well below the current high prices charged to Medicare but significantly above European prices — an eminently fair outcome. 

No longer would uber-wealthy Norway, for example, be able to demand a drastically low price, one at which drug manufacturers cannot make money in the United States. Norway would have to capitulate and pay a higher price, or go without the drug. 

Some economists think Europeans would forego new drugs during the patent period and wait for generic versions to become available. However, what is likely to happen is that wealthy citizens of such nations would travel to the U.S. for treatment, with this medical tourism increasing business and profits for the U.S. health care industry — a good thing.

Poorer fellow European citizens left without care would be unlikely to tolerate denial of drug coverage over years-long patent periods without agitating for coverage.

At stake is not only equity among and between the U.S. and other wealthy nations in contributing to drug company profits, which fund all-important research and development, but the very existence of profits and R&D. Other proposals to lower U.S. drug prices would eliminate profits. If, as many advocate, legislation were passed allowing importation of “low-cost drugs” from Canada and overseas, then foreign governments indeed would set drug prices in the U.S. Is this what PhRMA wants?

Some economists have opposed MFN with the argument that, instead, the expensive FDA approval process — which takes as much as a decade and $2 billion per approval — should be streamlined and the required time and expense reduced. That is a false choice. The FDA approval process should be reformed and the MFN rule employed, too. 

The real reason PhRMA opposes the MFN concept is that the current system assures manufacturers’ profits, is easy to administer, and doesn’t rock the boat. Manufacturers do not have to negotiate with multiple buyers to devise a single developed-world price that is low enough to be acceptable to the majority of developed nations but still high enough to generate profits. Admittedly, cajoling and negotiating with many different governments simultaneously is a difficult marketing and pricing challenge. 

Certainly it is more difficult than what drug companies do now, which is to set a high U.S. price, assuring profitability, no matter how thin the profit margin on European sales. 

This is the system which PhRMA demanded in 2003, when Medicare Part D legislation was passed by Congress and signed into law by President George W. Bush. PhRMA demanded and obtained a prohibition against Medicare negotiating drug prices. PhRMA rightfully feared that, otherwise, Medicare ultimately would negotiate down prices to an unprofitable level — just as European governments do.

MFN strikes a fair balance between that prohibition and the unhappy present circumstance under which Americans pay exorbitant prices for drugs and wealthy Europeans get bargain-basement prices. 

There’s absolutely no reason or justification for Americans to subsidize the health care of wealthy European socialists, especially when the unfair lower prices charged in Europe contribute to the illusion that socialist national health care systems are more cost-efficient and constitute a better way to deliver health care.

Red Jahncke is president of Townsend Group International, a business consultancy headquartered in Connecticut. Follow him on Twitter @RedJahncke.