Foreign Free-Riders and the American Patients First Approach to Lowering Prescription Drug Costs
CT Heltzel

Abstract

Prescription drug costs in the United States continue to greatly exceed the average prices in other countries. The U.S. Department of Health and Human Services has proposed a system to try and lower drug prices in the U.S. by basing them on an international price index, with hopes that foreign payors will be forced to spend more and cover additional contributions to R&D expenditure. This policy presumes the validity of the “free-riders” concept that foreign countries are benefiting from U.S. pharmaceutical spending while not pulling their weight in R&D fiscal support or productivity. However, data on top developed countries spending on pharmaceutical research relative to their GDP and number innovative drugs developed demonstrates free-riding as a false narrative. In turn, policy attempting to punish the price negotiation of other countries holds the potential to create no positive or reasonable pharmaceutical cost changes and debilitate access to novel drugs worldwide.

Background

The United States presidential administration under Donald Trump was elected into the executive office on a platform espousing reduction in American prescription drug costs. To initiate this promised effort, President Donald Trump unveiled his administration’s “American Patients First” plan in May 2018. This plan seeks to improve upon price negotiation, create greater competition, and incentive lower prices of prescription drugs for American consumers (1).

americanpatientsfirst
American Patients First: U.S. President Donald Trump’s plan to address American healthcare costs.

The Trump administration also identifies in this plan major challenges facing the American drug market that include “Foreign governments free-riding off of American investment in innovation”. The idea that other countries are acting as “free-riders” by paying lower prices for drugs and spending less on Research and Development (R&D) while Americans pay drastically more for the same prescriptions is not a new idea, and has been heavily inferred by the US government and pharmaceutical companies since the early 2000’s (2). However, many health and economic professionals have refuted the free-rider claim and that drug prices in other countries are not a primary contributor to extreme U.S. drug prices (3). To assess the value of targeting the pharmaceutical price gap between the U.S. and other countries, we will examine the validity of the free-rider claims, and if policy focused on having other governments pay more can benefit American payors.

Free-Riders and the American Pharmaceutical Price Gap

In 2015, retail pharmaceutical spending per capita in the U.S. exceeded $1,000, 30 percent higher than Switzerland, the next highest spender (4). Additionally, other developed countries spend about 41 percent of the U.S. price on the same drugs, on average (5). It is clear that the U.S. government and American consumers are at a steep disadvantage when paying for prescriptions. The truth is that the U.S. spends more on pharmaceuticals than any other country in the world and spends more on research and development. Knowing that other countries are spending less on drugs, it is commonly suggested that Americans are paying more to support the research costs on new products that the whole world benefits from. This is why the Trump administration has decided to address the American pricing issue by attempting to pressure other nations, creating policy that would create alignment in international prices. Essentially, American prices come down and foreign prices go up. But are international pharmaceutical developers actually not providing a fair contribution?

To determine if countries outside of America are truly acting as free-riders, it is important to look at spending on pharmaceutical R&D as a percentage of gross domestic product (GDP), and investment and productivity towards innovation. Many would see the U.S. total spending on R&D and percentage contributed to global R&D being the highest as an indicator that other countries have room for improvement in comparison. However, examining pharmaceutical industry expenditure on R&D as a proportion of GDP tells a different story. Between 2000-2015, countries such as Switzerland, Sweden, the UK, and Japan have all either committed more or similar amounts of spending to pharmaceutical R&D proportionally to GDP when compared to the U.S. (2) (6) (7). Observing such similar proportional spending across the board amongst top 20 economies demonstrates the idea of foreign spending on R&D not carrying its own weight is objectively false. As far as innovation goes, Europe is standing nearly toe-to-toe with the US in the number of new chemical or biological entities developed. Between 2012 and 2016, approximately 32 percent of new molecular entities were developed in Europe, and 38 percent in the U.S. (8). Weighted against total R&D expenditure, Europe actually produces more new, innovative drugs per dollar spent than the U.S. (8). The difference could be explained by European countries’ tendency to incentive spending towards “true innovation”, rather than developing drugs that are unlikely to provide novel uses versus currently marketed drugs.

Creating Greater Pressure on the Foreign Market

In 2018, President Trump announced a plan to reduce the United States’ extreme prescription drug prices, starting with a demonstrative initiative using Medicare part B. The President proposes to create an international pricing index (IPI) and using it to have Medicare pay for prescriptions based on the prices in other industrialized countries (9). This will hypothetically lower U.S. drug prices while forcing big pharma to raise prices internationally to cover R&D costs on the back-end. This policy concept attempts to punish international entities instead of directly regulating negotiation of pharmaceutical prices domestically. The primary reason pharmaceutical companies have been able to freely set prices in the U.S. is that the public and private payers are restricted from full and transparent bargaining of drug prices. Other governments typically have a means of limiting prices via regulated bargaining that allows the government to procure drugs at competitively set prices that compare favorably with drugs of similar types. The American plan hypothesizes that with American drug prices requiring to be set at average international costs, pharmaceutical companies will be pressured to raise prices internationally to continue to support R&D. Will such a strategy be able to effectively change costs in America, or abroad?

It is a common saying among pharmaceutical lobbyists that “if Europeans are made to spend more it would be fairer for global pharmaceutical R&D costs.” However, this does not inherently mean those in the U.S. would get to pay less. Of course, the proposed policy averages international prices to set the U.S. price, but there are potential workarounds and potential pitfalls. For example, the Centers for Medicare and Medicaid Services (CMS) may base drug rates on other countries’ prices, but companies could make deals to raise foreign drug prices to U.S. values and proceed to apply rebates that then reduce the costs internationally. If large groups of countries all worked similarly in their methods to reduce drugs costs in response, it would be difficult for the U.S. to do anything about it. On top of the potential of U.S. drug prices not being greatly affected, the policy could create international drug supply problems that will harm all countries. Companies could decide to wait longer to roll out new drugs in foreign markets, protecting their products from price changes demanded either by the U.S. international governments. Thus, all countries would suffer from a less open trade environment and less access to innovative therapies.

Conclusions

The price of drugs in the U.S. are certainly higher, on average, than any other country in the world. U.S. companies also benefit the rest of the world by spending more than anyone else on R&D, as well. The idea that other developed countries are not pulling their weight and depending too much on America’s goodwill fiscally is, however, a misguided perspective. On the grounds of both industry R&D spending proportional to national GDP and production of pharmaceutical innovation, developed countries do nearly as well, if not better, than the U.S. If the U.S. government decides to implement drug policy that attempts to affect European costs, it could create a climate where not only do drug prices go unchanged, but all nations may lose out on availability of novel medicines. Perhaps it is for the best if the U.S. continues to examine how they might be able to better negotiate their own prices, rather than demand change internationally.

List of abbreviations

CMS: Centers for Medicare and Medicaid Services
GDP: Gross Domestic Product
IPI: International Price Index
R&D: Research and Development

Availability of data and materials

The datasets analyzed in this article are available from

  • the OECD, [https://www.oecd-ilibrary.org/social-issues-migration-health/health-at-a-glance-2017_health_glance-2017-en], [https://stats.oecd.org/index.aspx?DataSetCode=HEALTH_STAT#]
  • the EFPIA, [https://www.efpia.eu/media/219735/efpia-pharmafigures2017_statisticbroch_v04-final.pdf]

References

1. Department of Health and Human Services. American Patients First. Washington, D.C.:; 2018.
2. Light DW, Lexchin J. Foreign free riders and the high price of US medicines. BMJ. 2005 October.
3. Light DW, Caplan AL. Trump blames free riding foreign states for high US drug prices. BMJ. 2018 March.
4. Organisation for Economic Co-Operation and Development. OECD.Stat. [Online].; 2018 [cited 2018 December 13. Available from: https://stats.oecd.org/.
5. Yu NL, Helms Z, Bach PB. Health Affairs. [Online].; 2017 [cited 2018 December 12. Available from: https://www.healthaffairs.org/do/10.1377/hblog20170307.059036/full/#one.
6. The Organisation for Economic Co-operation and Development. OECDiLibrary. [Online].; 2015 [cited 2018 December 11. Available from: https://www.oecd-ilibrary.org/docserver/health_glance-2015-70-en.pdf?expires=1544759361&id=id&accname=guest&checksum=F8F73D47590ABF8CCE7B84B7A4DF398F.
7. The Organisation for Economic Co-operation and Development. OECDiLibrary. [Online].; 2017 [cited 2018 December 11. Available from: https://www.oecd-ilibrary.org/docserver/health_glance-2017-72-en.pdf?expires=1544759472&id=id&accname=guest&checksum=550361477C5AC6CE3301CF48D1306A7D.
8. European Federation of Pharmaceutical Industries and Associations. efpia.eu. [Online].; 2017 [cited 2018 December 11. Available from: https://www.efpia.eu/media/219735/efpia-pharmafigures2017_statisticbroch_v04-final.pdf.
9. Department of Health and Human Services. HHS.gov. [Online].; 2018 [cited 2018 December 12. Available from: https://www.hhs.gov/about/news/2018/10/25/hhs-advances-payment-model-to-lower-drug-costs-for-patients.html.

 

 

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