Kevin Drum says there’s no evidence that pharmaceutical companies in socialized systems are less innovative. He cites a handful of big drug companies that have headquarters in Europe. But my point is not their nominal headquarters in a mutlinational world, but where the cash for their R&D comes from, and where they have been moving their operations under price pressure from the governments in Europe. Take GSK. Yes, it’s still nominally British. But Wiki revealingly tells us that
The majority of its activity is in the United States, although the company has a presence in almost 70 countries.
GSK isn’t alone. Check out Novartis, a nominally Swiss company Kevin cites that is also heavily based in the US. The reason is the size of the US market but equally the prices it can charge for its drugs here. Take that away, and you will surely have a drop in drug R&D. Yes, there is flim flam and abuse and corruption in Big Pharma. But not enough to ease the pain of the price restraints the Democrats are eager to slap on pharmaceuticals. Mark Kleiman makes my point better than I did:
Where a drug is invented doesn’t really matter much. A company that invents a drug in Europe still gets much of its profit from the American market. So the question is, what would be the effect on innovation of squeezing down on pharmaceutical prices in the U.S.?
My first guess is that it would slow things down. If both Wyeth and Novartis have to consider that their next blockbuster drug is going to bring in less revenue, the probability that Drug X will be that blockbuster has to be higher in order to justify spending the money to find out. That means some good prospects get overlooked; presumably not forever, but for now.
If every country tries to free-ride by making sure that its consumers don’t pay their share of the cost of innovation, it figures that there will be less innovation. Maybe that’s not right; maybe drug companies, faced with a somewhat less creamy American cash cow, would be able to negotiate up prices in Europe and Asia. (That’s Kevin’s guess.)
But one or the other is going to have to happen, or some combination. It’s not the case that reduced prices can come out of pharmaceutical-company profits; those firms have to raise capital in the same market as everyone else, and their risk-adjusted returns on equity aren’t out of line with those of other companies. (Pfizer’s market capitalization is just shy of $200 billion, which is something less than two months’ worth of U.S. health-care expenditure.)
So it’s true, to some extent, that the U.S. is effectively cross-subsidizing pharmaceutical consumption in other countries, either by sparing them higher prices or by keeping up the pace of innovation.
Kevin doesn’t worry, because we’re "over-medicated" anyway. Well, that’s a concession of the trade-off I’m asserting. For my part, I don’t think I’m over-medicated. And I do think that without the private healthcare system in the US, I – and millions of others – would be dead by now, and that includes the poor and the destitute with HIV in the developing world, who get a free ride off American capitalism as well. You want to throw global medical research into a depression? Back socialized medicine in America. Maybe the trade-off of fewer treatments tomorrow for more drugs for more people now is worth it. But you don’t get something for nothing.
The Dish 