Imagine we caught a burglar breaking into our neighbor’s house. As we call the police, the burglar tells us it’s OK because he was going to spend a part of his loot at our restaurant down the street.
That is pretty much what the pharmaceutical industry is telling us about provisions in Donald Trump’s new trade deal that will make people in Canada pay more for their drugs. The agreement has a variety of measures that will make patent monopolies and related protections longer and stronger. This is being presented as somehow a win for the United States.
To set the table, like every wealthy country other than the United States, Canada restricts what drug companies can charge for their drugs. While the United States hands the drug companies patent monopolies and lets them charge whatever they want, Canada negotiates the prices that drug companies can charge. As a result, prices in Canada for many important drugs are 40 percent, 50 percent or 60 percent less than in the United States.
Several provisions in the new United States, Mexico, Canada Agreement (USMCA) will strengthen the bargaining power of the U.S. drug industry, likely reducing the gap between U.S. prices and Canadian prices. For example, it requires a 10-year period of exclusivity for biological drugs before a biosimilar can be introduced in the market. It also lengthens the normal 20-year period of patent monopoly in instances where drug companies argue there were unreasonable delays in issuing the patent.
These and other provisions have the intended effect of increasing the price that Canadians will pay for their drugs. While it is obvious why Pfizer, Merck and other big U.S. drug companies want to be able to charge Canadians higher prices for their drugs, it is not obvious what the rest of us gain if these companies earn higher profits at the expense of our neighbors.
The answer is pretty much the same as the one the burglar gave. They will spend some of their additional profits on new research. While that may be good for us, just as we might appreciate the burglar patronizing our restaurant, it would be a much better story if both us and the Canadians paid lower drug prices.
The Trump administration’s efforts in the USMCA are about exporting our higher drug prices to the rest of the world. This is bad for other sectors of the economy and terrible for our long-term health cost picture.
In terms of other sectors, the basic story is that if Canadians have to pay more to Pfizer and Merck for drugs, they have less money to buy our cars, steel or milk. Other things being equal, a larger trade surplus on prescription drugs means a larger trade deficit on everything else.
However, the more important part of the story is that the Trump administration is helping the pharmaceutical industry lock in its pattern of charging incredibly high prices for drugs. These drugs would almost invariably be cheap in a free market.
Drugs are almost invariably cheap to manufacture. What makes them expensive are the patent monopolies. When someone is facing a life-threatening illness, they will pay tens or hundreds of thousands of dollars, if they have the money or get their insurer or the government to pay for the drugs. In many cases, the generic version of these drugs is available for less than 1 percent or even 0.1 percent of the patent-protected price.
While we do have to finance research, there is good reason for believing that patent monopolies are very inefficient mechanism for do so. According to the National Science Foundation, the pharmaceutical industry is spending $70 billion a year on research. The gap between the patent-protected price and the free-market price comes to around $350 billion a year in the United States alone. The industry gets hundreds of billions in additional revenue from Europe, Canada and other countries.
In addition to the tradeoff of $5 in higher drug spending for every dollar of research, we also have the perverse incentives created by patent monopolies. The sky-high margins on drugs gives pharmaceutical companies an incentive to push their drugs for uses where they may not be appropriate and to conceal harmful side effects. They do both all the time.
We should be looking to alternative mechanisms for financing research. Several prominent senators, such as Bernie Sanders and Elizabeth Warren, have proposed legislation that would directly fund the research and development of new drugs. This would allow new drugs to be sold at generic prices from day one. No one would then have to struggle to find a way to get $150,000 to keep their spouse or parent from dying of cancer.
But Donald Trump wants us to celebrate a big step in the opposite direction. The Canadians will have to pay Pfizer more for their drugs. What a great victory!