http://cepr.net/publications/op-eds-columns/sanders-khanna-bill-would-stop-monopoly-drug-pricing-in-the-us
Dean Baker
Truthout, December 3, 2018
Debates on economic policy are often far removed from reality. Nowhere is this truer than in the case of prescription drug prices.
In the United States, we pay high drug prices because the government gives pharmaceutical companies patent monopolies, where it threatens to arrest anyone that sells a drug in competition with the patent holder. As a result, drugs often sell for prices that are several thousand percent above their free market price.
Incredibly, in debates on drug prices, these monopoly prices are routinely described as being the result of the free market, turning reality completely on its head. The people who want to lower drug prices are then said to be trying to interfere with the free market, which we are all supposed to think is a bad thing to do.
This is one of the reasons why a new bill to lower drug prices by Sen. Bernie Sanders and Rep. Ro Khanna is so brilliant. The bill is actually lowering drug prices by using the power of the market, making it clear that the proponents of high drug prices are the ones who want the government to interfere with the market to keep drug company profits high.
The bill would effectively end the patent monopoly for any drug where the price in the United States is above the median of the prices charged in the next seven largest wealthy countries. This is likely to mean a reduction in the price of most brand drugs by around 50 percent.
The reason is that, while other countries also grant patent monopolies and related protections to drugs, they don't allow the manufacturers to exploit these monopolies to the same extent as in the United States. They have some sort of price negotiation with drug companies, which is intended to place a limit on the price that can be charged when people's health or life is at stake.
In effect, the Sanders-Khanna bill imports the price negotiation process put in place by these other countries. Drug companies will have a strong incentive to set their price below the median of the seven benchmark countries. If they charge a higher price, they effectively lose their patent monopoly. They could still make some money off of licensing fees charged to generic producers, but this would be a small fraction of what they would make from having a patent monopoly.
Another nice feature of the Sanders-Khanna bill is that it would lower drug prices for everyone, not just Medicare patients. There have been a number of bills introduced in recent years that have been designed to reduce the cost of drugs for people in Medicare. While lower drug prices for people enrolled in Medicare would be good, we should be looking to reduce our drug prices across the board. There is no reason people in the United States should be paying so much more than everyone else.
The industry's response will be to whine that if they charged lower drug prices they won't be able to finance the development of new drugs. There is a grain of truth to this, but only a grain. The industry will collect roughly $440 billion (2.2 percent of GDP) in revenue this year from sales in the United States alone. It spends around $70 billion on research. This is less than one-sixth of the money it pulls in.
Certainly, if we did bring spending down to the levels in other wealthy counties it would lead to somewhat less research, but the question is the size of the falloff in research. After all, by giving another $1.5 trillion to corporations over the next decade, the Trump tax cut will almost certainly lead to some additional investment, but the question is how much. The evidence to date with the tax cut is that we are seeing very little payoff in the form of higher investment. Similarly, the additional revenue from unchecked patent monopolies is likely to translate into little by way of additional research into developing new drugs.
Ultimately we should be looking to more modern and efficient mechanisms than patent monopolies for financing drug research. The government already spends almost $40 billion a year on biomedical research through the National Institutes of Health. If we paid for the research up front, then all new drugs could be sold at their free market price from day one, saving us close to $400 billion a year. In that world, prescriptions would be $20 or $30 a piece, not hundreds or thousands of dollars.
But for now, the Sanders-Khanna bill is a huge step forward in making drugs affordable. And, it does it by using the market forces, a prospect that is very scary to the pharmaceutical industry.
-- via my feedly newsfeed
WASHINGTON, DC – At the G20 Summit in Argentina this weekend, US President Donald Trump will meet with Chinese President Xi Jinping to talk, above all, about trade. If their discussions do not go well, Trump could follow through on his threat to increase tariffs on a wide range of Chinese goods. But the stakes are even higher than that.
More broadly, Trump argues that the World Trade Organization has failed – for example, with regard to China – and that the United States should withdraw from the organization. Threatening to leave the WTO makes no sense even as a negotiating strategy, let alone as a policy, but it could still happen. The consequences for the US economy and for the world could be calamitous.
Ostensibly, Trump's current priority in discussions with the Chinese is stronger protection for US patents and copyrights. On the face of it, this makes some sense: it is estimated that various forms of "theft" of intellectual property cost the US economy at least $225 billion (1% of GDP). Protecting intellectual property has long been an important part of US trade policy, as reflected, for example, in the Uruguay Round of negotiations that concluded more than 20 years ago. And there have been conspicuous cases of industrial espionage that allegedly involve Chinese companies (or perhaps some branch of the Chinese government) stealing trade secrets from firms with operations in the US.
But some of the most prominent American concerns about China's intellectual-property regime today come from companies that want to invest in China, including the establishment of productive capacity there. China conditions these investments on technology transfer – a point highlighted by the US Trade Representative in a report released earlier this year, and now one of Trump's talking points.
China's insistence on technology transfer increases the short-term cost of doing business (for US and other foreign direct investors) and creates the threat of future competition from Chinese firms. Trump vows to "bring back" manufacturing jobs to the US. How does making it easier for American companies to manufacture and innovate in China contribute to fulfilling that promise?
Perhaps Trump's agenda is the more conventional aspiration to "open markets" for US exports, and it is entirely possible that the Chinese will offer to buy more of some category of goods after the G20 summit. Trump likes headlines and most likely he would prefer a favorable news cycle or two, given the recent gyrations in financial markets. But such deals are typically meaningless – the goods were going to be bought anyway in some fashion.
A more likely outcome, at the summit or soon after, will be another lurch in US policy against the existing WTO framework. The US is already blocking the appointment of judges to a key WTO appeals court. If this continues, the WTO adjudication process will effectively grind to a halt, perhaps as soon as next year. This would be a major loss: the WTO's dispute settlement process is essential to rules-based global trade. And, contrary to what Trump claims, the US wins far more often than it loses at the WTO. From 1995 to March 2017, the US prevailed in 91% of cases that it brought against other countries, according to data from the conservative Cato Institute.
But the US stands to lose a case brought against the Trump administration's recently imposed tariffs on imported steel and aluminum, because they most likely violate WTO rules. So the White House now wants to undermine the WTO's legitimacy and rescind US commitments to a multilateral trading system more broadly.
Could the US actually pull out of the WTO? Chad Bown and Douglas Irwin of the Peterson Institute for International Economics have written a careful analysis of the possibilities (I am also affiliated with PIIE, but I was not involved with this work). In their view, the power to do so more likely lies with Congress. But Trump certainly could issue a declaration of withdrawal, and then litigate his authority to implement it. Which way would the Supreme Court decide? It is very hard to predict.
And while that litigation continues, there would be great uncertainty about tariffs and much else. Bown and Irwin point out that, given how the system works, tariffs that are currently below 5%, on average, could jump to nearly 30%. There would naturally be retaliation in the form of higher tariffs imposed by America's trading partners, which is exactly what happened after the steel and aluminum tariffs were imposed earlier this year.
There are definitely valid concerns about how China conducts trade, including what Pascal Lamy, a former WTO director-general, calls "opaque, trade-distorting subsidization of high-tech products." But, as Lamy says, a more effective way to deal with this would be to strengthen WTO rules. Plenty of other countries would like to join the US in such an effort. Unfortunately, as in so many areas, Trump prefers unproductive confrontation to cooperation.