May 17, 2018
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Pharmaceutical Pricing

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The pricing of pharmaceuticals is a complicated situation. The pharmaceutical company in pricing a particular pharmaceutical is not just recovering the costs of making that pharmaceutical, which generally is insignificant, but must also recover the cost of the research, development and approval process expenses incurred in regard to that particular pharmaceutical. Pharmaceutical companies also need to recover the research, development and approval costs for those pharmaceuticals which failed and never obtained FDA approval, generate a sufficient return to fund the research, development and approval process for new drugs, and make a profit.  There is no simple formula or methodology that can be used, either by politicians or by bureaucrats, in determining what a reasonable price for a given pharmaceutical product would be in light of the components that it contains.

It appears, however, that the drug pricing proposals, whether they are from President Trump, or from Republicans, Democrats or other commentators, have not zeroed in and effectively addressed how a government bureaucrat or a government elected official could determine the reasonableness of a particular price for a particular pharmaceutical.

There is an alternative, however. That alternative would be the concept of “Most Favored Nations”.  Under that concept, the United States would mandate by statute, that no one could sell a pharmaceutical in the United States for a price higher than the lowest price that it was sold anywhere else in the world.  The United States would, therefore, get the benefit of the various worldwide negotiations of numerous purchases of that pharmaceutical, since a pharmaceutical company would no longer have the ability to make up the shortfall of revenue it needs to cover the various cost components of the pharmaceutical by imposing a much larger price on American consumers/payors to make up the shortfalls.  President Trump’s recent proposal to address pharmaceutical cost disparities, so that the United States consumers and payors are not subsidizing the pharmaceutical industry for the benefit of other countries, can be accomplished with use of a Most Favored Nations concept.

It would be up to the pharmaceutical company, not up to a government bureaucrat or a government elected official, to determine what price they need to charge throughout the world, realizing that the lowest price that they can charge will be the price that they can charge in the United States. That may have, and more likely will have, an adverse effect upon the pricing that is now offered in other parts of the world.  While many, if not most purchases of pharmaceuticals, other than the United States, do not have an oligopolistic or monopolistic impact on the pricing, the United States clearly has, because of its direct or indirect purchase of pharmaceuticals, an oligopolistic impact on the pricing.  This concept would eliminate many, if not all of the problems, resulting from a market in which there is an oligopolistic affecting what the pricing would be.

We would still need governmental oversight in such an arrangement. The government must ensure that the prices are consistent with the Most Favored Nations concept and to take enforcement steps in cases of noncompliance.  More essentially, the government will need to aggressively ensure that the intellectual property of the pharmaceutical companies is not infringed or otherwise compromised by other purchasers, who no longer will be able to obtain pharmaceuticals at prices significantly less than those paid by the American consumer.

Obviously, under the Most Favored Nation concepts, there would be no need to import pharmaceuticals from Canada since pharmaceuticals could no longer be sold in Canada at a price lower than those being sold in the United States.

 



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