America is Subsidizing Canada's Cheap Drugs

At the Freakonomics blog at nytimes.com, Zola P. Horovitz, a biotech industry consultant discusses why prescription drug prices are so high in America compared to Canada and Western Europe. She identified the problem as precisely what I always expected. Government interference.

Normally, in a free market economy, multiple firms compete and this forces them to continually lower prices and increase quality in order to win customers. Just look at your cellphone.

Now picture your cell from 5 years ago, if you even had one. Your current one is probably cheaper, brighter, lighter, more compact, and has more features than your cell from just a half decade ago. Why?

Why is it that computers and DVD players and cell phones and mp3 players always get cheaper and better? Why do health care and medicine always get more expensive. There are four basic reasons.

1. Demand is skyrocketing. Populations in Europe and North America are getting older, and old people get sick. In addition, world economic growth is so fast that poor people who only had access to primitive medicine before are becoming middle class people who would actually like to see life after 40.

2. The costs of researching medicines is extremely high.

3. Insurance encourages people to use medicine more inefficiently. Insurance generally covers some procedures outright, some require a copay, and some are simply not covered at all. So if your insurance covers an X-ray for something, you figure you might as well get it--even if it is probably unnecessary. Hell, you aren't paying for it anyway. If you were paying for the procedure outright, you might not get it. Since most people with insurance use medical resources inefficiently, the prices of everything goes up. This especially hurts the uninsured who have to pay for everything outright.

4. Government mandated price controls. When governments mandate low prices, supply plummets, shortages occur, and non price controlled units become extremely costly.

Look at rent control in New York City. Prices are artificially low, so landlords have no incentive to improve quality--they couldn't charge any more, so whats the point? There are shortages, too. Ask anyone who tried to find an apartment in NYC. And if they do find an apartment, and it isn't rent controlled, it will cost them many times what a free, competitive market would charge.

This is exactly what we see happening in America today. Other countries have established universal health care systems. These governments negotiate with pharmaceutical companies and agree to pay only slightly more than the cost of the medicine itself. The pharma companies have no choice. They can only take a slight profit or nothing at all. The government dictates this.

But somebody has to pay for all the billions of dollars of research the pharma companies do. And so it falls to us (and to the growing middle classes in developing countries that cannot afford universal coverage) to subsidize health research for everyone else. The question, then becomes what happens when America moves to universal health care--this will definitely happen if a Democrat wins in 2008--like everyone else? Who will pay for research then?

Government research grants are ineffective (since they give the money upfront, there is no incentive to try hard). Will all the countries share the burden of paying for research? Will medical progress stall because people can't manage to trust Capitalism, despite the evidence right before their eyes?

Next time some freeloading Canadian brags about how much more "progressive" Canada is, hit him with some knowledge.