Thursday, February 24, 2005

First some genuine thanks to Hugh Hewitt for his kind words regarding my blog! His book Blog, inspired me to start The California Medicine Man.

I received some interesting emails and comments on my last entry:

I've received several viewpoints on why American drugs are cheaper when purchased in Canada. Hgstern made the point that the Canadian government subsidizes drug costs. I did know that but perhaps you can clarify something for me. I thought those subsidies were only for Canadian residents. If a nonresident (ie. an American visitor to Canada or an out-of-country mail order customer) purchases meds at a Canadian pharmacy, does he get the same subsidy?

My sense is that the overall cost to an American is still low because the market simply can't bear much higher pricing owing to the relative strengths of our economies. If Canada is footing the bill than the difference is coming out of the Canadian tax base. This is something I can't imagine would make Canadian taxpayers happy (other than the pharmacy owners).

Maobi pointed out that the pharmaceutical companies may be raising issues of quality control as a red herring to hide their true agenda. I'm shocked to discover gambling here (with apologies to Claude Rains). In truth, I do think, for the reasons I've given, that there is some truth to the argument. Phil Marrow does offer some support for this position. "Some of the batches my be 100% active ingredient (an exaggeration) and another all inactive (not an exaggeration)." This, regardless of whether it's a true concern of the drug companies.

SWBarns suggests that the main reason drugs are cheaper in Canada is that the U.S. carries the development costs for the rest of the world. This doesn't make economic sense to me because there is no unique incentive for a drug company to put all the burden of development on any one country. The balance of supply and demand is really what drives prices. Development costs are only one component of supply. There are others.

You did correctly make the distinction of total cost (total cost divided by total number of pills) vs. marginal cost (the cost of making one additional pill). This is important because so many people don't understand why it may cost 2 cents to make a pill that costs $5 to buy and that this by itself doesn't necessarily represent obscene profits.

Phil Marrow correctly makes the point that the economic status of an intended market is only one criteria of a pricing strategy. It is one of the main ones though. I didn't know that cars produced in Mexico by American manufacturers were more expensive than in the U.S. That's very surprising given the Mexican economy. Any idea of why that's true Phil?

I felt your comments on my entry on physician's declining quality of care were quite apropos. In fact, before I went into academia myself, I volunteered as a clinical instructor for several years. While teaching bright, motivated house officers at Harbor-UCLA Medical Center, not a day went by where I didn't learn something valuable myself. I plan to write more about this on a future post.

7 Comments:

Blogger Henry Stern, LUTCF said...

The primary method that the Canadian system uses to subsidize rx costs is thru the Patented Medicine Prices Review Board (PMPRB). This board sets the maximum price that can be charged for a given med.

As time goes on, we see the net effects of this artificial price setting (cf 1973 US gas price controls); according to the AP, the average price of drugs purchased in Canada rose 23 percent over the past year and a half, compared to an increase of only 8 percent at U.S. pharmacies. In addition, American manufacturers are beginning to limit the quantities they're willing to sell to/in Canada.

Econ 101 tells us the effects of supply & demand.

February 24, 2005 5:25 PM  
Blogger SWBarns said...

Your comment that it doesn't make economic sense is correct. Unfortunately governmental action can trump the market (at least in the short term). Hgstern explains that the Canadian PMPRB sets the maximum price for a medication. If the company does not agree to sell at that price the Canadian government has the power to provide a nonexclusive license to a generic drug manufacturer.

Drug manufacturers are bowing to this pressure when they cut prices. Every dollar that they cannot charge in Canada is one that US consumers pay. The Canadian government does not subsidize, it coerces. The pharmaceutical industry in Canada is essentially non-existent so there is no constituency to change this.

An analogy would be the US government proclaiming that Canadian oil will be sold to the US at $15 a barrel if that price is not met we will take the oil and pay someone $5 a barrel to pump it out of the ground. Patent rights are property and the Canadian government is taking, in a constitutional sense, the property rights of American companies. If Americans wish to have new drugs developed we will foot pretty much the entire bill.

February 24, 2005 7:50 PM  
Blogger Kat said...

I believe that the first commenter has addressed the main point of Canada's drug system.

I think we should also understand point of purchasing and distribution. In most cases, drugs in the united states are not sold directly from the manufacturer to hospitals, clinics, pharmacies or companies like mine: home health care. Instead they are purchased through a middle man/company that does the stocking and distribution across the nation. This obviously adds a layer of costs that the manufacturer does not sustain. Economically, for any drug company, this is a sound decision.

Purchasing power is based on the amount individual companies or pharmacies can leverage through negotiation and quantity purchased at any given time. Purchasing groups are developed in order to leverage this power further. Not all of the profits are made at the manufacturing level. They are made at distribution and dispensing. ie, the middle man and the pharmacy, hospital, etc.

February 25, 2005 7:02 AM  
Blogger Kat said...

In which case, these profits support businesses that employ hundreds of thousands. Once you regulate the price of drugs, you regulate the profits these companies can make and then you must either regulate the pricing of healthcare or nationalize it, much in the same way that Canada has done or watch as one after the other disappears until only very large companies can leverage the same power. In which case, limiting the market/competition and allowing a few to control, which leads directly to price regulating at the corporate level. Lack of competition is always bad for controlling prices.

This is where Canada gets all of its leverage. healthcare in toto is managed and subsidized by the government of Canada through taxes. Therefore, they do not have to be concerned with profit margins and paying for their employees at the direct level of hosptial, clinics, etc. One would think that the Canadian tax payer would raise a fit about their subsidized healthcare going to support subsidized drugs for their American counterparts.

February 25, 2005 7:02 AM  
Blogger Kat said...

On the other hand, the Canadians don't complain much because this increases the quantity they buy and lends to their purchasing power to leverage continued discounts from drug companies at the same time increasing cash flow into an area where the buyer is not in the national health system and does not take advanatage of any of their other subsidized care through hospitals, clinics, etc.

It's win, win for Canada. The American buyer is unaware that they are subsidizing Canadian healthcare and cutting the throats of the American worker in the process.

This is free market versus controlled market. This is Canada undermining US economy.

What can and will happen is that US drug costs will continue to soar or price regulating comes in and drug companies, middlemen and dispensing entitities will be forced to tighten their belts, put people out of work, limit the number of companies/competition and force even higher costs of drugs and/or medical care. Manufacturing will be limited and it will eventually limit the amount of drugs on either market and cause even higher prices.

February 25, 2005 7:03 AM  
Blogger Kat said...

In truth, all this fuss about uncontrolled drugs and quality is a cover for trying to control the rising costs of drugs and healthcare in the US while still maintaining a free market.

Canada is cheating and we should have explained it to the American people down to how it effects them at their level. The sad part is, everyone has been indoctrinated into thinking that corporations are just plain evil and greedy and can cut this at any time (and should by the thoughs of many), just take it on the chin because it's always those "greedy" people at fault and not the market.

These same people would be crying if they had to use a Canadian type health system and watch their jobs disappear into the smoke of controlled markets.

In short, I think Canada is a thief and your average US buyer doesn't care as long as they get it cheap.

February 25, 2005 7:03 AM  
Blogger Henry Stern, LUTCF said...

Some of the roosters have started to come home...Just received an interesting flyer from Humana regarding rx usage. Briefly, they're really taking a long, hard look at rx efficacy, and mandating how and under what circumstances certain meds will be covered.

One of the most obvious -- and a nod to bean-counter medicine -- is that many brand-name drugs will only be refilled if the doc can convince the carrier to make an exception. I'm not advocating or condemning this -- I really want to think it thru -- but it is likely that other carriers will begin following suit.

February 25, 2005 7:14 AM  

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