The Cost of Bargaining With Big Pharm

I think the Democrats should insist on revampling the Medicare drug bill. It's just plain silly that the government can't negotiate directly with the drug companies for lower prices. After all, the government negotiates big discounts for drugs for Medicaid and the VA administration, and Medicare is a much bigger entitlement. As every Costco shopper knows, when you buy in bulk you get cheaper prices. Unless, of course, you have a highly efficient lobbying machine.

That said, it's important to know that bargaining has real consequences. Tyler Cowen found this economic paper:

EU countries closely regulate pharmaceutical prices whereas the U.S. does not. This paper shows how price constraints affect the profitability, stock returns, and R&D spending of EU and U.S. firms. Compared to EU firms, U.S. firms are more profitable, earn higher stock returns, and spend more on research and development (R&D). Some differences have increased over time. In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent. During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate. Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

To be honest, I just don't find those numbers that impressive. Medicaid and the VA Administration secure discounts of at least 15 percent from the drug manufacturers. In an entitlement as gigantic as Medicare, that's billions and billions and billions of dollars. (And the savings will balloon once the boomers retire.) If all we're talking about is 46 fewer medicines, and 1700 fewer jobs, that's a tradoff I can live with. No one pretends that saving our entitlement programs won't be fun or easy. But it's time we get serious about it. Everybody will have to pitch in, even big pharm.

Update: Over at the WSJ, James Stewart argues that all this negotiating stuff is irrelevant: big pharm will thrive because America is getting older:

The aging of the baby-boom population portends an all-but-certain surge in demand [for drugs]. Second, given the resources and incentives, science and human ingenuity will bring an end to the recent dearth of blockbuster drugs on the horizon. In my view, everything else, including which party controls Congress and on what terms Medicare pays for a prescription-drug benefit, is so much static.

So invest in big pharm stocks while they're cheap, and investors are still punishing them for the election results.