"There is a simple reason health care in the United States costs more than it does anywhere else: The prices are higher."

"“The United States spends more on health care than any of the other OECD countries spend, without providing more services than the other countries do,” they concluded. “This suggests that the difference in spending is mostly attributable to higher prices of goods and services.”

The result is that, unlike in other countries, sellers of health-care services in America have considerable power to set prices, and so they set them quite high. Two of the five most profitable industries in the United States — the pharmaceuticals industry and the medical device industry — sell health care. With margins of almost 20 percent, they beat out even the financial sector for sheer profitability.

The players sitting across the table from them — the health insurers — are not so profitable. In 2009, their profit margins were a mere 2.2 percent. That’s a signal that the sellers have the upper hand over the buyers.

This is a good deal for residents of other countries, as our high spending makes medical innovations more profitable. “We end up with the benefits of your investment,” Sackville says. “You’re subsidizing the rest of the world by doing the front-end research.”

But many researchers are skeptical that this is an effective way to fund medical innovation. “We pay twice as much for brand-name drugs as most other industrialized countries,” Anderson says. “But the drug companies spend only 12 percent of their revenues on innovation. So yes, some of that money goes to innovation, but only 12 percent of it.”

And others point out that you also need to account for the innovations and investments that our spending on health care is squeezing out. “There are opportunity costs,” says Reinhardt, an economist at Princeton. “The money we spend on health care is money we don’t spend educating our children, or investing in infrastructure, scientific research and defense spending. So if what this means is we ultimately have overmedicalized, poorly educated Americans competing with China, that’s not a very good investment.”

Philip Bonner:

"75% of the world’s medical R&D is done in or for the U.S. healthcare system, and that is why.  To put it another way, our system pays for *three times* the medical advancement as the *rest of the world put together*.  Canada once had a thriving medical R&D industry; when they socialized their system that industry largely shut down and moved one country south.  But now, there is nowhere else left for that all to move to.  If we shut it off here, it’s gone.

A very large part of the reason our healthcare system is so expensive compared to others that seem to have equal or better outcomes is exactly this problem – that we bear the burden of paying for the world’s medical advancement, and that other systems take advantage of that without paying their fair share of it.  But that leaves us with only three options – (a) keep paying for it, in which case our system will continue to be more expensive than anyone else’s, (b) socialize our system and stop paying for it, which will result in *no one* paying for it, and thus then it not getting done, or (c) make the other systems pony up and pay their fair share, which would be the best answer.

The majority of the money for the world’s medical advancement is recovered from the American market.  Most drugs cost more to develop than to make.  If you have a drug that costs $5 a dose to make, but cost $100 a dose to get to market (in the U.S., amortized under our current shortened patent timer), then it will be $105 a dose.  If some other country then decides that they will pay $25 a dose for it, then the company can sell it there, make back $20 a dose on the extra doses, and then the price here can go down to $85 a dose.  So generally, the companies do go ahead and do that.  But that still leaves us paying more than three times as much, and funding most of that development cost.  Whereas if that other country had to pay a fair market price, the cost could be evenly divided, and it would be $55 a dose in both places.  That other country would still have the option to have a socialized system, and to then provide that medicine to its own citizens for any price it chooses, or for free, but wouldn’t be able to do so at our expense by dumping most of the development cost burden on us in the process.

Solving this would be tough, but most of the other wealthy countries with price controlled socialized systems are members of the WTO.  Maybe a suit through the WTO for restraint-of-trade could be filed that would prevent the governments of those countries from dictating artificially low prices.  Again, those other countries would still have the option to have socialized systems, and to then provide that medicine to their own citizens for any price they choose, or for free, but wouldn’t be able to do so at our expense by dumping most of the development cost burden on us in the process.
A more detailed explanation of drug pricing:

I’m going to create a “test case”, using some actually pretty realistic numbers.  The main concept is that it very often costs FAR more to develop a drug than it does to make it once it has been developed.

Let’s suppose, to make the math easy, that we have a drug developed that cures a condition with one dose.  Once on the market, this drug costs about $25 a dose to make.  Getting this drug approved in the U.S. costs $100,000,000 and consumes 12 of the 17 years of the patent duration (typical amounts).  Getting the drug approved in Europe, which has similar (but not entirely compatible) standards would be about the same; $100,000,000 and 12 years.  Getting the drug approved in both U.S. and Europe would save some money through avoiding duplication, and could be done in the same amount of time, for a total of $125,000,000.  The investors that put up the money for this development expect to double their money (not unreasonable for a 12-17 year investment).  The drug will sell in the U.S. market for what they need to sell it for.  The E.U. declares they will pay $125 a dose.  There are 100,000 patients a year in the U.S. with this condition, and 150,000 a year in the E.U.

For the sake of simplicity, I’m going to ignore advertising costs and such for this example.

So here are the options for the company:

Seek approval only in Europe.  150,000 patients a year times five years of patent = 750,000 patients.  $125 a dose, minus $25 a dose to produce, = $100 a dose return; times 750,000 patients = $75,000,000.  Not economically viable.  To return the costs, $200,000,000 (development + investor profit) divided by 750,000 patients = $267 a dose, plus production costs = $292 a dose.

Seek approval only in U.S.  100,000 patients a year times five years of patent = 500,000 patients.  $200,000,000 (development + investor profit) divided by 500,000 patients = $400 a dose, plus production costs = $425 a dose.  Economically viable if the condition is serious enough that this price is worth it.

Seek approval in both markets.  $250,000,000 (development + investor profit), minus the $75,000,000 return from the price controlled E.U. market, leaves $175,000,000 to recover in the U.S.  $175,000,000 (development + investor profit) divided by 500,000 patients = $350 a dose, plus production costs = $375 a dose.  So this helps the price in the U.S. some, and is worth doing, even though it still costs three times in the U.S. what Europe has decreed it will pay.  This is the scenario that is most common.

If both markets were free, then the price would be: 250,000 patients a year times five years of patent = 1,250,000 patients.  $250,000,000 (development + investor profit) divided by 1,250,000 patients = $200 a dose, plus production costs = $225 a dose.  Quite a bit less for us; not much more for them if they pick up their fair share for the five years left on the patent.

After that, a generic gets sold to everyone for $50 a dose, and everyone benefits (but only if it was economically viable to develop it in the first place).

If we talk about patent duration reform, that transforms all these numbers a lot, and is a whole new set of scenarios.  But I hope this helps you understand how the U.S. market winds up subsidizing the socialized medicine systems of other countries, and thus why medicines cost more here."



I would only point out that other countries piggyback — to use your apt word — not only on U.S. defense spending, but on U.S. healthcare spending too. Our drug costs are far higher than in other parts of the world. Why? In part because the U.S. government does not bargain with pharmaceutical companies to the extent that other nations do. Given the sheer heft of government purchases, via Medicare and Medicaid, we have what’s called “monopsony” power. Practically speaking, this means the U.S. government can force drug companies to lower their price. But we do not. By stark contrast, other countries do.

Since we don’t, this means that, practically speaking, we Americans subsidize the development of drugs that other countries can buy more cheaply for their citizens, since in almost all other countries, health care is national and is bought in volume by their governments.

The conservative jurist Richard Posner argued in 2009 that the government should use its monopsony power to muscle Big Pharma into lowering its prices. But he acknowledged that “[t]he drug companies in turn would reduce their output.”

I, meanwhile, have long taken the position, perverse in the eyes of most people I know, that — to put it bluntly — the more drugs, the better. (Legal drugs, I mean.) In other words, I do not want drug companies to decrease their output.


Ken Thorpe:


Patients throughout the globe benefit from the pharmaceuticals, medical devices and innovative treatment approaches developed by U.S.-based manufacturers and healthcare providers, but pay less for them because their countries make liberal use of government price controls.

Is it fair that other nations don’t pay their share for the drugs, devices and treatments that yield longer and healthier lives? Of course it’s not. Should this be a priority in trade negotiations between our government and their counterparts in other capitals, ensuring that prices are set by the market and not by arbitrary price ceilings? Certainly. Spreading the financial responsibility for innovation among all those who benefit from it would lead to more equitable pricing worldwide and greater benefit ultimately.

Until that occurs, though, it’s foolhardy to point a finger at just one healthcare sector, and blame it for the high price of modern medicine. The fact is that pharmaceuticals represent around 10 percent of the nation’s total healthcare spending – and have been for more than 40 years. The drugs administered for a host of diseases, from cancer to diabetes to heart disease, many times actually save money by preventing more expensive acute procedures. Given that the primary outcomes of medical innovation are longer life, less disability, and better quality of life, it perplexes me that these benefits are almost always ignored in the analysis of prices of any number of medical goods and services."