Friday, September 25, 2009

An idea to prevent R+D free-riding

An understanding of monopsony theory leads one to a simple conclusion: the US is financing the national healthcare systems of the rest of the developed world.
Pharma and Medtech companies engage in very risky research because of the prospect of gains in success. Countries with national healthcare offer no prospect of gains because even if the pharma company finds a new drug, they will have already sunk all R+D costs into it and at that point the national healthcare plan, which has tremendous negotiating power because it represents every consumer in the country, can negotiate a low price that the pharma company will still have a reason to accept (i.e., it's better than nothing).
Thus, pharma companies won't develop healthcare solutions.
The US has a competitive private market for healthcare, so pharma companies don't have to accept reduced drug prices because the health insurance companies have less leverage. The US is a huge market, so pharmaceutical companies have an incentive to develop new healthcare for the US. Once they've invented them for the US already, they have an incentive to sell them to foreign countries.
In this sense, foreign national healthcare systems are free-riding off of US innovation... they don't pay for any of it, but they get the results.
An interesting idea would be a mandate that pharmaceuticals made in the US/owned by US companies/developed for the US (some metric like that) would not be allowed to be sold to the national healthcare plans of other *developed* countries for a price less than the average price at which it's sold to Medicare and US private health insurers.
This would substantially lower the cost of healthcare in the US, and stop US subsidy of foreign healthcare services. You wouldn't want to do this in impoverished countries, who can barely afford anything anyway, but to healthcare services in most of Europe, it'd be a viable option.

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