That ‘Americans pay for drug R&D’ point

In the unlikely event that you’ve fallen for the absurd myth “US healthcare is really expensive because they pay for the rest of the world’s drug development”…

Total global pharma R&D spending was US$53bn for 2004 (it won’t have order-of-magnitude changed since then). US healthcare spending was US$2.4 trillion for 2007.

So even if you assume the US does literally pay every penny associated with global pharma R&D, that’s only *2%* of US healthcare spending. If you’re worried about medical innovation being stymied by some kind of NHS-like system in the US, all you need to do is commit to investing a tiny proportion of the savings in a public R&D fund.

This would have the added advantage of focusing on drugs that are useful, rather than near-identical-but-patent-dodging clones of existing drugs which can be sold to gullible patients and gullible-bordering-on-bribed doctors based on cherrypicked studies and outright lies.

12 thoughts on “That ‘Americans pay for drug R&D’ point

  1. I didn't know that there was such an absurd myth doing the rounds!

    It would strike me as nonsense anyway, I'd guess half of global medical R&D by US companies and half by European companies. I'd also guess that maybe between 5% and 15% of healthcare spending is on drugs bought from private companies. Further I'd guess that these companies spend a quarter of their income on R&D, which would also get to your 2% figure.

    But are you one of those who say that "The US system is shit/isn't perfect, so we have to stick with the NHS-model"? Which is as infuriating as those who say "The NHS is shit/isn't perfect so we should have the US-model".

    Frankly they are both shit. Let's do what most European countries do (and, allegedly, New Zealand).

  2. I'm not sure there was ever really an argument in Britain about keeping the NHS because the US system is rubbish (I imagine British views on the US system are more complex than that. This particularly debate seems to have come from the US, and doesn't necessarily need a reply (especially when it is clearly not being made in good faith).

    The NHS remains popular, and relatively cheap (I can't see any other system being much cheaper, in fact wouldn't most be more expensive?). So I'm not sure there's a great urgency about replacing it given the other problems facing our country.

  3. The R&D thing was one part of the explanation I'd heard (and mentioned on LibCon, mostly as a concession to the righties), and has probably led to a bit of confusion as I didn't mention the other part – which may also be bollocks, I have no idea.

    That other, more convincing-sounding bit is that drugs cost a lot more in the US than the same drugs do in, say, sub-Saharan Africa – and that the reason the pharmaceutical companies can afford to supply drugs to the third world at a knock-down rate is because of richer countries (especially the over-priced US market) paying over the odds.

    But that would have been too long-winded an aside. And may well still be bollocks – no idea. Does sound plausible, though.

  4. I'm not particularly attached to the single-public-sector-provider model, but:

    1) the NHS isn't shit. It's demonstrably at least OK.

    2) the NHS is very cheap. We spend less on healthcare as a % of GDP than any major developed country. I strongly approve of this: most healthcare spending is a massive waste of money fuelled by gullible desperate people with no real clue on what's best for them.

    I'd rather NHS spending had been held at 1997 levels, rather than the massive, largely undeserved pay rises that the last 12 years' increase has mostly funded, but as far as I can see any plans for NHS alternatives would cost more than we currently spend.

  5. @ Nosemonkey. What the drugs companies would like to do is called 'discriminatory pricing' and is entirely acceptable and rational economic behaviour*.

    If you have high fixed costs (R&D) and low marginal costs (actually making the drugs); AND you can segregate your markets, you sell to people on basis of how much they can or will pay. So the drugs companies recover their (high) R&D costs by selling at high prices in the west; and as long as they can cover their (low) marginal costs they are happy to sell at lower prices to poor countries.

    The problem is that said poor countries are so corrupt they just re-sell the stuff on the grey market, so it is the governments of poor countries that are stuffing over their citizens, not 'Evil Big Pharma'.

    * Discriminatory pricing only works if you can segregate your markets – particularly where goods/services are consumed at point of sale, i.e. public transport and cinemas charge lower prices in the day time because their is less demand, and the people who want to travel/watch a film in the daytime are usually those on lower incomes, i.e. unemployed and pensioners.

  6. Mark W….yes, and drug prices in the US are very much higher than they are in countries where govts are able or desire to negotiate them down (ie, all except the US).

    JohnB: no, you cannot simply look at R&D spending itself: for all hte other revenues of the pharma company are required to pay for it. The returns to capital, the salesmen, th bean counters, all are needed to produce that R&D spend. So it's, by your calculation, more like 13% (although of course no one is really saying that all medical innovation is pad for by the US system, only lots of it).

    Further, even that argument ain't quite right. Necessary to distinguish between invention (the creation of new stuff) and innovation (the adoption of new stuff throughout the society). It's that second that capitalism/freemarkets do so damn well.

  7. As I've said at Chris's, I disagree: there's no reason why that $53bn needs to be channeled through the phenomenally inefficient route of "marketing company with enormous salesforce". Particularly as the current pharma model ensures that most drug research spending is wasted anyway (for every genuinely revolutionary drug that comes to market, there are four 'me-too' clones that cost almost as much to trial and provide negligible additional benefit).

  8. @ JB, "I’m not particularly attached to the single-public-sector-provider model…". That's the key to all this – the provision side.

    We can argue over the funding side as a separate exercise (mixture of taxpayer funded, private insurance and voluntary payments would suit me just fine).

    I don't think your point 2) is correct. Back in 2003 we were a bit behind other European countries

    (the USA is a complete outlier and an irrelevance) but, seeing as NHS spending has gone up from 5.9% of GDP to 8.4% of GDP since then, I am sure that we are roughly in the middle by now.

  9. "What the drugs companies would like to do is called ‘discriminatory pricing’ and is entirely acceptable and rational economic behaviour"

    Quite. I do wonder if the "we subsidize you freeloading eurocommiefilth bastards" crowd have similar objections to, say, easyjet's yield management system.

  10. …seeing as NHS spending has gone up from 5.9% of GDP to 8.4% of GDP since then, I am sure that we are roughly in the middle by now.

    Not sure that's true. I don't have any figures to hand, but as far as I'm aware, healthcare spending in other European countries has increased as the UK has increased its spending, leaving us roughly where we were relatively speaking, spending a little less than most EU countries.

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