Except in rare cases, pharmaceutical companies develop drugs for the U.S. market. For drugs that make it in America, potential sales in Europe, Japan, Canada, China and elsewhere are gravy. Drugs that can’t make it in the U.S. are scuttled. Probable success in America is a necessary and sufficient condition for the development of new drugs. There are four main reasons for this:
This is from Charles L. Hooper and David R. Henderson, “Expensive Prescription Drugs are a Bargain,” Wall Street Journal, September 13, 2022 (September 14 print edition.)
Why did the Journal give it the title it did? It’s accurate. Here’s another excerpt:
Research by Columbia University economist Frank Lichtenberg suggests that 73% of the increase in life expectancy that high-income countries experienced between 2006 and 2016 was due solely to the adoption of modern drugs. He also found that the pharmaceutical expenditure per life-year saved was $13,904 across 26 high-income countries and $35,817 in the U.S. Most Americans would pay $36,000 to live an extra year.
We also address the fact that governments around the world free ride on Pharma’s R&D that we Americans pay disproportionately for. In short, it sucks to be us. But we still get a good deal, as the paragraph above shows.
READER COMMENTS
Thomas Lee Hutcheson
Sep 14 2022 at 12:37pm
I think an even better deal would be cost benefit analysis of drug approval, at least for use by Medicare/Medicaid/ACA.
David Henderson
Sep 14 2022 at 1:29pm
I disagree. Why prevent people from buying drugs that are safe and efficacious just because a CBA shows a ratio above 1? Are you really that people shouldn’t be able to spend their own money on drugs that are safe and efficacious?
Dylan
Sep 14 2022 at 2:26pm
I think you may have read a bit too quickly, as Thomas specified cost-benefit analysis for government funded drug expenditures, so the patient isn’t spending their own money, they’re spending our money.
David Henderson
Sep 14 2022 at 3:22pm
Thanks, Dylan. I, as another commenter pointed out recently, tend to take things literally. So when TLH said “drug approval,” I thought he meant drug approval. But if he simply meant approval for CMS to spend, my offhand reply is that I think he’s making a good point.
Dylan
Sep 14 2022 at 2:24pm
A rare piece on pharma where I’m largely in agreement with you and Charley (at least on the quotes, can’t read the whole WSJ piece).
A couple of quibbles, while the U.S. certainly drives a large chunk of pharma development and it is true that development can be cancelled if it looks like the U.S. market isn’t going to deliver for some reason or another, particularly if it is early in the development lifecycle, if it comes later (say a rejection from the FDA) many companies will settle for approval in other parts of the world (illustration of sunk costs). And, a good chuck of my career in pharma was working with companies that were developing drugs from the outset with no intention of launching in the U.S. (at least in the short term) Biosimilars were one notable area, but also drugs that might face IP issues in the U.S. or heavier competition would sometimes develop a strategy of ex-U.S. only. A minority for sure, but not exceedingly rare.
Not sure if this tracks, at least if they are paying with their own money. Median individual salary in the U.S. in 2021 was only a bit above $37,000. Hard to see paying everything you make in a year just to keep you alive for another year.
David Henderson
Sep 14 2022 at 3:25pm
Thanks, Dylan.
You wrote:
Good point.
You wrote:
But the data show that the average American puts a value on an additional year of life at approximately 10 times $36,000.
It’s really hard for you to imagine that people would spend a whole year of salary on living an additional year? I’m guessing your salary is a multiple of $36,000. Let’s say it’s $150,000. You can spend $150,000 and live an additional year or not spend it and die today. You wouldn’t spend it?
Dylan
Sep 14 2022 at 4:15pm
I think you’ve talked about having a heavy skepticism of those numbers in past posts (forgive me if I’m confusing you with another writer on EconLog) and I think that’s another area where we agree. I think it is hard to extrapolate from the pay premium from deep sea oil rig workers to make claims about how much people value a year extra of life more generally.
For me, almost certainly not. That money would have far more value going to my wife after I’m gone, than it would in giving me an extra year of (probably marginal quality) living.
But, that is kind of beside the point I was trying to make, which is (to use a phrase from my new line of work) “does it scale?” Sure, we can afford to extend some people’s lives by a year at a cost of $36K/year…but certainly not most.
nobody.really
Sep 15 2022 at 8:32am
Yes, I suspect this was not the main thrust of Henderson’s post, but I also find the remark ironic. I come from reasonably long-lived stock–and mores the pity as I have observed, and am currently attending to, relatives dying of degenerative diseases. We are not discussing how much we would pay to prolong these lives; we’re discussing if we could possibly arrange to get them to jurisdictions where we could legally end them. I am reminded of the words of Scott Alexander:
“I work in a Catholic hospital. People here say the phrase ‘culture of life’ a lot, as in ‘we need to cultivate a culture of life’….
And now every time I hear that phrase I want to scream. 21st century American hospitals do not need to ‘cultivate a culture of life’. We have enough life. We have life up the wazoo. We have more life than we know what to do with. We have life far beyond the point where it becomes a sick caricature of itself. We prolong life until it becomes a sickness, an abomination, a miserable and pathetic flight from death that saps out and mocks everything that made life desirable in the first place. 21st century American hospitals need to cultivate a culture of life … the same way a man who is burning to death needs to cultivate a culture of fire.”
nobody.really
Sep 15 2022 at 10:08am
Maybe this just illustrates the concept of diminishing marginal returns.
Charley Hooper
Sep 15 2022 at 6:09pm
I think part of the stumbling on this issue is due to the “one year for one person” for “a large chunk of money” transaction.
In reality, one patient would be on a statin for 10 years, say, to live one extra year. That patient, to use our example, would need to spend $3,600 per year—a much more reasonable proposition.
Also, it’s often that case that 1,000 people pay $36 for 10 years so that 10 of them can live an extra year.
A question for you: would you pay $36,000 to have your wife live an extra year?
Dylan
Sep 15 2022 at 7:36pm
You’re absolutely right. I had wanted to say something similar in my first post, but you did a much better job than I would have in being succinct. And I do think that changes the calculus considerably, even if it really shouldn’t.
As to whether I’d pay $36K to add a year of life for my wife, I think that depends on a lot of factors. Where I am now, probably yes. A couple of years ago, when I made a lot closer to the median income, the answer probably would have been no. And that’s not just theoretical, both of us didn’t go to the doctor for many years, even when seriously ill, because we didn’t have the income at the time to afford it.
nobody.really
Sep 29 2022 at 5:23pm
Perhaps. Yet this is a curious message for an econ-ish blog. Surely we could make similar statements about any monopoly good or service that is priced above equilibrium levels: MOST consumers are not the marginal consumer, so MOST consumers would still find the higher price a good deal. Does that justify the practice?
I bet water is even more important to longevity than pharmaceuticals. Should we let water utilities price tap water at whatever price the market will bear, regardless of the cost of service?
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