America foots the bill for Europe's largesse

The highly profitable US free market for drugs in effect subsidises other countries; price control regiemes, says Amity Shlaes.

Richesse oblige is the rallying call that continental Europe has settled on when it comes to combating Aids in Africa. Thus Joschka Fischer, Germany's foreign minister, swears that the United Nations can count on Berlin's "full support" in fighting the disease. Drugs for Africa must be cheaper or free, drug companies' patents waived or rewritten.

Implicit here is a condemnation of any drug company or developed nation that does not keep pace with the giving - especially the wealthy US. Oxfam, the UK-based charity, has said it is time to start standing up to the US and drug companies. Even the Bush administration has shown signs of succumbing to this view, as for example last week, when it dropped a World Trade Organisation case against Brazil's easy patent law.

But it is Europe's political class that is taking the lead here, rejecting as heartless commercialism any concern that it might be wrong to force drug companies and governments to subsidise Africa or give it an economic free ride.

This sanctimony belies a strange truth: when it comes to cutting-edge pharmaceuticals, needy Africa is not the worst free rider in the room. That label belongs to rich-man Europe itself. For while the continent has purchased its share of drugs over the decades, its tight pricing policies have not helped, and have even hurt, drug company profits and the sort of innovative work necessary to combat new diseases.

The US, meanwhile, has served both as the industry's main profit centre and as the global headquarters for research and development. But for European policies, the global rate of drug innovation might have been much greater and there would be a wider range of medicines to combat crises such as Africa's.

This may seem a convoluted line of argument. But tracing it helps to reveal the important link between two areas we do not usually consider to be connected: domestic social policy and humanitarian aid for poorer lands.

This story starts with continental Europe. After the second world war most countries there established one or the other variant of a national health system, including, eventually, some sort of entitlement to prescription drugs. (The UK case is more complicated, so we'll leave it out this time.) These programmes, which made monopsony buyers of governments, did not, at first, all include price controls or curtailments of supply. But prescription drugs are expensive and public budgets limited. After a while national governments clamped down. And they are still clamping. Elisabeth Guigou, France's social affairs minister, warned last month that the world's drugmakers must expect the pressure for lower drug prices to continue and strengthen.

In the US, by contrast, drugs are bought and sold in something closer to a classic market, with patients or their insurance companies purchasing the products. Consumers do not all love this system. Indeed, Congress is currently mulling legislation to create a European-style drug entitlement for senior citizens. But to date, the market tradition has prevailed.

The consequence has been a giant differential in prices, with the US playing the role of pharmacological cash cow. Patients from prosperous America pay high prices for drugs - especially newer ones, which still enjoy maximum patent protection. Europe, also prosperous, pays a third less on behalf of European patients.

The contrast has become particularly dramatic as drug advances have accelerated. Zoloft, the star antidepressant of the 1990s, is sold for 30-40 per cent less in Germany than in the US, trimming profits for its maker, Pfizer. Norvasc, a new drug that fights high blood pressure, costs $1.18 a pill in the US and 88 cents in Germany.

Pharmaceuticals companies tend to argue that this is a case of cross-subsidy - that Europe is a long-run loser for research-based companies and that manufacturers raise prices in the US to compensate for European shortfalls. This is hard to prove. But what is clear is that drug companies forgo profits they might have collected in a less controlled European market - and that the same companies treasure the opportunities they enjoy on the other side of the Atlantic, in what David Stout, GlaxoSmithKline's US head, recently termed the last free market in the world. What is more, the industry has put its money where its mouth is, moving much of its work to the US.

This in turn affects that most crucial area, innovation. Today research- based pharmaceuticals companies working in the US spend about $22bn a year on research and development. In Britain and continental Europe, by contrast, the amount is more like $12bn, according to the European Federation of Pharmaceutical Industry Associations. This despite the fact that Europe, including Britain, boasts both a greater population and a bigger economy than the US. As a result the majority of the hot new drug products are generated in US-based labs. The Washington-based Pharmaceutical Research and Manufacturers of America reports that of the 17 anti-retroviral drugs used in Aids treatments, 13 were made in laboratories in the US. In other words, the American form of prosperity - the private sector sort - has done the best job of developing the help that Africa says it needs most now.

All this suggests two things. One is that the US lawmakers backing prescription drug entitlements might ask themselves whether they are destroying more than they are creating. The other is that it is time for Europe to take a fresh look at the consequences of its domestic social programmes - and to acknowledge that there is more than one kind of generosity, including a generosity of the free market.

© Copyright 2001 Financial Times

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To book Amity Shlaes for a speaking engagement, contact Jamie Brickhouse at the Red Brick Agency, 646.281.9041.
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