Gary Becker looks at whether the Swiss system would be good for the US. He worries that a system that only spends 11% of GDP on health care compared with the US’s 16% can’t deliver the same outcomes. He doesn’t evaluate this but worries that the Swiss are being given a free gift by the US:
For one thing, the Swiss impose sharp price controls on drugs, lab tests, and other medical procedures. To take drugs as one important example, Swiss price controls reduce prices of top selling US patented prescription drugs to about 40-50% below their American prices. In particular, the cost of lipitor in Switzerland is about 1/3 of its American price. In reality, what the Swiss (and other countries) do is free ride off of the incentive provided by American drug prices for pharmaceutical companies to invest the huge amounts of resources required to produce blockbuster drugs like lipitor.
Very small countries like Switzerland can get away with this free riding since their demand for drugs is so much smaller than that of the US. However, were the US to emulate the Swiss system, and there is a call from some Congressmen for greater control over drug prices, the incentives biotech and pharmaceutical companies have to innovate would be greatly reduced. It is precisely the greater price freedom in the US that induced many drugs companies to relocate their research labs out of Europe and into the United States.
Well, isn’t that interesting. Let’s start with the obvious first point: 2 out of the top 5 pharmaceutical companies responsible for all this innovation are Swiss. Near as I can tell, they do much of their R&D outside of the US. And surely being so close to the political system, if the prices were bad for them (e.g., if the Swiss govt squeezes them it demonstrates other govts can too), you can’t say there is insufficient pressure to do something about it. Of course, Lipitor is made by Pfizer (a US company).
Now let’s see if the economics makes sense. In every other market, if you regulate prices below market clearing you get rationing. Is there any evidence of rationing of drugs in the Swiss system? Becker doesn’t seem to think so. He seems to think that the Swiss can just tell pharmaceutical companies what to sell their products for and that is that. But, in reality, placing just a little weight on the future, why don’t pharmaceutical companies just refuse supply?
It seems more likely that the pharmaceutical companies are exploiting the US’s inflated willingness to pay given the non-transparent nature of their health care system; you know, with a tendency to over-prescribe that has been discussed. To be sure, that can motivate R&D; especially if the rationale is that you come up with something new and the health care system’s decision-makers will decide that they must have it. But it is far from clear that it is generating the right mix of R&D.
[Update: I have it on good authority that the US spends about $75 billion per annum on health related R&D including pharma, biotech, devices and NIH. That means that if you cut $700 billion in expenditure per annum and then fully subsidised the current US R&D spend, you would produce the same level of innovation. In other words, at best the US is paying $10 in additional costs for every $1 allocated to R&D. That is a darn pretty inefficient system.]