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$80 Billion of WHAT?

In June, Obama announced an agreement with the drug companies to cut the price of medicines by $80 billion over the next ten years. Now, $80 billion might sound like a huge amount of savings, but the bigger question is how much savings is this really?

So Greg Palast rummaged through the government health statistics, and discovered that spending on prescription drugs is projected to be $3.6 trillion dollars. In other words, $80 billion is only a 2% savings. Hmmm, doesn’t sound quite as good, does it?

But it gets worse. Much worse. First of all, this $80 billion “savings” is not on what we are currently paying for drugs, it is a savings over the amount the drug companies were planning on raising their prices. In plain English, the drug companies were planning on doubling the price of drugs over the next ten years, but now they will limit themselves to only raising prices 1.98 times. How absolutely generous.

What did big pharma get in return for this $80 billion pledge? Obama promised them that the government would not be allowed to bargain down drug prices, nor would the government be allowed to buy cheaper drugs from Canada.

Mind you, according to the New England Journal of Medicine, thirteen countries in Europe negotiate drug prices, and they are able to reduce the price of drugs between 35% to 55%. Even in the US, the Veterans Administration is allowed to negotiate the price of drugs, and they save 40%. (Medicare is not allowed to negotiate drug prices, a ban that Obama promised to overturn.)

Suddenly, $80 billion sounds quite small.

Incidentally, when I lived briefly in New Zealand I had to refill some prescriptions, and because I didn’t qualify for their national health plan I had to pay full price for them. I was shocked to find that full price there was less than my prescription co-pay for drugs in the US.

UPDATE: Obama Reverses Stand on Drug Industry Deal.



  1. Ben wrote:

    Why would you not negotiate prices? The companies stand to make the most money when they sell drugs for as much as each client is willing to pay.
    Example/analogy. Its similar to airline seats, you can get last second seats cheaply because the cost to the airline is very low so any amount of money is more than an empty seat. Drug companies also stand to make more by selling drugs more cheaply to poorer people as they are capable of paying less. Since the cost of the actual medicine is so low they can widen their market and recoup the R&D costs more quickly. I dont know why this doesn’t happen but Im sure the government is behind this somehow. Free markets tend to see these simple things when they are allowed to.

    Thursday, October 1, 2009 at 10:31 pm | Permalink
  2. Iron Knee wrote:

    Ben, are you really using as your counter-example of a “free market” the airlines? Seriously?

    Your argument is priceless — there’s something wrong with this market; ergo, the government must be at fault.

    I am a total supporter of free markets (what I do for a living is start companies, after all). But free markets do not do very well in a couple of situations. They are not efficient when demand is not elastic (demand does not go down when the price goes up, which is the case when you have a finite but necessary resource). That’s why we have regulated utilities.

    Secondly, you can only have a free market when you have *some* government control, otherwise capitalism devolves into feudalism and anarchy, like you have in Somalia. In particular, you need a stable currency, laws protecting property rights, and infrastructure.

    Friday, October 2, 2009 at 10:06 am | Permalink
  3. DNONO wrote:

    Should also be mentioned that the last seats = cheaper tix scenario totally depends on the departure/destination. DC to Ohio – maybe, DC to FL – never.

    Friday, October 2, 2009 at 12:34 pm | Permalink
  4. Ben wrote:

    I never said the airline was a free market, there is nothing even remotely close to a free market in this country. However there are different regulations in different industries (although not being in any of the industries mentioned here I dont know what they are). And most major problems exhibited by markets can be traced back to regulations and their unforeseen consequences. And yes inelastic demand for things such as medicine also tends to cause problems. However this is where competition comes in to maintain prices at reasonable levels. however for medicine the government provides monopoly privileges in the form of patents. Whether this is good or bad overall debatable.

    And no the government needs no control over the market for it to exist. The government is there in theory to protect the rights of the individual. This requires no interference in the activities of a market.

    Now my original argument which has not even been touched on is that under ideal circumstances the prices of medicine (everything really) would be based on the amount that the individual was willing/able to pay and not a fixed price.

    Friday, October 2, 2009 at 2:01 pm | Permalink
  5. Dalton wrote:

    If the complaint is that the government is giving big pharma monopolies on the drugs that they invent by way of patents (as are given to any other person or corporation that can prove they invented something) then maybe the argument should be that the government should do the R&D work for medicines and then allow the different pharmaceutical companies to distribute them. That way the government would be able to set the price and negotiate with whomever they wanted to as they would hold the patent for the medicines invented.

    Truthfully though, what I would like to see more than that would be for the FDA to actually do real extensive testing on new drugs instead of simply pushing them through. I don’t mind paying extra for medicines that I know (or at least have a lot more faith) won’t kill me or turn me into some raging monster because I took them.

    Saturday, October 10, 2009 at 2:45 pm | Permalink