You may have guessed that I detest the notion of a single-payer health care system in America and I hate the idea of adding an additional 31 million Americans to a paid-for-by-the-government system.
But our system is broken. We need a series of pragmatic changes that will move us towards a market-based and less expensive health care system.
Here is prescription #1.
The drug companies around the world spend billions to develop and test new drugs which can do marvelous things for one’s health when you need them. Let’s say Big Drug Company A develops “XXextra”, a cure for stupidity, at a cost of $3 billion. This includes early conceptualization, lab work and extensive testing along the way. This does not include the billions that it has already invested in drugs that were never good enough to come to market and were scrapped.
But when Big Drug Company A has a winner and it is approved by the regulatory agencies around the world it must decide on how to price its product – a fundamental marketing decision. Its marginal cost to produce the pill is only $3 per pill – in other words if they simply wrote off the research and development expenditures and didn’t care about paying off any company debt nor making any money for its shareholders it could produce the pill for $3 each and break even. But why would any company ever volunteer for a business like that?
So as a business the drug company tries to maximize the positive cash flow from its new discovery. Big Drug Company A starts with health care providers, pharmacies and insurance companies in the US and sell the product for $40 - $50 per pill because the pill has such health benefits and it gets prescribed in mass across the country.
But when Big Drug Company A heads to Canada, England and Germany to sell the same XXextra pill they run across a far more powerful buyer (because of their sheer size and the fact they are a single buyer for their entire country). The Germans know that Big Drug Company A is doing well in the US and the national buyers also know that the marginal cost to produce each pill is only $3. So the buyers each insist on a price of $10 per pill which the drug company eventually accepts. So the Canucks and the Brits and the Germans get the same benefits for their citizens without paying their fair share.
If the drug company plays hardball with the single-payer health care systems around the world they lose the margin (difference between the $10 revenue and $3 marginal cost) per pill that they would have received. As a result the drug company either makes less money or loses money; eventually it loses its capacity to develop the next blockbuster drug.
The answer? The US government simply sets a price range percentage in which any drug can be sold in the US. Some deviation is allowed but it would no longer be acceptable to charge Americans five times what they charge Canadians. So the range might be from 100% - 120%. In other words the wholesale price of the drug for one customer can not be more than 120% of that for another customer.
So after plenty of analysis Big Drug Company A decides that the wholesale price of XXextra will be $20 - $24 per pill. The actual price is still up to the drug company but it can no longer subsidize the rest of the world on the backs of Americans. Maybe now the Americans are paying $24 per pill and the Canadians are paying $20 per pill but America is not subsidizing everyone else’s health care system around the world.
This idea doesn't require a huge government bureaucracy so the probably left won't like it. But it is simple and combined with several other pragmatic solutions it would help us get our costs down.
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